Purchase and Sale Agreement 101
Andrew Tavin, Personal Finance Writer
Andrew Tavin, Personal Finance Writer
Andrew Tavin a contributing writer for Own Up.
Real estate transactions are some of the most expensive purchases the average person will make in their lifetime. With so much money at stake, it's important that every possible contingency is spelled out in a binding agreement.
The purchase and sale agreement is a real estate contract presented by a real estate agent or drafted by an attorney that outlines the terms of the sale, the specifics of the closing process, and the contingencies that would prevent the sale from being completed.
Who Writes the P and S Agreement?
In most states, the purchase and sale agreement is a standard form legal document presented by a real estate agent while attorneys generally handle more complicated sales contracts.
Some states, however, require an attorney to draft this agreement. Standardized forms are available online, but buyers and sellers who work without a real estate agent, for instance in For Sale by Owner situations, should hire an attorney to review the documents.
What Information Is Included in the P and S Agreement?
While there may be differences between real estate sales contracts, certain elements will be included in nearly every purchase agreement.
An Agreed-upon Purchase Price
Even if a seller has agreed to a potential buyer's offer, nothing is final until the purchase agreement is signed. The sale price may be renegotiated if the appraisal or inspection uncovers inaccuracies in the seller's description of the property.
The Details of the Earnest Money Deposit (EMD)
The Earnest Money Deposit, or EMD, is a negotiated good faith payment made by a buyer when their preliminary offer is accepted. The earnest money payment shows sellers in competitive real estate markets that a buyer is serious.
The deposit is held by an escrow agent, attorney or a real estate agent and applied to the purchase price once the sale is completed. If the sale falls through, the earnest money may be given to the seller or returned to the buyer pursuant to the applicable terms in the sale contract.
The Planned Closing Date
The closing date, sometimes called the settlement date, is the time when the buyer will take possession of the home. It is subject to change if issues arise and there may be additional terms outlining what will occur if the process isn't finished by the specified date.
A Legal Description of the Property
The size and location of the property, including a map with property lines, is provided in real estate contracts so it's clear exactly what is being transferred.
Any additional terms of the sale are outlined in riders, such as who will cover the different closing costs or which appliances and fixtures, like washing machines and window treatments, are included in the purchase price.
What Contingencies Are Included in the Agreement?
A key part of a real estate purchase agreement is the list of contingencies that must be met for the sale to go through. While a buyer and seller could write whatever they want into their document, there are certain common contingencies that appear in nearly all real estate purchase contracts.
Home Inspection Contingency
Although laws vary by state, the seller is generally required to disclose certain negative information about the property, like the presence of lead-based paint.
The home inspector looks for any material defects that the seller may not have disclosed or wasn't aware of. Any issues found during the inspection period could lead to a change in price if the prospective buyer still wants to buy the home in its current condition.
A mortgage lender will require an appraisal as part of the loan process. If a financial institution is considering lending money for a purchase, they want to be certain the property is actually worth its sale price.
If the appraisal value differs greatly from the seller's claimed value, the sale price could be altered or the sale could be canceled.
The loan agreement is written to protect the interests of both the buyer and seller. Neither wants to be stuck in a situation where a mortgage lender refuses to finance the purchase. That's why real estate deals will contain a financing contingency so the sale will be canceled if the mortgage company doesn't provide approval.
Home Sale Contingency
If a potential buyer is also selling their home, a contingency can be written canceling the purchase of the new home if their previous home doesn't sell during a certain period of time. A buyer would struggle to pay a new mortgage and their current mortgage at the same time, assuming they can even find a mortgage broker willing to lend to them in that situation.
A title contingency is present to ensure that the seller is the actual owner.
The title search could take anywhere from a few hours to more than 10 business days.
The buyer and seller can work with their respective real estate attorneys to add any additional contingencies relating to inspections for pest, radon, lead paint, or time period for completion of the sale.
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