Browse Proptionary encyclopedia

Build your real estate vocabulary to be able to communicate and invest more effectively and professionally.

Real Estate Purchase Agreement


A real estate purchase agreement is a legal contract that binds two or more parties together in relation to the sale of ownership of property. Both parties have to be legally allowed and fiscally able to buy, exchange, or make conveyance in other ways the purchased property in order for the contract to be valid. 


The specifics of a real estate purchase agreement can vary from state to state, and they can be used strictly as a tool to begin negation.  In most cases, a purchase contract will be binding and permanent. It is critically important for buyers to understand the terms and procedures associated with a purchase agreement to lower their risk of losing funds. It’s important before beginning that potential buyers decide what kind of ownership they plan to have, whether it’s a joint tenancy, a tenancy in entirety, a tenancy in common, etc.

A real estate purchase agreement only comes about after a prospective buyer has made their final choice as to the home they’re planning to purchase. A real estate purchase agreement can also be known as a residential purchase agreement, or a contract to purchase real estate. At the time the contract is introduced, the buyer will be comfortable with the location, neighborhood, the way the house is facing, the condition of the property and other stipulations of their choosing.  Purchase agreements must be in written form and signed by both the seller and the purchaser, according to the U.S. Statute of Frauds, because otherwise they are not considered enforceable.

There are some contingencies that must be taken care of before a contract can go into escrow. A contingency is anticipation of possible circumstances in the future. For instance, a potential buyer might like to get an appraisal on the property, and they may have to pay for it themselves. The topic of getting a property appraisal will usually come up during the loan application process and will most likely be a requirement set for by their lender. An appraisal will accurately establish the market value of the property. The reason that lenders require property appraisals is in case they need to use it as collateral for a mortgage. Once a lender has the appraisal, they can rest assured that the property will sell for at least the amount of the loan the purchaser has taken out. Appraisals are carried out by appraisers who are licensed by the state in which they operate. Other contingencies might include home inspections, exchanges, reverse exchanges and more.

All of these requirements must be adequately handled prior to the settlement date.

What a Real Estate Purchase Agreement Entails

A purchase contract will include the following:

–              A description of the building or property being sold, including the address.

–              Both parties’ identification.

–              A list of conditions, or contingencies that must be fulfilled before the sale goes through.

–              Basic rights, details and obligations stipulated by the contract.

–              The appliances and fixtures that are included in the home and what is not included.

–              A legal description of the property’s condition, or disclosures.

–              Itemized list of closing costs and a statement as to who is liable for them.

–              The deposit amount, or earnest money.

–              Possession terms, which describe conditions that must be met for the buyer to take ownership.

–              The proposed date the sale is meant to close, or settlement date.

–              Each party’s signature.

The most important of these items buyer to should pay attention to are the earnest money deposit, or EDM, the settlement, or closing date, contingencies, possession date, escrow, as well as the delivery and home warranty.

Earnest money refers to the deposit that an interested buyer has to make on a property and is usually about 1-2% of the property’s value. Once this deposit is made, it will be held to go towards the full amount due, or the full cost of the home. In some cases, buyers will want to put down more, maybe 4-5% of a property’s value to gain advantage over other buyers making bids for the same property. If for some reason the buyer feels the need to change their mind on the deal, that’s not related to contingencies, they may lose their deposit. However, if they pull out due to a legitimate reason, the deposit will be returned.

Contingencies are also something to consider. A continency must be carried out before the close date and includes things like home appraisals, as mentioned above.

Contingencies can also include mortgage approval, home inspection, exchanges, etc.  For instance, a buy may be interested in a property but be unable to purchase the new one until their current property sells. This is a condition that must go through. Another contingency might be a home inspection that finds that there’s mold in the basement. Something like this can be take care of by the seller, or the buyer has the option to pull out of the deal. Contingencies take time to complete and serve as protection for the buyers in case anything goes wrong.

Escrow is a time during which the property and important documents like contracts, and deposits are held in possession by the closing company, a title insurance agency, or a lawyer. A buyer will go into escrow once their contract and deposit has been submitted. During this time, a title insurance agent will confirm that a title transfer is indeed possible and there are no outstanding liens, debts, needed repairs, or unmentioned heirs to the property. Sometimes buyers must buy escrow, which tends to be around 1-2% of the selling cost of the property. Buyers can lose a portion of their escrow money if they pull out of the deal with legitimate cause.

Settlement dates, or closing dates, are defined as a pre-determined day that everyone involved in the contract will meet to finalize the sale. Sorting out when closing day will be allows each party enough time to adequately prepare. If for some reason contingencies aren’t taken care of by that date, there is potential that the buyer might lose their deposit and the sale won’t go through.

A Possession date is when a purchaser is officially allowed to move into their new home. Although about 30-45 days after closing is most common, a buyer may choose days, weeks, or as soon the settlement date to move into their new home

Delivery refers to the medium through which the documents will be sent. Some offices will require physical documents for their records but sending forms like this online is a common practice as files can be saved online. Both email and/or physical documents are acceptable.

A home warranty is a policy sometimes offered by property sellers that covers the cost of appliance repair for the first year of home ownership. Even if a stove or the heaters were recently repaired, they may need more work within the first year, which can be disappointing to buyers, especially if there is something to do with a lack of disclosure. Most sellers will offer coverage from $300 to $600.

Sign Up

Start expanding your real estate knowledge

Already have an account?
By signing up to create an account I accept Proptionary’s

Join Us

Get ahead by signing up for the latest real estate, investment and financial articles.