What is a Real Estate Purchase Agreement?

Buying or selling a house isn’t as straightforward as exchanging money; it involves various documents and forms to ensure a smooth transition. One of the most important documents is the purchase agreement.

A real estate purchase agreement is typically the first formal document that shows a buyer's intent to purchase a property. This document can go by different names depending on state laws, including real estate sales contract, agreement of sale, home sale contract, or real estate purchase contract.

However, creating this contract can be intimidating and complicated, especially if you are unfamiliar with the process.

In this article, we will dive into who prepares it, what happens when either party backs out, contingencies, and what should and shouldn’t be included.

What is a Real Estate Purchase Agreement?

A real estate purchase agreement is a legally binding contract between a buyer and a seller outlining the terms and conditions for the real property sale.

Suppose you want to purchase your first home and you prove your finances to the seller and want to formalize the transaction.You would need to draft a Real Estate Purchase Agreement and submit it to the seller.

The purchase agreement serves the primary purposes of:

• Offering Legal Protection: Provides a binding legal document that enforces the agreed-upon terms, protecting both the buyer and the seller from breaches of contract.
• Ensuring Clarity of Terms: Defines all terms of the sale, including the purchase price, payment methods, closing date, and other essential details, reducing the risk of misunderstandings and disputes.
• Includes Contingency Safeguards: Incorporates necessary contingencies (home inspections, appraisals, and financing approval) that protect the buyer from purchasing a property under unfavorable conditions.
• Providing Title Assurance: Ensures the clear transfer of property ownership and addresses any title-related issues, giving peace of mind that the buyer will receive a marketable title free from undisclosed encumbrances.
• Establishes a Structured Process: Establishes a formal and organized process for the transaction, with specific timelines and procedures for each step, ensuring that all parties know what to expect and when to expect it, leading to a smoother and more efficient closing.

Who Prepares the Real Estate Purchase Agreement 

A real estate purchase agreement is typically prepared by a licensed agent or attorney using standardized forms provided by local real estate associations to ensure compliance with state-specific laws. 

In many residential transactions, the buyer’s agent often drafts the initial agreement, which is then reviewed and potentially modified by both parties' agents to reflect their clients' interests. This practice is common in areas where it is customary for the buyer to propose the terms of the purchase, giving the buyer some control over the initial negotiation phase.

However, in highly competitive markets, it is common for the seller’s agent to prepare the initial draft. This aligns the contract with the seller's goals.

What role do attorneys play? 

Attorneys are necessary for more complex transactions, involving substantial sums of money or when specific legal intricacies need to be addressed, such as unclear titles, foreclosures, and short sales, to mitigate risks for either party.

If you’re wondering if you can draft your contract instead of using a state-approved one, you can in cases where you're not a licensed agent dealing directly with an off-market private seller without agents involved. For legal validity, ensure both parties sign the contract.

However, sellers and buyers should work with real estate professionals (agents, brokers, and attorneys) to draft, review, and understand the purchase agreement. This helps ensure that all terms are fair and all contingencies are properly addressed.

Note that once the purchase agreement is signed, it becomes a legally binding contract. This means both parties are obligated to fulfill their duties as outlined. Whether knowingly or unknowingly, breaching the agreement can lead to legal consequences.

What Happens When the Buyer or Seller Backs Out

When a buyer or seller backs out of a real estate purchase agreement, consequent steps depend on the terms of the contract. Buyers in most cases, only lose their earnest money and rarely get sued unless their actions cause significant harm, such as financial loss to the seller.

“However, if the seller backs out, the repercussions can be more severe”, says Pre-construction Specialist at Precando, Samantha Odo. 

‘Buyers might seek legal remedies to force the sale through a specific performance lawsuit, where a court mandates that the seller complete the transaction. Alternatively, the buyer might sue for damages incurred, such as costs related to temporary housing or differences in pricing if they have to purchase another property at a higher price’, says Odo.

If both parties back out within the contract's contingencies, they may not face penalties. 

What are Purchase Agreement Contingencies

Purchase agreement contingencies outline scenarios under which the seller or buyer can back out of the agreement without a penalty. Here are some common purchase agreement contingencies:

1. Financing Contingency: This contingency allows the buyer to withdraw from the contract if they can’t secure financing to purchase the property. It typically specifies a timeframe within which the buyer must secure a mortgage loan approval.

