A Purchase Agreement Solidifies Your Sale: Here’s What You Need to Know Before Signing

What is a purchase agreement?

A purchase agreement, also known as a real estate sales contract, is the document the buyer and seller use to detail the sale price and terms. It typically starts as the buyer’s written offer to purchase the property. Once the seller accepts the terms and both parties sign the document, the offer becomes a legally binding contract. From there, it serves as the roadmap for the transaction through closing.

In other words, a purchase agreement is an offer that evolves into a contract.

“The purchase agreement not only sets the price being offered by the buyer but also terms and conditions,” says top real estate agent Jeffrey Cummings, who has 19 years of experience in the Greater Indianapolis Area. He shares that the document is typically seven to 10 pages long.

How the purchase agreement evolves during a home sale

In most states, real estate agents have a generic purchase agreement on file, which is drafted by a team of real estate attorneys and updated annually. The buyer’s agent typically prepares the document, customizing it to include a buyer’s purchase price, disclosures, contingencies, and so on.

The purchase agreement is a working document until signed. Here’s how the residential purchase agreement evolves during a home sale:

What are the types of purchase agreements?

There isn’t a single standard purchase agreement used in every real estate transaction. Depending on the state and the property being sold, buyers and sellers may use different forms and templates. These are the three main types of purchase agreements you’ll likely encounter.

State or association purchase agreement: If you’re working with a real estate agent, this is likely the agreement they’ll use. It’s a standard form based on the local real estate association’s guidelines. For reference, take a look at this sample purchase agreement from the California Association of Realtors.

General purchase agreement: This is a shortened version of the state or association agreement. It’s typically for buyers who purchase a property without the help of a real estate agent.

Property-specific purchase agreement: This specialized contract is for property transactions outside of single-family homes, such as mobile homes and vacant land. While these documents share most of the same information as the two options above, they often include additional clauses unique to the property involved. 

For example, a purchase agreement for a mobile home may have a “Residency Application” section, specifying that a buyer must obtain residency approval if the property is on rented or leased land as a contingency of the agreement.

How to review the purchase agreement in depth before you sign

Once both parties sign the purchase agreement, the home sale officially moves forward under a binding contract. From there, the buyer and seller are expected to follow the agreed-upon terms. 

Walking away from the deal is usually only allowed under certain conditions outlined in the agreement. That’s why it’s so important to carefully review the purchase agreement before signing. A purchase agreement sets the rules for the entire transaction.

So once you sign the contract, you must follow through with the sale even if you receive a more competitive offer, struggle to find a new home before closing, or simply have a change of heart. When there’s no valid contingency or clear mistake on the buyer’s side, backing out usually isn’t simple. In most cases, you would have to challenge the contract in court, which can get expensive and take a long time.

To protect your interests and assets and ensure a smooth transaction, you must clearly understand all conditions and contingencies before you sign on the dotted line.

Examine the buyer’s ‘out clauses’

Buyers can include plenty of fair, standard requests in a purchase agreement, but sometimes they also slip in “easy exit” clauses that look like small, harmless contingencies. These can give them more flexibility to walk away if things don’t go as planned.

Depending on what comes up after the agreement is signed, you could run into delays at closing or, in some cases, the buyer may find a way to exit the deal. If that happens, they might even walk away with their earnest money, leaving you back at square one. That’s why it’s important to know what you’re agreeing to before accepting an offer.

Before you accept an offer, consider the following common contingencies:

Inspection contingency

This contingency gives the buyer time to bring in a professional inspector to check the home and decide whether they’re still comfortable moving forward based on the results. Typically, this contingency expires in seven to 10 days, which is when the inspection is scheduled and completed. 

Even if you already did a pre-listing inspection, buyers often still want their own, and they may come back asking for repairs or credits before closing. 

Some of the most common repairs buyers request after inspection include:

• Removing dead trees
• Fixing sewage problems
• Eliminating fire hazards
• Repairing roof issues
• Replacing damaged wood

A buyer may also request certain specialists to assess the home for pests, asbestos, and radon issues.

However, in a hot seller’s market, where more homebuyers compete for fewer properties, Cummings says buyers are less likely to make repair requests as they can consider other offers. “Sellers are like, ‘Hey, we’ll go to one of our ten backup offers,’” he says. 

Appraisal contingency

An appraisal contingency lets the buyer step away from the deal if the home ends up appraising for less than the agreed purchase price. In that situation, the lender may also adjust financing, which can affect whether the sale moves forward as planned.

Appraisals can take anywhere from a few days to a couple of weeks, depending on the home and local market conditions. They usually happen after the inspection, once the initial due diligence is already underway.

If the appraisal values a home under the contract value, the buyer can renegotiate their offer or leave the deal. The seller can also cover the difference between the home and loan values, or the sale may fail altogether.

Financing contingency

This contingency allows the buyer to back out of the contract if they can’t obtain a mortgage. If your purchase agreement includes a mortgage contingency, it can take a month or two for the buyer to close on their home loan. Financing problems often cause settlement delays, which can lead to extended contract timelines or even cancellations.

Home sale contingency

With a home sale contingency, the buyer agrees to purchase your home if, and only if, they sell their house first. While this may seem like a rational request from a buyer, it is a particularly risky contingency for sellers.

