Contracts for the sale and purchase of real estate are required by law to be in writing. In all states and the District of Columbia, only a written real estate purchase agreement can be enforced in court.
These documents may be titled in various ways, such as Agreement for the Purchase and Sale of Real Property, Contract for Sale of Real Property, or simply Buy and Sell Agreement.
If you're planning on buying or selling residential property, you need to understand what a real estate purchase agreement is, how it works, why it's important, and how to get out of one if needed.
Much of what you'll read below will also relate to commercial property, however, there are other considerations for commercial property that may relate to the nature of the property and the use for which it is intended by the purchaser.
Purchase agreement forms
Either the seller or the buyer may create a purchase agreement. In a majority of real estate transactions, at least one real estate agent is involved, in which case an agent usually provides the form.
The general practice is for the interested buyer to submit a proposed purchase agreement to the seller, which has been signed by the buyer. If the seller agrees, they sign the document, at which time the purchase agreement is accepted and becomes a binding contract. In some cases, the seller may sign first, in which case the purchase agreement will be accepted when it's signed by the buyer.
An online search for "real estate purchase agreement template" or "real estate purchase agreement form" will reveal numerous websites with forms. To be more specific, the name of the state where the property is located can be added.
In many areas, a state or local real estate broker's organization has developed a standard form for use by brokers. Some states may have standard forms prepared by the state bar association. Such forms should comply with the law of the area for which they are intended to be used, and may be used by anyone.
In some states, these forms are available online for free, and in other states they are only available to members of the broker organization or bar association, or may need to be purchased.
For example, if you do an online search for "New York Real Estate Purchase Form," one of the results will lead to a New York State Multiple Listing Service form titled "Standard Form Contract for Purchase and Sale of Real Estate."
Content of a purchase agreement
Most real estate purchase agreements consist of multiple pages. The length may vary depending upon such factors as whether the buyer will obtain a mortgage, the number of contingencies included, and state law requirement.
Even a simple real estate purchase agreement should include:
- The names of the buyers and sellers.
- The address and legal description of the property.
- The purchase price, and the terms of payment.
- How title is to be transferred. This should include a date of closing, and what type of deed will be used to convey title, which is usually a warranty deed.
- The date the buyer takes possession.
- The signatures of the buyers and sellers.
It's also common for a purchase agreement to include other details, such as:
- Any amount that is paid as earnest money, or a down payment.
- Whether closing costs will be paid by the seller, the buyer, or split between them.
- How, or whether, pre-paid property taxes will be pro-rated.
- Any contingencies that allow either party to withdraw from the agreement. These are discussed further below.
- Any personal property that is included in the sale, such as appliances or furniture.
- What constitutes default by either party, and the consequences of default.
- Any disclosures that may be required by law. This varies according to state law. For example, California currently requires at least ten separate disclosures to be given to the buyer by the seller.
- Fees to be paid to brokers.
Purchase agreement contingencies
A contingency is something that may allow one party to get out of the contract. Most contingencies relate to the buyer, who may be able to cancel the agreement in certain situations, such as:
- The property fails a physical inspection. This can include a general inspection, as well as specific inspections such as for wood-destroying organisms, mold, lead-based paint, etc.
- The property's appraisal comes in at less than the sale price.
- Title problems are identified by a title search.
- The buyer is unable to qualify for a mortgage in a specified amount, and for a specified term and interest rate.
- The buyer is unable to sell their current home by a specified date.
The only contingency that commonly relates to the seller is if the seller is unable to secure a new residence by a specified date.
Some states may have laws giving a buyer the option to cancel for any reason within a certain number of days after signing the agreement, and may have deadlines for the completion of inspections, appraisals, and financing applications.
A well-crafted real estate purchase agreement can provide a degree of protection for both parties, and avoid potentially costly misunderstandings.