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What is a purchase agreement, and how do you write one?
Learn more about the meaning of a purchase and sale agreement and find out what to include in yours.
A purchase agreement is a contract typically used in transactions where the buyer is acquiring goods rather than services. It is most commonly employed in complex and high-value deals, such as the purchase of real estate or large, specialized equipment. A real estate purchase agreement is a legally binding contract that outlines the terms and conditions for the purchase and sale of a property. It is entered into by the buyer and seller and specifies the details of the transaction and the circumstances under which the sale will take place.
What is a purchase agreement?
Whether it’s called a purchase agreement, or contract, the purchase and sales agreement is a binding contract for the sale of goods between a buyer and a seller. You could have a purchase agreement for anything — even that old clunker you still haven’t donated to public radio — but they’re typically used for things worth more than $500. Anything worth less than that can usually be handled with a bill of sale, or even a simple receipt.
Purchase agreements are most commonly found in real estate transactions and property transfers. That’s because of the higher dollar values involved, and because real estate transactions are far more complex than most other types of sales.
What’s the difference between a purchase agreement and a bill of sale?
The difference between the two might not be that obvious. Both are legal documents between a buyer and a seller in a financial transaction involving the sale of goods. In fact, both seem to use lots of the same language and may contain many of the same terms and conditions. But the purpose of each document — and its timing within the transaction — is actually very different.
A purchase agreement is a binding contract that outlines the various conditions everyone must abide by or complete in order to finalize a prospective future sale. The contract spells out the terms on which the buyer agrees to purchase the goods and the seller agrees to sell them. These agreements are most often used for real estate transactions (including real property transfers) and business assets.
A bill of sale, on the other hand, is more like a receipt than a purchase agreement. It’s a legal document, too, but it certifies a sale that has already happened and formally transfers ownership (title) of that item to the buyer. It’s most often used to transfer personal property, typically items of value like motor vehicles, boats, or planes.
How to draft a purchase agreement.
As mentioned above, a purchase agreement is quite simply a contract, which means that once signed, the terms are set and legally binding for both the seller and the buyer. To that effect, when drafting a purchase agreement, it's not enough to just group all contingencies and disclosures into a single document. Usually, purchase agreements included the following:
- Information on both buyer and seller. Name and contact information for both parties is required.
- Full legal description of the property (or asset) being sold. If this is a real estate purchase agreement, then it needs to include the address of the property being sold.
- Purchase price. The agreement shows the price to be paid for the property or the asset being sold.
- The date of transfer. This means the exact date on which the official transfer of title or ownership will take place (in the case of real estate agreements, it should also include the date and time the buyer will receive the keys to the property).
- Any disclosures and contingencies. Conditions that must be met for the sale to go through.
- Signatures. Every purchase agreement must be signed by each party.
If this is a private sale and you need to draft the purchase agreement yourself, there are plenty of templates you can find online and customize to fit your needs. Here are a few tips and guidelines to make sure you're on the right track:
- Refer to the contract as a "purchase agreement" explicitly.
- Avoid using overly formal or "legal-sounding" language to make the purchase appear more official.
- Whenever possible, use clear, simple language.
- Clarify any vague or ambiguous terms.
- When uncertain, it's better to provide more detail than too little.
- Be precise — precision is crucial when drafting a purchase agreement. Any ambiguity can lead to complications for all parties involved.
Contingencies of a purchase and sale agreement.
Contingency clauses are common in real estate transactions, for good reason. Purchase agreement contingencies are conditions that must be met in order for a real estate contract to become binding. These conditions help protect both the buyer and the seller from unforeseen events and provide a legal way to back out of the transaction if the conditions aren’t met. Numerous types of contingencies can be included in a contract by either the buyer or the seller. The four major ones are:
- Financing contingency. The offer is contingent on the buyer securing financing for the property. This is also sometimes called a loan approval contingency or mortgage contingency.
- Inspection contingency. The buyer must be satisfied with the results of the home inspection. This contingency allows the buyer to walk away from the deal if the inspection uncovers significant defects.
