A real estate purchase agreement is a legally binding document that binds two or more parties (typically the buyer and seller) to the terms and conditions of the sale or purchase of a home or any other residential real estate. In addition, a real estate purchase agreement is also used for previously owned property or for a property; the construction of which will be completed before closing.
A real estate purchase agreement is typically used by potential buyers and sellers of residential property. It outlines things like the purchasing price of the real estate, earnest money deposit, essential dates during the transfer period, contingencies, etc. A real estate purchase agreement must be written and signed by both parties for it to be valid and enforceable.
The objective of having a residential real estate purchase agreement is to ensure both parties are protected from being exploited. In addition, it is an avenue of ensuring that all expectations of the real estate transaction are satisfied before closing. To this effect, the residential real estate agreement tries to cover every foreseeable event of the transaction. A real estate purchase agreement is also important for stating the legal rights and responsibilities of the residential property buyers and sellers before legal title is transferred from the property owner to the buyer.
Real estate purchase agreements vary from one state to another due to the state-specific guidelines issued within the respective states. As a result, it is normal to find unfamiliar terms in different residential real estate purchase agreements. Therefore, committing to real estate purchase agreements that one does not fully understand should be avoided.
A real estate purchase agreement is also known as;
- Real Estate Contract
- Residential Real Estate Purchase Agreement
- Agreement to Purchase Real Estate
- Real Estate Sales Contract
- Home Sale Contract
- Real Estate Purchase Contract
How to Use Purchase Agreement
The process of buying and selling a residential property with the help of a real estate purchase agreement can be long and serious in nature, but it needs to be executed carefully and with due diligence. This process is a combination of the steps involved in-between up to when the property ownership is duly transferred.
This process is discussed below.
Offer to purchase
In the procedure of buying or selling property with the help of the residential lease agreement, once potential buyers have identified and selected a suitable home for purchase after researching and visiting homes during private showings, they reach out to sellers and make an offer. Again, the offer should be reasonable and reflective of the worth of the home.
Residential property can be costly, and its purchase will mostly require buyers to obtain financing from banks or other financial institutions. Therefore, buyers ought to obtain a pre-qualification letter that banks issue to show that they are financially worthy of a loan with the bank. Sellers will often require this pre-qualification letter to be provided as proof of the buyer’s ability to afford the residential property. A pre-qualification letter makes it easy for the buyer to gain access to residences and get a private viewing of the property.
Preferred type of tenancy
Buyers should then decide whether they shall own the property as joint tenants in common or joint tenants. Joint tenancy permits the transfer of property to the surviving tenant without probate if the one tenant passes away. Tenancy in common allows tenants to own a share of the house, which is transferrable to any other person other than the other tenant.
Write the agreement
Next, the residential real estate purchase agreement should be crafted. The buyer can write it and submit it to the seller, who has the right to accept, reject or issue a counteroffer. If the residential real estate purchase agreement is approved, it should be signed for due process to take place.
The buyer should then conduct an inspection of the property; this should be mandatory for buyers regardless of the seller’s claims to the property being up to standards.
A certified inspector is commonly involved for they understand what and where to look for faults. For buildings constructed before 1978, it is essential for a buyer to have a lead specialist assess the place to check if its tenants will be subjected to lead substances that are hazardous.
Buyers should also be permitted to look around the place to have an inspection of their own. Things to look out for include; cracks in the foundation, holes in rafters, ceiling wear that might indicate leaks or flooding, or any other concerns.
Next, the buyer starts the process of acquiring funding if they cannot raise the purchase price from their personal funds. The seller can opt to agree to finance the buyer if the seller financing method is used.
Apart from seller financing, the buyer could opt for the following types of it;
- Third-party financing – Third-party financing is the most common method of financing. It involves third parties such as banks and other financial institutions. They offer a loan or mortgage to the buyer for a specified period which is to be paid at given interest. Qualification is based on the buyer’s employment status, credit score, and income records and is determined through an appraisal. When an appraiser is used, financiers can be confident in granting the loan.
- Assumption of mortgage – For sellers with an existing mortgage on the property, they can opt to transfer the mortgage liability to the buyer and treat it as the price of sale. The buyer assumes the financial responsibility of the mortgage and makes payments to the initial lender. This method can save buyers’ closing and interest expenses.
- No mortgage – No mortgage financing applies to any situation the buyer makes the purchase without any third-party financing.
- No financing – The buyer, on the other can opt to pay the purchase price from their personal funds without using a loan. This is more enforceable to buyers with huge financial ability.
- Escrow – An escrow can be used to buy and sell a residential property. The escrow holds the property and funds until all requirements, such as insurance issues, inspections, and financing, of a residential real estate purchase agreement, are met.