To avoid this contingency, sellers can make a counteroffer, requesting that the buyer remove the stipulation. They can also suggest alternatives, such as a bridge loan, or refuse to sign a contract until the buyer secures an offer and closing date on their current property.

Watch the video below to see how our Buy Before You Sell program works.

Other contingencies

Buyers may also add custom contingencies to the purchase agreement. For instance, one Washington homebuyer included a contingency that a feng shui specialist must evaluate the property to verify whether it has the right energy.

Confirm the purchase price and closing costs responsibilities

Beyond the buyer’s contingencies, it’s important to pay attention to the numbers in your purchase agreement. The contract outlines the money exchanged in the home sale. Review these figures carefully before you sign:

Purchase price: This is the total value a buyer offers to purchase your home. It matters because it directly affects how much money you’ll actually walk away with from the sale. Taking a closer look helps you make sure the offer makes sense for your home and what it’s worth in today’s market.

Earnest money: Also called a “good faith deposit,” this amount shows how serious a buyer is about their offer. If a buyer walks away from the deal, they’ll lose this deposit. Typically, an earnest money deposit is 1% to 3% of the total purchase price, although it can increase to 10% in more competitive conditions.

Down payment: Most buyers require a mortgage loan to afford a home purchase, but the down payment is the percentage of the purchase price a buyer pays upfront and out-of-pocket.

A larger down payment often indicates lower risk to a seller. Should the buyer encounter any last-minute financing snags, the seller has good reason to assume the buyer can cover the shortfall.

Escalation clauses: In a competitive market, sellers are more likely to see an addendum to some purchase agreements called an escalation clause. This clause indicates that a buyer will pay more for the property if there are better offers on the table.

For instance, a buyer may offer $375,000 with an escalation clause that increases the offer to $2,000 above any competing offer. Usually, escalation clauses include a price cap indicating the highest possible offer.

Cummings recalls a time when fierce buyer competition drove aggressive escalation clauses. “With multiple offers, we [we]re seeing a lot of buyers offer full price and then have an escalation clause that goes [$40,000] or $50,000 over the asking price.”

Closing costs: The purchase agreement dictates who is responsible for which closing costs. Closing costs include insurance premiums and fees, commissions, property taxes, and more. Buyers’ closing costs typically amount to 2% to 5% of the final sale price, but sellers can pay anywhere from 6% to 10%.

Depending on your market, it’s customary for sellers and buyers to cover certain closing costs while others are up for negotiation. The buyer typically pays for the inspection and appraisal, for instance, while the seller traditionally covers the Realtor fees.

»Learn more: Before committing to any purchase agreement, it helps to know what your sale will really cost you at closing. The Home Seller Closing Cost Calculator gives you a quick way to estimate your net so you can make smarter decisions.

Check the closing deadline

The closing date usually depends on a few things, like when the seller is ready to move out and how quickly the buyer’s lender can get the loan processed.

The closing date is also sometimes referred to as the possession date, indicating when the buyer takes possession of a home, but the two are not always synonymous. Some closings experience delays, so it’s in a seller’s best interest to prepare for a hiccup or two.

“Buyers, of course, want possession at closing,” Cummings says, but “we try to negotiate for our sellers at least a few days to move out after the closing, in case there is an issue.”

Most parties schedule the closing date 30 to 45 days after signing the purchase agreement. Always discuss the closing date with your agent to ensure the closing timeline is realistic.

Understand how the buyer intends to pay

Financing issues are the number one cause of closing delays, so sellers should carefully evaluate a buyer’s financial strength before accepting an offer.

Most buyers include a pre-approval letter with their offer to assure the seller that their finances are sound. When possible, buyers also make hefty down payments, which increases the likelihood that a home sale will proceed on schedule.

“The buyers [who] win in multiple-offer situations [put] at least 20% down, sometimes 50%, or sometimes cash,” Cummings says. “In a normal market, you’ll have people doing more FHA, VA, and insured conventional loans.”

Scan for any special requests

Keep an eye out for additional buyer requests. For instance, a buyer may ask that you include specific appliances or furniture in the sale. Some buyers may even request to verify that the home is not “haunted.”

“In our contracts, there’s a ‘further conditions’ line, extra room for somebody asking for the house to be professionally cleaned before closing,” Cummings says, adding that any kind of request can be added here.

Remember: Who You Work With Matters

Working with a top agent you trust is the best step sellers can take to maximize their chances of a successful home sale. In fact, HomeLight data shows that top-performing agents sell homes faster and for more money than average agents.

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A top agent can help you review the purchase agreement with a fine-tooth comb

A purchase agreement might look simple at first, but it’s actually a detailed legal document, and what’s in it can seriously impact whether a deal goes through or falls apart.

To help you sift through legal jargon and ensure a smooth sale, you need to partner with a top real estate agent. An industry expert can help you compare multiple offers, so you can select the best of the batch. Once you choose an offer, they’ll help you understand the purchase agreement and negotiate on your behalf for the best terms.

When it’s time to sign, your agent will ensure that all contingencies, conditions, and deadlines are met, making sure your closing proceeds smoothly and without any issues. Connect with a reliable agent in your area today.

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