2. Home Inspection Contingency: The buyer has the right to conduct inspections of the property to identify any issues or defects. If significant problems are found during the inspection period, the buyer can negotiate repairs, request a credit, or withdraw from the contract. 

3. Appraisal Contingency: This contingency protects the buyer by ensuring that the property appraises for at least the purchase price. If the property appraises below the agreed-upon price, the buyer can negotiate with the seller to lower the price, bring additional funds to cover the difference or cancel the contract.

Components of Real Estate Purchase Agreement

A real estate purchase agreement typically includes several key components that outline the terms and conditions of the property sale. Here are the main components typically found in such agreements:

• Identifying Information: Names and contact information of the buyer(s) and the seller(s), as well as a description of the property being sold (including legal description and address).
• Purchase Price: The agreed-upon purchase price for the property. This section may also include details on how the purchase price will be financed (e.g. cash, mortgage).
• Earnest Money: It’s 1-3% of the purchase price held in escrow and serves as a sign of the buyer’s serious intent. The amount of earnest money deposit, the timeline for depositing it, and conditions under which it may be forfeited or refunded should be detailed.
• Financing Details: If applicable, details regarding the buyer's financing arrangements, including any mortgage contingency clauses. 
• Closing Date: The date by which the transaction is expected to close, transferring ownership of the property to the buyer.
• Prorations: Details how expenses such as property taxes, utilities, and HOA fees are prorated between the buyer and seller as of the closing date.
• Property Condition: State of the property at the time of closing and any warranties or disclosures provided by the seller.
• Signatures: Signatures of all parties involved including the buyer, seller, and agents, including the date the agreement was signed.

What Not to Add to Real Estate Purchase Agreement

In a real estate purchase agreement, it's important to avoid including certain elements that could complicate or undermine the clarity and enforceability of the contract. Here are things that shouldn’t be added to a real estate purchase agreement:

Irrelevant personal information

Personal details unrelated to the transaction, such as personal histories or irrelevant personal anecdotes, should not be included. The agreement should focus strictly on the legal and financial aspects of the property sale.

Incomplete or vague terms

The agreement should be clear, specific, and comprehensive in outlining all terms and conditions of the sale. Vague or ambiguous language can lead to misunderstandings and disputes. Hence, involving attorneys can ensure clarity and prevent misinterpretations.

Price breakdown

While the total purchase price should be clearly stated, a detailed breakdown of how the allocated price (such as specific amounts for land, improvements, fixtures, etc.) is unnecessary in the purchase agreement. Such breakdowns are commonly found in other related documents like appraisals or financing statements.

How to Automate Real Estate Purchase  Agreements

If you’re a real estate agency or investor dealing with multiple transactions, automation enables the generation of bulk contracts quickly, ensures consistency, and reduces mistakes.

Step 1: Choose the right software 

Select a reliable document automation software that supports the creation and management of real estate contracts like Docupilot. It has features like template creation, dynamic fields, bulk processing, and e-signature integration that ensure an efficient automation workflow.

Step 2: Draft a template 

In Docupilot, you can upload your existing purchase template, use our templates or create one from scratch using the create button. Ensure your template covers all essential sections, such as identifying information, purchase price, contingencies, and closing procedures.

Step 3: Insert merge fields 

Merge fields in Docupilot include dynamic content like tokens and conditions. Tokens allow you to insert placeholders for specific information such as buyer and seller names, property details, purchase price, and dates to automatically customize each agreement. With conditions, you can adapt your template to different scenarios. 

Step 4: Insert preferences and test 

The preference tab allows you to decide how your documents would be generated by entering details such as file name, document format, time zone, page size, and more. 

Step 5: Create bulk purchase agreements 

Bulk creation is an automated process where Docupilot pulls details from a data source to fill the templates. To do this, integrate Docupilot with your data sources such as CRM, Forms, or Excel using Zapier or Make integration. 

Step 6: Delivery 

Set up the automated delivery of completed agreements via email or an integrated e-signature platform. This ensures that recipients can easily review and sign the documents electronically, streamlining the closing process.

Safeguard Your Real Estate Transaction With Purchase Agreement  

A real estate purchase agreement is an essential tool that provides legal protection and ensures all aspects of the property sale are clearly defined and agreed upon. 

Whether prepared by a licensed agent or attorney or drafted by the parties involved in private transactions, the agreement must be thoroughly reviewed and understood to avoid potential legal complications. 

By including specific contingencies and following a structured process, both buyers and sellers can navigate the complexities of real estate transactions with greater confidence and peace of mind.