Schedule the closing
After all contractual obligations have been fulfilled, the transaction can be closed. The buyer and the seller should schedule a day with a local title company. A title company traces the ownership of the property, locates the deed, and conducts a deed search to verify if ownership of the said residential property can be transferred to the buyer. Attorneys involved should coordinate with the title company to ensure relevant documentation is submitted and due diligence is done before closing. All funds, documents, and disclosures should be issued to the relevant parties, and the deed with the buyer’s name can then be produced and handed over.
Closing normally comes at costs which are commonly 2-55 of the purchase price. State laws will usually dictate who is liable for closing costs.
Closing costs are inclusive of;
- Property-related taxes and fees.
- Real estate agents’ fees amount to about 6% of the purchase price.
- Notary fees.
- Escrow fees.
Warranty deed or quitclaim deed
Next in the process, a warranty or quitclaim deed is issued by the seller to the buyer. A warranty deed is a declaration or guarantee by the seller that they are the rightful owners of the property being sold and are liable for compensating the buyer if it is later found their claim was untrue.
File the deed
Once the buyer signs the deed in the presence of a notary (recommended), it should be registered at the registry of deeds of the county where the residential property is located.
If there are any property taxes to be paid by the buyer, they should be paid during the filing. Taxes shared between the buyer and the seller must be paid during closing.
The final step is the physical transfer of the property, which sees the new owner take occupation of the home. This marks the end of the transaction.
How to Write Real Estate Purchase Agreement
Once both parties have agreed on the best way to carry out the transaction smoothly and successfully, a residential real estate purchase agreement should be prepared to put this in writing.
The steps discussed below indicate the components of a typical residential real estate purchase agreement and how they fit into the overall structure of the document.
Introducing the parties
First and foremost, the residential real estate purchase agreement should indicate the exact date it was created and identify the buyer and the seller. Write down the official full names and contact information, such as the mailing addresses of the parties.
Description of the property
Next, a description should be provided of the residential property to identify the specific property being conveyed.
An ideal description will typically include;
- Legal description – A legal description states the type of property, location, tax parcel information, and any other information specific to the property. For example, types of residential properties include single-family houses, duplexes, condominiums, and others.
- Personal property – If the property is accompanied by personal property belonging to the seller, for example, appliances such as refrigerator, dishwasher, oven, etc., list them in this section.
Next, basic terms of the transaction need to be outlined. Basic terms represent the essential details, rights, and obligations of the residential real estate purchase agreement.
Basic terms will address the following.
- Earnest money deposit– How much will be paid as earnest money deposit and the planned due date should be specified. Earnest money deposit is an amount paid to the seller by the buyer as a gesture of faith and commitment to buying the property. It is usually 1-3% of the asking price. The money is held by the seller or an escrow. If the deal closes, the earnest deposit is credited to the purchase. If the transaction does not go through, it is refunded to the buyer.
- Purchase price and terms – How much will be paid total in words and figures also needs to be indicated to specify the purchase and then declare the payment plan of the buyer.
- All-cash offer – Transactions where the buyer will be paying the full amount themselves should be specified by stating that it is an all-cash offer type of purchase. Indicate the date and time when this payment is expected to be paid.
Afterward, the residential real estate purchase agreement should declare any other means of financing the buyer will use to raise the finances. These means of financing must be described in detail. For example, if bank financing is being used, outline the date prior to which the buyer must submit proof of qualification for the loan from the financial institution.
If the seller is the financier, indicate the loan amount, down payment, applicable interest rate, and term of the loan. Define the term in months or years. Deadline for submission of relevant documents must be specified by day, month and year.
A contingency in a residential real estate purchase agreement refers to a foreseen event (possibility) that upon its occurrence, the residential real estate purchase agreement can be terminated. Outline any contingencies that may apply to the transaction.
Some of the common contingencies include;
- Inspection – An inspection contingency allows the buyer to terminate the residential real estate purchase agreement should they find serious property faults that compromise the property’s value or quality of tenancy/occupation.
- Financing – A financing contingency allows the buyer to duly withdraw from the residential real estate purchase agreement commitment and receive their earnest money in the event that they fail to secure the finances (mortgage or loan) for the purchase.
- Loan – A loan contingency permits the buyer to describe the type of loan they are hoping to secure before buying the property, thus allowing them to terminate the residential real estate purchase agreement if this does not fall through.
- Appraisal – Financial institutions will sometimes request buyers to include an appraisal; having an appraisal contingency allows the buyer to back out of the residential real estate purchase agreement if the property is found to be overvalued.
