Purchase agreement – Terms and conditions, Legal requirements, Contingencies

A purchase agreement is the cornerstone document in any real estate transaction. It serves as a binding contract that defines the terms and conditions between a buyer and seller for the transfer of property. Whether it’s a residential home, commercial property, or a business, the purchase agreement outlines critical aspects such as the purchase price, contingencies, and closing date. According to legal experts in real estate law, a well-drafted purchase agreement protects both parties by specifying expectations, timelines, and any legal recourse in case of a breach. In this article, we’ll delve into the various elements of purchase agreements, answering the most pressing questions and exploring attributes that every buyer and seller must consider.

What is a Purchase agreement?

A purchase agreement is a legal contract outlining the terms of a property sale. The most critical components include the purchase price, contingencies, and closing date. Real estate attorney John Black of Black & Associates defines it as “the blueprint of the transaction,” ensuring that both parties are protected in case any disputes arise.

What Is the Difference Between a Purchase and Sale Agreement?

The difference between a purchase agreement and a purchase and sale agreement lies in their names only. Both are contracts used interchangeably to refer to the same legal agreement between a buyer and seller in a property transaction.

What Are the Essential Terms in a Purchase Agreement?

The most essential terms include the purchase price, property description, buyer and seller information, and contingencies. Experts like Mary Harris, a real estate agent with Century 21, emphasize that these terms ensure clarity and legal protection for both parties.

How can I find a purchase agreement template?

Purchase agreement templates can be found through various online legal document providers, real estate associations, or local real estate boards. These templates offer a starting point for creating a customized agreement tailored to specific transaction needs. Using a professionally drafted template can help ensure that all essential elements are included and reduce the risk of legal issues. LawDepot provides standardized forms, including purchase agreement templates, to help users draft their agreements efficiently. In California, the California Association of Realtors is the go-to repository for all real estate related forms. Any property that is listed on the MLS by a licensed real estate agent/broker, will require a CAR Purchase agreement form. It is very rare, if not unheard of, for a licensed agent or broker to take part in any real estate transaction that uses non-CAR forms. The CAR is the approved form required by almost all brokerages. The only time you may be able to use a non-CAR form is if you are making an off-market deal, which does not involve a licensed real estate broker or agent. (For example, you and your neighbor agree among yourselves that you will buy his house, you can download an agreement off the internet and use it– but at your own risk, because there is no guarantee that whatever you are getting is actually correct. Better to stay with CAR forms.) 

What’s the difference between a purchase agreement and a sales agreement?

The terms “purchase agreement” and “sales agreement” are often used interchangeably, as they both refer to a contract between a buyer and seller for the transfer of property or goods. 

What are the terms and conditions of a purchase agreement?

The terms and conditions of a purchase agreement typically include the purchase price, payment terms, closing date, contingencies, representations and warranties, and any specific obligations of the buyer and seller. These elements are essential for outlining the responsibilities of each party and the conditions under which the sale will proceed. Clear terms and conditions help prevent misunderstandings and legal disputes. According to Rocket Lawyer, “A purchase agreement sets forth the terms and conditions under which a buyer agrees to purchase a property from a seller” . There are many aspects to a purchase agreement, and purchase agreements may be found on the CAR Website.

How do I write a purchase agreement?

First, unless you are a licensed agent or broker, you should probably not be writing a real estate purchase agreement. You should consult a lawyer, broker, or agent. However, if you are buying your neighbors or family members house and just want to do it “off the books”, you as a lay person has every right to draft an agreement and sign it- there certainly are no laws against that. It is not advisable for a lay-person to do this, as there are huge risks involved in drafting up agreements without the knowledge or experience of an agent, broker or lawyer.

To write a purchase agreement, the basic essentials are: identifying the parties involved, describing the property or goods being sold, and specifying the purchase price and payment terms. Include any contingencies, representations and warranties, closing date, and other deadlines to perform on whatever contingencies there are. Again, it is highly inadviseable to do this yourself without consulting a legal professional. 

What are the legal requirements for a purchase agreement?