- Appraisal contingency. The home must appraise at a value equal to or higher than the price the buyer has agreed to pay.
- Home sale contingency. The purchase is contingent on the buyer's ability to sell their current home.
Failure to meet any one of these conditions can derail a potential sale, but the two contingencies that usually have the most impact on a successful closing are a satisfactory home inspection and — most importantly — the buyer’s ability to put their financing package together.
For most buyers, this will be a mortgage loan. Even if you've been preapproved for a loan, the purchase agreement should be contingent on your lender's final approval. Including this contingency protects you from potential legal consequences (including loss of your earnest money deposit) if the deal doesn’t close.
Who prepares a purchase agreement?
If the purchase agreement is a real estate one, then it's usually the buyer's agent who writes up the real estate contract. In theory, the buyer or seller could do it themselves — preferably with the advice of a qualified professional. You can create a contract from a standardized template or you can customize the entire agreement from scratch based on your back-and-forth negotiations, just so all the required elements are there.
Purchase agreements must be extremely clear as they specifically outline the conditions everybody must meet in order to complete the transaction. If other terms or conditions are negotiated after the agreement has already been signed, an addendum can be added, but both sides will need to sign again.
And remember that this is a contract. Make sure you know what you’re agreeing to before writing — or signing — any binding document. It’s always a good idea to get a final review from a legal professional before you commit.
Keep in mind: the only exit ramp from here on out is marked “breach of contract.”
Purchase agreement FAQs
What happens after you sign a purchase agreement?
Real estate transactions are way more complicated than buying or selling practically anything else. You may have spent years finding that dream home. Now you’ve drawn up the purchase agreement and your offer has been accepted. That doesn’t mean you’re about to get the keys.
It may take weeks or even months from contract acceptance to actually finalize the transaction. During that time, you, the seller, and various third parties all need to work together to inspect the property, verify its title, and go through the final hoops on financing in order to close the sale.
What is escrow in a purchase agreement?
Once the purchase agreement has been signed and the earnest money has been deposited, you are officially “under contract.” You now have the legal right to purchase the property (assuming that all of the contract conditions are satisfied). Signing the purchase agreement and depositing the earnest money is often referred to as moving the sale into escrow.
The seller may have their own contingencies in the purchase agreement. If so, those conditions carry equal weight. If any of them remain unsatisfied, the seller can legally dissolve the contract just like you can. Both parties must agree that all of the contingencies have been satisfied; if not, the contract can be canceled.
What is title search?
In most states, once the contract is signed the earnest money check is deposited with a third party such as an attorney or a title and escrow company. They research the ownership history, or title, of the property by looking through public records. The title search confirms that the seller has the legal right to sell the property and that there are no liens (legal claims) against it.
Can a purchase agreement be renegotiated?
Soon after the contract is signed, you have the right to inspect the property to make sure that all is well. If the property is in good condition, continue with the transaction. If not, you may want to attempt to renegotiate the price or get the seller to make needed repairs.
Usually, the buyer has the right to re-inspect the property right before closing. You may not be able to do a complete inspection, but you want to ensure that nothing has changed at the property. Use this inspection, called a final walk-through, to confirm that the seller has completed any repairs agreed to under the contract.
What happens when a purchase agreement expires?
There’s no legal requirement that a purchase agreement has to contain an expiration date, but most of them do. Some contracts also include a renewal clause, to provide a little breathing room in case contingencies take longer to resolve than expected.
However, sometimes a purchase agreement does expire before closing can occur, for a variety of reasons. Perhaps the lender missed the closing date, for example, compromising your financing. Once the purchase agreement expires, there is no longer a binding contract giving you the right to purchase the property. You and the seller are no longer engaged in an active contract with each other — period. Does that mean the sale is dead? Not necessarily.
The typical remedy is to try and extend the closing date. If the lender hasn’t approved your financing by the closing date, the seller might agree to push the date back to allow more time for your loan to go through — but they don’t have to. If the loan isn’t approved, the sale will then fall through completely.
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What is a real estate purchase agreement and how do you write one?
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