- Title – A title contingency is put in place to ensure sellers prove they are the rightful titleholders of the property and allowing buyers to withdraw from the residential real estate purchase agreement if this condition is not met.
Sale of another property
The seller should declare in this section of the lease if the purchase of the property is dependent on the buyer selling another property in their possession. This is common in real estate. It should be clarified in the residential real estate purchase agreement which property is being sold and how many days after signing the agreement the buyer will have to finalize the sale.
Factors relevant to the closing
Next, the terms of closing should be outlined. This is inclusive of the following.
- Closing date – Indicate the exact closing date by stating the day, month, year, and time when this will be done.
- Clarifying closing costs – List the expected closing costs and state who will be responsible for covering them. Remember closing costs can be shared as earlier stated.
Additional facts affecting the closing
There are other considerations that influence when the closing will take place. They can vary from one transaction to the other it is important to include them accordingly in the residential real estate purchase agreement.
- Survey – Guidelines on how a survey of the property is to be carried out should be outlined in the residential real estate agreement. For example, indicate the deadline awarded to the buyer to complete the survey; the number of days given to the seller to take corrective measures for any defects identified should be written down.
- Title – The seller should indicate the number of days after receiving the title search report. The buyer has to oppose any issues they deem misleading or unacceptable in the title search report. Also, include the deadline of the seller has to correct the objections made by the buyer.
- Title insurance – The seller should also declare that the buyer is responsible for getting title insurance which is insurance meant to cover the loss of value of the property in the future in case the title is found to have defects.
- Property condition – The date up to which the buyer has to carry out an inspection of the property also should be indicated. The date should be given, showing the specific day, month, year, and time. Also, the deadline for presenting the seller with inspection reports and new disclosures from the results of the inspection should be stated. Afterward, the residential real estate purchase agreement should state how many days the buyer and the seller have to agree on the new disclosures.
- Appraisal – Clarify if an appraisal will be conducted or not and whether the buyer’s commitment to the residential real estate purchase agreement is contingent on the appraisal. The number of days allocated for negotiation after the appraisal should be indicated.
- The closing – The date when the transaction will be closed should be stated next. It should be given in the format of the day, month, and year.
- Governing law – Residential real estate purchase agreements are governed by state laws. Declare the state whose laws were considered when creating the residential real estate purchase agreement. Identify it by name; it is the state where the property is located.
- Offer expiration – The terms and conditions of buying and selling the residential property are time-dependent. As a result, a date after which the offer will be considered null per the residential real estate purchase agreement should be stated.
- Addendums – Addendums are texts or documents added to the residential real estate purchase agreement to address different aspects of the transaction.
Examples of such addendums include;
- Closing Date Extension Addendum
- Earnest Money Deposit Receipt
- Condominium Assoc. Addendum
- Estoppel Certificate Addendum
- Release of Earnest Money
- Escrow Holdback Agreement Addendum
- Inspection Contingency Addendum
- Short Sale Addendum
- Termination Letter to Purchase Agreement
- Seller Financing Addendum
- Third (3rd) Party Financing Addendum
- Buyer beware – Also referred to as “caveat emptor,” is a principle used in real estate to state that allows sellers not to mention or disclose defects on real estate property, implying that the buyer buys the property at his or her own risk. This provision is found in different states like Alabama, Colorado, Arkansas, Florida, Indiana, Massachusetts, Missouri, New Jersey, Virginia, Montana, New Hampshire, West Virginia, and Wyoming.
Disclosures in a residential real estate agreement are meant for making relevant information (facts) of the property known to the buyer. Outline disclosures as applicable to the transaction.
Common disclosures include;
- Lead-based paint disclosure – A lead-based paint disclosure informs the buyer of the use of lead-based paint and is applicable for houses constructed before 1978. Lead-based paint is considered a health risk, especially its chippings.
- Well disclosure – Through a well disclosure, the seller informs the buyer of the existence of wells within the property, which is usually through a map indicating the locations of the wells. It should be clarified if the wells are sealed or currently in use. If the seller (property owner) is not aware of any wells, he or she should declare it.
- Methamphetamine disclosure – Sellers should use a methamphetamine disclosure to state if there was a production of methamphetamine in the property, and if there was, they should disclose its removal and remediation status.
- Property disclosure statement – Sellers use a property disclosure to outline any defects of the property, and as a result, they are not liable for them for the property is valued with the defects in consideration. A property disclosure statement is required in all the states that do not authorize a “buyer beware” addendum.
