What is a Real Estate Purchase Agreement
A real estate purchase agreement or contract is a vital document in every real estate deal that outlines the price and terms of the transaction. Further, this document covers every element of the sale from earnest money to well disclosures. The nature of the document is to ensure that all expectations are clear, working to protect both the buyer and seller.
Purchase agreements vary from one state to the next. In certain regions, purchase agreements are relatively short and are used to simply open the negotiation process. However, in other states, the purchase agreement can act as a full legally binding contract. Thus, when looking to utilize a purchase agreement—especially in a state where a purchase agreement acts as a legally binding contract—it is imperative that you enlist the services of a real estate attorney.
A common issue real estate buyers and sellers encounter is feeling overwhelmed the first time they see the purchase agreement. However, this overwhelming feeling is normal as the agreement typically contains industry-specific terms and can be several pages long. To avoid these issues and be able to move through the real estate transaction with a clear head, it is important that you fully understand the important concepts of the document. One final note is that real estate purchase agreements are also commonly referred to as a real estate sales contract, home purchase agreement, real estate purchase contract, and home purchase agreement.
Below is an overview of a real estate purchase agreements and a discussion of the most important topics within these agreements.
Who Prepares the Real Estate Purchase Agreement
In most cases, the buyer will hire an attorney to create the purchase agreement. While real estate agents do have the ability to create this agreement, they must be legally licensed to practice law.
Components of a Purchase Agreement
To be valid, a real estate purchase agreement must be made in writing and signed by each party involved in the transaction. Thus, handshakes and verbal commitments are not enough and if the document is not in writing, it technically doesn’t exist. In addition to written consideration, a real estate purchase contract will also typically include the following.
- Identification of the parties
- A description of the property
- Essential details, rights, and obligations of the contract
- Contingencies or conditions that must be met before the sale can go through
- The condition of the property
- Which fixtures and appliances are included in the sale and which are excluded
- The amount of the earnest money deposit
- Itemized closing costs and who is responsible for paying them
- Prospective date of closing
- Signatures of each party
- Terms of possession (when the keys to the property will be handed over)
While some of these provisions are self-explanatory, there are a few that require a deeper understanding.
Identifying the Address and Parties Involved
At its core, a purchase agreement must outline the property in question. This outline should include the exact address and clear legal description of the property. Additionally, the contractor must also state the identity of the buyer and seller of the property.
An important point to understand is that if two people are buying the property, they must determine whether they would like to act as joint tenants or tenants in common and include these specifications in the purchase agreement. Joint tenants receive the right of survivorship. This right means that if one tenant passes away, the property immediately transfers to the other tenant without going through probate.
On the other hand, if the joint buyers choose to utilize a tenancy in common, each tenant will simply own a share of the property. These shares do not have to be equal and either party can transfer their share to another entity.
Price and Terms
The real estate purchase agreement must also clearly state the offer price that was accepted by the seller in addition to how the seller plans on paying this sum. The most common ways buyers pay for a property are with cash, a cash down payment, and mortgage, or with an existing mortgage. These details should all be detailed in the purchase agreement and if necessary, you can include a financing addendum.
Additionally, the purchase agreement will usually include earnest money requirements. Earnest money allows the seller to confirm the contract and while rates will vary from one agreement to the next, buyers can expect to pay at least $1,000. Because earnest money is simply another type of down payment that ensures the seller that the buyer is serious, the earnest money deposit is normally applied to the purchase balance. Most sellers will add a provision stating that if the buyer backs out of the agreement, they forfeit the earnest money deposit.
Closing Dates and Costs
The date of closing will also be included in the purchase agreement along with any stipulations such as if the closing date must change, both parties must agree to the change in writing. This is important as the owner of the property legally changes upon the listed closing date. Further, the closing date marks the transfer of the property title from the seller to the buyer.
There are closing costs for both the buyer and seller. These costs and which party will pay for them varies significantly from one transaction to the next and thus must be included in the real estate purchase agreement. In most cases, the buyer will cover these costs. However, the seller could pay the expenses, or the buyer and seller could decide to split the bill.
Real Estate Taxes and Special Assessments
On the closing day, the seller should prorate property taxes and other costs such as fuel, maintenance fees, or homeowners association fees. As certain taxes are not known at the time of closing, the parties commonly use addendums. One important note is that the seller is responsible for paying any special assessment fees during or prior to the closing.
Items that are Included or Excluded
The purchase agreement must also state what items located on the property will be included or excluded from the sale. These include items that are not permanently affixed to a property such as.
- Light fixtures
- Heating and cooling equipment
- Window treatments
- Built-in kitchen appliances
- Bathroom fixtures
Sellers are legally obligated to disclose any information that could affect the property value or safety.
Buyers and sellers may agree to a purchase agreement dependent on certain conditions that must be met before the property is sold. Below are a few of the most common contingencies buyers or sellers will request before signing a purchase agreement.
A home inspection is a critical part of every real estate transaction. While the buyer must pay for the inspection fee, they can choose whatever third-party they would like to do the inspection.
In addition to the inspection, the lender must carry out an appraisal. If the appraisal shows that the property value is lower than the seller is willing to sell the property for, the buyer must personally pay for the difference in price or negotiate the price lower. Additionally, the lender may require that the seller fix an issue on the property prior to closing.
In most cases, a buyer must pay a percentage of the property value to the seller upon closing while receiving the remaining balance from mortgage financing. Buyers usually obtain financing prior to closing. However, buyers can include a financing contingency that allows them to break the purchase agreement if their financing falls through.
The seller must show that they obtain the title of the property before closing. This ensures that buyers will obtain the property title upon closing.
Delivery, Acceptance Date, and Offer Expiration
Both the buyer and seller should know when the purchase agreement expires if neither party accepts the deal. Additionally, the agreement should state how long the party making the offer has to withdraw the agreement without penalty.
Another point to include is that if both parties accept the agreement, they must communicate this acceptance.
While buyers and sellers have multiple opportunities to cancel a purchase agreement, cancellation must occur within the terms of the agreement. If the buyer or seller fails to cancel the agreement within the terms of the contract, they will be in default of the contract. Default usually occurs in the following situations.
- Buyer fails to pay earnest money on time
- One entity fails to return signed disclosure forms on time
- Buyer or seller cancels the sale after all contingencies have been removed
- Seller does not complete contractually obligated work on the property
- Seller prevents access for inspection or final walk-through
- The seller does not move out on time
If one party is in default, they likely forfeit earnest money and open the door for formal litigation.
After receiving the initial purchase agreement, the seller can reject the offer, accept and sign the contract, or create a counter offer. This counter offer is a legally binding agreement. It could be close to identical to the prior agreement with a few key changes such as.
- a higher price for the property,
- higher earnest money requirements,
- refusal to cover or help cover closing costs,
- refusal to adopt certain contingencies,
- altered time frames for addressing contingencies, and
- excluding personal property from the agreement.
Further, the buyer can opt to offer a counter offer and in most states, an unlimited number of counter offers can be made between the buyer and seller of the property.
With over 20 years of experience, Antonoplos & Associates real estate attorneys have the knowledge and experience required to assist clients with real estate litigation in DC, Maryland, and Virginia. Furthermore, our attorneys have a strong background in real estate, construction law, and business law. Because of this experience, we are can assist clients with most aspects of real estate litigation. Finally, we are able to help you before, during, and after your real estate litigation. This is true whether you need assistance with personal or commercial legal issues.
Contact Our DC Law Office for More Information
Finally, for more information on what is a real estate purchase agreement, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding real estate law, check out our blog.