Purchase and Sale Agreement

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Updated May 20, 2022

A purchase and sale agreement is a binding contract that includes the terms and conditions for the sale of a property in exchange for a specific price. After it is signed, an earnest money deposit is paid by the buyer and is non-refundable if their contingencies are met.

Until the transaction is complete (closing date), the buyer will commonly perform their due diligence on the property (i.e. inspections, testing, etc.). 

If financing is needed by the buyer, the agreement can be contingent on the buyer receiving a mortgage from a local bank or credit union. Under a financing contingency, the property may also be required to be appraised for the price mentioned in the sales agreement.

Earnest Money Deposit

An earnest money deposit demonstrates a buyer’s good faith in buying a property. The amount is applied towards the sales price and is non-refundable if the buyer should back out of the transaction for any reason not mentioned in the agreement.

It’s recommended the seller requires the buyer to pay an earnest money deposit between 1% to 3% of the sales price.

After payment, the seller should provide the buyer with an earnest money receipt.

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Comprehensive Version (10 pages)

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How to Buy Real Estate (10 steps)

  1. Finding Homes for Sale
  2. Get a Pre-Qualification Letter
  3. Attend Open Houses
  4. Schedule a Private Showing
  5. Write the Purchase Agreement
  6. Review the Seller’s Disclosures
  7. Get the Home Inspected
  8. Obtain Financing
  9. Schedule & Attend the Closing
  10. Record the Deed

1. Finding Homes for Sale

According to the 2017 Profile of Home Buyers and Sellers, the following are the best resources to find a home for sale:

  • the Internet – 51% of home sales the buyer found the property on the internet. The top three (3) websites to find a home are Zillow.comRealtor.com, and Trulia.com respectively.
  • a Real Estate Agent – 30% of home sales that occurred the buyer found the property through the use of a licensed real estate agent. There are about *3 million licensed agents in the USA (*Source). The top three (3) real estate brokerage companies are Century21, Keller Williams, and Sotheby’s International Realty respectively.
  • Other – 29% includes friends and family informing the buyer, seeing a yard sign, and reading the newspaper. It’s best when you are searching for a home to have the mindset of keeping your eyes and ears open at all times.

2. Get a Pre-Qualification Letter

Unfortunately, in the world of real estate, a buyer will find that it is much easier to get into residences and get private showings if they have a pre-qualification letter. This is a statement from the bank that shows the buyer is able to obtain financing under their current financial status.

In other words, a pre-qualification letter certifies the buyer is able to afford the property. In most market conditions the buyer will have no problem viewing any home that is for sale.

3. Attending Open Houses

An open house is how a buyer “gets a feel” for the market conditions in their area. It is recommended to view houses within their price range. Once an idea of what the buyer is looking for is discovered, the search can be narrowed.

4. Schedule a Private Showing

This is completed by the buyer or their agent. The seller, or their agent, will be contacted and the parties will meet at a specific time at the residence. Usually, the seller and their agent will leave the premises and give the buyer 15 to 20 minutes to look around the home.

If the buyer likes the home, an offer will be made.

5. Write the Purchase Agreement 

The purchase agreement also acts as the offer letter. The seller will have the choice to accept, reject, or submit a counter-offer. If the seller accepts, the purchase agreement will be signed and the buyer will be required to submit their downpayment (if any).

Step 6 – Review the Seller’s Disclosures

If an agreement is made, the seller will be required to complete and put forth disclosure forms to the buyer. These forms will notify the seller of any issues or repairs needed in the home as well as if there are any hazardous substances on the property.

Step 7 – Get the Home Inspected

No matter what the seller tells you, get the residence inspected by a certified inspector in your area. A certified inspector will be someone that will most likely have an understanding of the issues with homes in the area and will be able to articulate any issues on the premises.

  • Find a Certified Inspector (epa.gov) – If the residence was built prior to 1978, it may be worth it to get the property inspected by a lead paint specialist who can tell you if there are any issues with the interior. The main hazard with lead paint is that it can chip and crack over time leaving a powdery-like substance that is extremely toxic, especially to children.

