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Real Estate Purchase Agreement: Know The Facts

4-Minute Read
Published on March 23, 2020

Those who are selling or buying a house might not appreciate just how big of a deal the process is. Sure, we all know it involves lots of big decisions and can often be stressful and time-consuming. But if you haven’t been through it before, you might not realize that there’s a big legal component to it as well.

Any time a home is sold and the property is transferred from one person to another, a legal contract called a real estate purchase agreement will be used to stipulate the conditions of the sale.

What Is A Purchase Agreement?

In real estate, a purchase agreement is a binding contract between a buyer and seller that outlines the details of a home sale transaction. The buyer will propose the conditions of the contract, including their offer price, which the seller will then either agree to, reject or negotiate. Negotiations may go back and forth between buyer and seller before both parties are satisfied. Once both parties are in agreement and have signed the purchase agreement, they’re considered to be “under contract.”

You may have also seen purchase agreements referred to as a:

  • Real estate sales contract
  • Home purchase agreement
  • Real estate purchase contract
  • House purchase agreement

Who Prepares The Real Estate Purchase Agreement?

Typically, the buyer’s agent writes up the purchase agreement. However, unless they are legally licensed to practice law, real estate agents generally can’t create their own legal contracts. Instead, firms will often use standardized form contracts that allow agents to fill in the blanks with the specifics of the sale.

What Is Included In The Real Estate Purchase Agreement?

Every transaction is different, so not all real estate purchase agreements will look the same. However, there are some basic items that should be included in every purchase agreement.

  • Buyer and seller information
  • Property details
  • Pricing and financing
  • Fixtures and appliances included/excluded in the sale
  • Closing and possession dates
  • Earnest money deposit amount
  • Closing costs and who is responsible for paying
  • Conditions under which the contract can be terminated
  • Contingencies or conditions that must be met for the sale to go through

Understanding The Components Of The Purchase Agreement

While many parts of your contract are fairly straightforward, like what price you’ll pay and when closing will happen, other parts of the purchase agreement might be a little confusing, especially for first-time home buyers. Make sure you fully understand the entire purchase agreement before you sign it.


Your real estate purchase agreement will include information about how the home will be paid for. If the buyer isn’t paying in cash, they’ll need some sort of financing (i.e. a loan) to buy the home, the specifics of which will be written out in the contract.

For example, the contract will specify if the buyer is obtaining a mortgage to purchase the property, or if they’re using an alternative, such as assuming the current mortgage on the property or using seller financing, where the buyer makes payments to the seller rather than a traditional mortgage lender.

Earnest Money Deposit

Earnest money, sometimes also referred to as a good faith deposit, shows that a buyer is serious about buying the home. Sellers don’t want to waste their time; they want to know that a buyer is going to stick with the contract through closing. The earnest money deposit gives them that confidence.

If, between the time you sign the purchase agreement and close on the home, the buyer decides they want to back out for a reason that isn’t stipulated in the contract, they lose their earnest money and the seller gets to pocket it. However, a buyer can get their earnest money back if they back out due to a reason stipulated in the contract.

Earnest money is typically held in escrow by a third party and is credited toward the down payment or closing costs at closing.


There are many different types of contingencies that can be included in real estate contracts on both the buyer’s and seller’s side, and it’s important to understand any contingencies that are included in your purchase agreement

Contingencies are conditions that must be met before the sale can go through. Here are some of the more common contingencies you may see in home sale contracts.

  • Financing contingency: Sale is contingent on the buyer being able to obtain financing. Protects the buyer in the case they are unable to secure a mortgage.
  • Inspection contingency: Buyer is able to back out of the sale without penalty if they aren’t satisfied with a professional inspector’s assessment of the home.
  • Appraisal contingency: States that the home must appraise at a value equal to or higher than what the buyer agreed to pay.
  • Home sale contingency: The home purchase is contingent on the buyer’s ability to sell their current home.

Closing Costs

At closing, there are certain fees and costs that will need to be paid. How much each party will pay will depend on what was negotiated in the contract. Closing costs can include things like agent commission, appraisal and inspection fees, taxes, lenders fees and insurance.

For buyers, closing costs may be 3% – 6% of the purchase price. Closing costs may be slightly higher for sellers.

Can A Real Estate Purchase Agreement Be Cancelled?

The best time to back out of a real estate purchase is before you’ve signed the purchase agreement. After that, you’re under contract, and you may be penalized if you back out for reasons that aren’t stipulated in the purchase agreement.

Before signing a purchase agreement, make sure it includes information about the conditions under which the contract can be terminated.


Even if you aren’t a legal expert, it’s still important to understand the legal and contractual aspects of your home sale or purchase. Buying or selling a home is a big deal, and you can avoid headaches by making sure the deal you’re getting into is a good one.

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