A guide to real estate purchase and sale agreements

Found the perfect home that meets your needs and your budget? As the excitement builds before closing day, you need a full understanding of what you’re filling out and signing before sealing the deal. Buying a home is likely one of the biggest purchases you’ll ever make, and the process is complicated, with plenty of documents and forms to sign.

One of these critical documents is the purchase and sale agreement, and it’s filled with details and important terms that set the transaction in motion toward closing. Purchase and sale agreements also include common contingencies related to home inspections, appraisals, and other circumstances that can affect you as a buyer. 

The basics of the purchase and sale agreement

After a buyer's offer is accepted, and the price and terms of a transaction are agreed upon, both parties sign a purchase and sale agreement, or PSA. This document is prepared by either a real estate attorney or a real estate agent, depending on real estate laws in your area.

A PSA contains all critical terms related to the transaction, including details about earnest money, closing date, and any specific contingencies both the buyer and seller have agreed to. PSAs must be comprehensive and thorough, containing every term for purchasing the home.

Many homebuyers confuse PSAs with a similar and critically important document: the purchase agreement. The PSA only defines the terms of a transaction, and signing it won’t complete the sale of a home. Signing a purchase agreement, on the other hand, does complete the home sale. It’s the penultimate document both parties sign before finalizing the transaction.

What should a purchase and sale agreement include?

While the terms included in a PSA differ from sale to sale, there are several general categories that are included in all situations.

Purchase price

When buying a home, you and the seller need to agree upon a price and set it out in writing. Every PSA includes the agreed-upon sale price, but it’s important to know that this price can change or continue to be negotiated even after both parties sign the PSA.

Negotiations often occur in situations where issues could cause the sale to fall through, like if the home inspection uncovers a major problem or if the appraisal comes back too low. In these cases, the buyer will often negotiate a lower price with the seller (as they should).

Earnest money information

Buyers often furnish earnest money — a small deposit — to prove their seriousness and the credibility of the PSA. This earnest money is also known as a good faith deposit, and the PSA should outline all relevant details like:

• The amount of earnest money to be deposited
• When the money should be deposited
• What contingencies entitle the buyer to receive their money back
• How long the buyer has to perform a home inspection or other due diligence tasks
• Who manages the earnest money, such as a title company or third-party escrow

Closing date

The purchase and sale agreement should include the agreed-upon closing date to set the sale process in motion. Before the closing date, you as the buyer should complete an appraisal, a home inspection, a title search, and mortgage underwriting. On closing day, all these processes come together at either a real estate attorney or title company’s office as the sale is finalized.

Learn about closing disclosures in real estate

Title insurance company information

Every purchase and sale agreement should include all necessary information regarding the title company the buyer is working with, like the name of the company and its address. Buyers often furnish escrow money to the title company who holds it. In some jurisdictions, buyers and sellers close on the property at the title company’s office.

Title condition

Your PSA should include information on how the house title is transferred, including who pays for the title policy. It also details how the title is both insured and conveyed.

Escrow company

Every PSA details all information regarding the escrow company, like who the escrow agent is and who pays them. It also outlines when parties should deliver loan proceeds to the agent. In many home sales, the title insurance company and escrow agent are the same.

Contingency

Contingencies are critically important in every home sale—they’re typically the reason buyers and sellers back out of a transaction. When buyers and sellers can’t agree on contingencies, either party can often legally terminate the transaction without losing money. In short, contingencies give both parties a little bit of wiggle room. Some of the common contingencies you may want to include in your PSA include:

• Mortgage contingency: This contingency outlines how long the buyer has to obtain financing to buy the property. If a buyer doesn’t come up with the cash or secure a mortgage loan by the deadline, they can withdraw without a penalty, while the seller can put their home back on the market.
• Title contingency: A title contingency allows the buyer to perform a title search and raise any objections to the status of the property. The seller must clear any title issues before closing.
• Home inspection contingency: A purchase and sale agreement often contains a home inspection contingency outlining how much time the buyer has to have the property professionally inspected. This ensures that the property is free from issues like a leaky roof, structural defects, or faulty systems like plumbing or electrical. If a property has defects, the seller is not obligated to fix them. If the seller chooses not to fix issues raised by the buyer, the buyer can end the sale process with no penalty.
• Appraisal contingency: Another contingency that safeguards buyers, appraisal contingencies stipulate that the property must appraise for the agreed-upon sale price, at minimum. If an appraisal returns a value lower than the sale price, the buyer can terminate the contract. The seller also has the option to reduce the price to the appraised value.

Addendum

An addendum, or rider, is an additional document included with a standard purchase and sale agreement. They often contain requests from either the buyer or seller to move the sale along. For example, a buyer may include a septic inspection addendum if they’re concerned about the function of a property’s septic system, or a seller may request closing date extensions for a number of reasons.

Remember that some addendums are optional but, depending on your jurisdiction, others are required by law. Work closely with your real estate attorney or real estate agent to determine what you must include.

The importance of PSA documents

No matter where you’re buying property — and no matter your budget — the terms of every home sale are dictated by the purchase and sale agreement. By understanding what’s included in this critical document, homebuyers can come to the bargaining table armed with information. Of course, working with the right real estate agent is critical when it comes to a smooth, successful purchase. By asking the right questions and doing your research, you can work hand in hand with your agent and approach your next home purchase with confidence.