What buyers and sellers should know about purchase agreements

Key takeaways

• A real estate purchase agreement is a legally binding written contract that outlines the terms of a home sale, including price, financing details, contingencies, disclosures and the closing date.
• Once a buyer makes an offer and both the buyer and seller sign the agreement, it becomes enforceable by law and guides the transaction through steps like inspections, appraisals, title review and the final walk-through.
• Purchase agreements can be standard templates or custom contracts, and they protect both parties by clearly defining responsibilities, required disclosures, remedies for default and conditions that must be met before closing.

Every home sale requires a contract that explains all the details that are required to transfer ownership. That’s where a real estate purchase agreement comes in, protecting the interests of both the buyer and the seller. A purchase agreement keeps everyone on the same page by detailing requirements for a home sale. This helps minimize the chance of disputes, misunderstandings and even potential legal battles if something goes wrong during the process.

A purchase agreement is a legally binding document signed by the buyer and seller to formalize the sale of a property. It includes the terms, conditions and financial aspects of the transaction.

As you work with your real estate agent, a purchase agreement might also be referred to as a real estate purchase contract or a real estate sales contract. Depending on the property’s location, an agent or attorney who works for the buyer usually prepares the documents for an offer, including the purchase agreement that must be signed for the sale to move forward. 

The purchase agreement starts with the buyer, who includes it when making an offer on a house. The seller can accept this offer, reject it or negotiate and submit a counteroffer.

They sign the agreement, making it legally binding with conditions each party must satisfy to close on the home.

• Earnest money: The good faith deposit made by the buyer, which is often held in an escrow account. 
• Buyer and seller details: This includes contact information and the full legal names of both the buyer and the seller.
• Property information: The property address, a legal property description and any relevant property features will be listed.
• Purchase price: The sales price that the buyer agrees to pay for the property.
• Financing information: Details on how the buyer will pay for the property. If the buyer will finance the purchase, this may include the loan amount and interest rate. 
• Contingencies/cancellation terms: These are the conditions that must be met for the sale to move forward. Common contingencies include home inspection, home appraisal and financing clauses. 
• Disclosures: Depending on the property and its location, seller disclosures may be required to help the buyer better understand the condition of the home.  
• Title insurance: The agreement should specify who is responsible for purchasing title insurance, which provides protection against title defects such as financial encumbrances, fraud and disputed claims of ownership. 
• Closing date: The date when ownership is officially transferred to the buyer. 

Requirements vary by location, but some common disclosures apply to:

• Lead-based paint: A seller must disclose any lead-based paint if the property was built before 1978, the year of a federal ban.
• Septic systems: This includes a description of the system, its location, maintenance history, known issues and details on any inspections.
• Resource-protected areas (RPA): Homes built in an area with protected natural resources, such as properties that are near watersheds, may require disclosure. When a home is in an RPA, there may be limits on the owner’s ability to landscape, cut down trees or build an addition. 
• Homeowners associations: If the property is in an HOA, the seller must share details on the community’s rules and regulations, amenities and financial health, including homeowners association fees and assessments.  
• Titles and encumbrances: Any privileges that go with the land regardless of its ownership and any conditions that affect who the owner of the property is.

Some states have particularly unique disclosures. For example, California requires the seller to disclose if a death has occurred within the previous three years. In New York, sellers must disclose if the house is considered haunted. An agent or a real estate attorney can advise you on the disclosures that are required for each specific property.

There are two types:

State or local real estate associations usually draft template purchase agreements. They offer a consistent format with common clauses and terms for transactions. Additionally, they are updated to comply with local laws and regulations, which reduces the risk of disputes and errors during a home sale.

An addendum can be added to a standard purchase agreement to address the unique circumstances of a home sale, as long as the buyer and seller agree to it.

A custom purchase agreement is typically drafted by an attorney and tailored to the specific needs of a buyer and seller. For example, builders commonly use custom contracts to sell new construction homes.

If you’re reviewing a custom agreement for a home purchase, it's wise to have your own representation. Consult your agent or a real estate attorney to ensure you fully understand the terms and conditions before you sign.