Inspection Tips – It is also best for the buyer to walk around the home and perform their own inspection by:

  • Walking around the home looking for cracks in the foundation;
  • Check the rafters for holes (due to termites) or general rotting;
  • Walk the outside premises after a rainfall; and
  • Pay attention to ceiling details and anything that may show past flooding, leaks, or any repair that is needed.

Step 8 – Obtain Financing

If financing was a condition of the purchase agreement, the buyer will have to go to a local financial institution to apply and secure funding for their home. This is commonly known as a “mortgage” and depending on market conditions may require up to 20% for a down payment along with other financial commitments.

Appraisal – When obtaining financing, a professional known as an “appraiser” will be required to justify the price the buyer is paying. This will give the financial institution providing financing the comfort and security they need in the chance the buyer can no longer afford the mortgage payment.

Once financing is finalized the closing may be scheduled.

Step 9 – Schedule & Attend the Closing

Scheduling the closing will need to be done with a local title company. The title company will pull the deed and conduct a deed search and ensure that ownership to the buyer is legally feasible. All documents and attorneys will be coordinated with the title company and after all the due diligence is completed the closing will be scheduled.

At the closing, all documents, disclosures, and funds will be transferred to the respective parties. This may sound simple but a typical closing can last from a couple to several hours depending on the complexity of the property. After the closing has concluded, a deed with the buyer’s name will be produced.

Step 10 – Record the Deed

The deed is the legal title to the property which states who is the owner. This will usually be signed at the closing, as a notary public is required in most states, and afterward can be filed at the Registry of Deeds in the county where the property is located.

Transfer Taxes – If there is a real estate transfer tax, this is usually paid at the time of recording the deed. If payment for the transfer taxes was to be split by the buyer and seller, which is common, the payment should have been made at the closing.

After the deed has been filed with the county recorder the sale is complete.

Disclosures

A disclosure is a statement or attachment to a purchase agreement that reveals information about the property. A disclosure form is usually mentioned if required by local, state, or federal law.

  • Lead-Based Paint Disclosure – Federal law requires the owner of a property constructed prior to 1978 to identify if there has been any chipping, peeling, or deteriorating paint on the premises. Due to the paint particles being hazardous to a person’s health, this is a required disclosure to be attached to any purchase agreement.
  • Property Disclosure Statement – Required in every State, although, if the State is considered “Buyer Beware” the seller is not legally liable for the information provided.

Addendums

An addendum is commonly attached to a purchase agreement to detail a contingency that is in the agreement. A contingency is a condition that must be met or else the terms of the entire agreement may not be valid. Below are the most common conditions that are mentioned in purchase agreements.

Buyer Beware

Buyer beware, or “caveat emptor”, is a term used when the laws in the State do not require the seller to mention the material defects on the property. Therefore, the buyer is purchasing the property on an “as-is” basis.

The following States are considered buyer beware: Alabama, Arkansas, Colorado, Florida, Indiana, Massachusetts, Missouri, Montana, New Hampshire, New Jersey, Virginia, West Virginia, and Wyoming.

(Video) What is a Purchase Agreement?

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Step 1 – 

How to Terminate a Purchase Agreement

Unless the buyer or seller breaches or fails to perform under the purchase agreement, it cannot be canceled unless both buyer and seller agree. Most purchase agreements are canceled due to the following:

  • Failure to Pay a Deposit
  • Material Defects (found during building inspection)
  • Cancellation during the Contingency Period
  • Failure to Obtain Financing
  • Mutual Agreement

Notice to Terminate a Purchase Agreement

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Related Agreements (5)


Asset Purchase Agreement – Used to buy the valuable holdings or possessions of a business or individual.

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Business Purchase Agreement – For the buying and selling of a business and all its assets and liabilities.

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Commercial Real Estate Purchase Agreement – For any type of non-residential property, it’s recommended to use the commercial purchase agreement.

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Land Purchase Agreement – For the buying and selling of raw land for either commercial or residential use.

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Stock Purchase Agreement – Used to buy a portion or all of a business entity.

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