The legal requirements for a purchase agreement vary by jurisdiction but really, they are fairly simply. A basic purchase agreement just needs to be in writing, signed by both parties, and to clearly outline the terms of the sale. We have seen one page hand written purchase agreements (between people who know / trust each other) be sufficient to get a real estate sale done. However- if such a simple agreement does not properly account for different scenarios which may happen, and disagreements arise between the parties, an oversimplified or vague/ambiguous agreement will end up in front of a judge, who will then resolve the disputes and ambiguities. Proper purchase agreements lay out all the necessary details and account for all the usual issues that can arise in these transactions. That is why they are over 20 pages long (in small font too)- and not hand-written one-pagers.

Purchase agreement sample

A purchase agreement sample can be found through various legal document providers, real estate associations, or online resources. BTRE cannot provide agreement samples, because BTRE uses CAR Forms, and real estate agents and brokers are not allowed to give out CAR’s forms. Anyone who is dead set on doing their own agreement can likely find one at one of many places online- but buyer beware! There is no guarantee that those are any good. CAR is the gold standard, and every effort should be made to use the CAR forms. 

How do I create a purchase agreement for land?

To create a purchase agreement for land, include details such as the legal description of the property, purchase price, payment terms, contingencies, and closing date. It’s also important to address any specific conditions related to land use, zoning, and environmental issues. Consulting with a real estate attorney can help ensure that the agreement complies with local laws and adequately protects both parties’ interests. According to LegalNature, “Creating a land purchase agreement involves specifying the terms of the sale and any conditions that must be met” (LegalNature, “Land Purchase Agreement”). Again, the CAR has such agreements, and anyone who is trying to do a land deal should use the CAR agreement.

What contingencies are common in a purchase agreement?

Common contingencies in a purchase agreement include financing contingencies, inspection contingencies, appraisal contingencies, and title contingencies. These contingencies allow the buyer to back out of the agreement or renegotiate terms if certain conditions are not met. For example.

1. Inspection reveals foundation cracks and mold in house or other significant / costly problems; buyer will likely tell seller the home price needs to be lowered significantly, or, buyer can back out of the transaction without losing his/her deposit.
2. Appraisal by licensed appraiser comes back lower than the contract purchase price, Buyer can ask seller to lower price to the appraised value, or else, can drop out of the transaction, again, without losing their deposit.
3. Buyer cannot get financing; buyer’s loan falls through, in spite of buyer’s good faith efforts and belief at the outset that, they could get financing; buyer can back out without losing their deposit.

There are other contingencies, some of which are standard, and others which can be more creative (Things like, contingency that buyer must first sell their previous house in order to use that money for the new house- sellers hate this one and this probably won’t fly, unless the market is slow/seller is desperate) As explained by Zillow, “Contingencies are conditions that must be met for the purchase agreement to be binding” .

What is a purchase agreement deposit or earnest money deposit (EMD)?

A purchase agreement deposit, also known as earnest money deposit (EMD for short), is a sum of money paid by the buyer to demonstrate their commitment to the transaction. This deposit is typically paid into an escrow account when the contract is signed, and applied to the purchase price at closing. The deposit helps assure the seller of the buyer’s intent to complete the purchase “for real” and provides the seller with security that, if the buyer plays games/does not fulfill their obligations, the seller will end up taking the buyers deposit as a penalty. In the Southern California market, EMD’s are typically at least 3% of the purchase price. In markets where properties are often $1million or more- this is not a small amount, and is usually enough to “keep the buyer honest.” According to Investopedia, “Earnest money is a deposit made to a seller showing the buyer’s good faith in a transaction” .

What is the typical closing date in a purchase agreement?

The typical closing date in a purchase agreement is usually 30 to 60 days after the agreement is signed, but it can vary depending on the specifics of the transaction and the needs of both parties. The closing date is when the final transfer of ownership occurs, and all remaining funds are paid. Setting a realistic closing date is crucial for allowing sufficient time to complete all necessary steps, such as inspections, appraisals, and financing. According to Jacqueline DeMarco “Understanding the Closing Date” from The Balance, “The closing date is the date on which the sale of the property is finalized” 

How does a purchase agreement title search work?

A purchase agreement title search involves examining public records to verify the legal ownership of the property and identify any encumbrances, such as liens or easements. This search ensures that the seller has clear title to transfer to the buyer and that there are no legal issues that could affect the transaction. Conducting a title search is a critical step in the purchase process to protect the buyer’s investment. According to Tara Mastroeni article “What Is Title Insurance And Why You Need It When You Buy A New Home”“ at the American Land Title Association, “A title search is the process of reviewing public records to determine and confirm a property’s legal ownership”.