Other common disclosures are as follows;
- Termite damage
- Subsurface sewage disposal system
- Personal interest
- Radon gas
- Adequate facilities taxes
- Potential annexation
Additional terms and conditions
Either or both parties might have other concerns they would like to address in the residential real estate purchase agreement. Therefore, the following additional terms and conditions can be included in a residential real estate purchase agreement.
- Dispute resolution – A dispute resolution can be mandatory or optional. It is meant to outline the procedure or options available that should be used to resolve any disputes between the buyer and the seller. For example, mediation, arbitration, or legal action are various dispute resolution methods to consider.
- Option to terminate – A clause that permits either party to terminate the residential real estate purchase agreement within a specified period before closing can be included.
- Closing deliverables – The documents that will be transferred to either party can be listed in this section of the residential real estate purchase agreement.
- Risk of loss – A clause that declares who, between the buyer and the seller, is liable for any damages to the property that can occur in between the effective date of the residential real estate purchase agreement and the closing.
- Real estate taxes – Since there are property taxes applicable for land or any real estate property permanently fixed on the ground, the residential real estate purchase agreement can outline who assumes the responsibility of these taxes before closing or for the duration of the transaction.
- Homestead classification – Homestead classification awards residential property owners tax credit if provided they are the rightful owners and if they or a qualified relative occupies the property. Both parties can agree to declare the property as property that falls under homestead classification.
Items included or excluded
The residential real estate purchase agreement can also be used to list all the properties that will be included or excluded from the transaction package.
For example, the following items should be included as part of the property’s sale.
- Light fixtures
- Heating and cooling equipment
- Built-in kitchen appliances
- Window treatments
- Bathroom fixtures
Representations and warranties
Next, any representations and warranties that are applicable to the property should be outlined. Representations state what is known to be factual and true about the house as of the day when the representation is made. Warranties act as promises to the buyer that the seller takes full responsibility if the information given in the representation is found to be untrue.
The final step in writing a residential real estate purchase agreement is having it signed. A residential real estate purchase agreement must be written and signed for it to be valid according to the statute of frauds. The seller should be the first signatory, followed by the buyer, then the agent. Each party should provide their name, signature and indicate the specific date of signing.
Note: Statute of frauds is a common law in the US that requires certain contracts, like the residential real estate purchase agreement, to be in writing, detailed, and signed to be valid.
A counteroffer is offered by the seller after receiving an initial unsatisfactory offer from the buyer. A counteroffer will often be perceivably similar to the original residential real estate purchase agreement with minor changes here and there.
Changes that sellers commonly select in a counteroffer include;
- An increased purchase price.
- A higher interest money deposit.
- They refuse to cover or offer to share the closing costs.
- Rejection of specific contingencies.
- Changes in time frames
- Exclusion of some or all personal property from the offer.
In case of termination
Sometimes, unprecedented circumstances might befall either party necessitating the termination of the residential real estate purchase agreement. The most common reason for termination of the agreement is a breach of contract. However, the buyer and the seller can mutually agree to terminate the agreement.
- Reasons for termination
Breach of contract can present itself when either party fails to carry out their contractual obligation(s).
Other reasons for termination include;
- If the buyer fails to pay the security or earnest deposit and on time
- If material defects that are unacceptable to the buyer are found in the property.
- A specified contingency is invoked.
- When the buyer is unable to obtain funding.
- If the seller fails to move out on time (usually before closing).
- If the buyer is restricted from inspecting the property.
- Termination letter
Once the decision to terminate the residential real estate agreement has been made, real estate agents and escrow agents request the seller to hand in a termination letter in order to release all and any escrowed funds. A termination letter states when the agreement will be terminated and the reasons for termination.
The lack of a residential real estate purchase agreement when buying or selling residential real estate makes it hard for the buyer and seller to understand their roles and responsibilities during the transaction clearly.
Potential consequences of not using a residential real estate purchase agreement include;
- Loss of time – Parties can lose a lot of time should disputes arise, which would result in lawsuits in the absence of an agreement. Parties have to appear in court, and much time is lost before the property is sold or bought. The transfer of the legal and receiving funds ends up taking longer.
- Loss of money – Parties end up paying attorneys, thus losing money. After the court’s decision, the guilty party will always be required to pay compensation for the inconvenience and applicable penalties.
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Frequently Asked Questions (FAQs)
A real estate purchase agreement will ordinarily contain the buyer’s and the seller’s identifying information, a property description, purchase price, payment terms, closing terms, disclosures, addendums, signatures, and an option to terminate.
A real estate contract can be terminated under any condition specified in the contract. Breach of contract is the most notable reason for contract termination. Concerned parties can, however, agree to terminate. If a buyer defaults, misses a payment, fails to raise funding, among others, are also reasons why a contract can be terminated.