What are common disputes in purchase agreements?

Common disputes in purchase agreements often arise from misunderstandings about property condition, financing issues, or failure to meet contingencies. These disputes can lead to delays, renegotiations, or even cancellation of the sale. Clear communication and detailed documentation can help prevent many of these issues. According to the American Bar Association, “The most common disputes in real estate transactions involve misrepresentations about the property’s condition” . This means that, whether honest or simply a tactic (it happens both ways), buyers will often look at the home inspection and come back to the seller complaining that the home is in much worse shape than previously thought, and attempt to get various concessions (usually money) out of the seller. It then becomes a (sometimes heated) negotiation.

How are purchase agreements enforced?

Purchase agreements are enforced through legal means if one party fails to fulfill their obligations. This may involve mediation, arbitration, or litigation, depending on the terms of the agreement and applicable laws. Courts can order specific performance, award damages, or rescind the contract. The National Association of REALTORS® states, “A purchase agreement is a legally binding contract, and parties can seek legal remedies if the terms are not met”.

Most (but not all!) purchase agreements contain a “liquidated damages clause”, which essentially states that, the sellers legal claims against the buyer for failing to follow through on the purchase, is limited to forfeiture of the buyers EMD. This helps avoid litigation, as it specifies a definite amount, which both parties are aware of, for the penalty paid by the buyer for failing to perform, and thus avoids the need for a judge or arbitrator to make that determination. However, when a seller pulls out of the contract, there is no specified penalty for that, and that will often result in litigation, if the buyer is mad enough/wanted the property badly enough. Sellers have a much more strict obligation than buyers- the buyer only risks thier EMD for pulling out; Seller risks a big lawsuit.

What is the role of a real estate agent in a purchase agreement?

A real estate agent plays a crucial role in facilitating the creation and execution of a purchase agreement, and you should absolutely hire one to draft and handle it. Agents help negotiate terms, explain the agreement’s contents to their clients, and ensure all necessary documents are completed correctly and legally so the transaction does not fall through, or take unexpected turns based upon vagaries or misunderstandings. 

Agents also coordinate with other professionals involved in the transaction like transaction coordinators, appraisers, inspectors, handymen/repair people, etc. According to Realtor.com, “Real estate agents guide clients through the complex process of creating and finalizing a purchase agreement” .

Doing a real estate transaction without an agent is not in any way recommended, unless you are an agent yourself, a lawyer, or have some other sort of experience with real estate transactions to where you will not get yourself in trouble.

How do purchase agreements differ for commercial properties?

Purchase agreements for commercial properties often include more complex terms and conditions than residential agreements. They may involve detailed due diligence periods, specific performance clauses, and complex financing arrangements. Commercial agreements also frequently address issues like zoning, environmental concerns, and existing leases. The Commercial Real Estate Development Association notes, “Commercial purchase agreements require careful consideration of numerous factors unique to business properties” .

Often times, these agreements are custom-made and drafted by attorneys or brokerages for the specific transaction at hand. (Whereas, residential agreements are essentially boilerplate and all the same). 

What is the importance of due diligence or an inspection period  in a purchase agreement?

Due diligence is a critical phase in the purchase agreement process, allowing the buyer to thoroughly investigate the property or business being acquired. This period helps uncover any potential issues or liabilities that could affect the value or desirability of the purchase, or simply might give a buyer more time to analyze the neighborhood, the rental market, etc, and determine the deal is a bad fit. The inspection period gives the buyer all the power- the buyer can change his mind for just about any reason in this period, and get his EMD back.  Proper due diligence can protect the buyer from unforeseen problems and inform negotiations. According to Forbes, “Due diligence is essential for making informed decisions and mitigating risks in any significant purchase” .

What is the significance of the effective date in a purchase agreement?

The effective date in a purchase agreement is the date when the contract becomes binding on both parties. This date is crucial for calculating deadlines for contingencies, inspections, and the closing date. It’s typically the date when both parties have signed the agreement, though this can vary based on the specific terms. According to Rocket Lawyer, “The effective date is a key element in a purchase agreement, marking the start of the contractual obligations” .