Buying or selling a home is a major transaction, with hundreds of thousands of dollars changing hands. You’ll want to base such a transaction on more than just handshakes and verbal agreements. In short, you’ll want a binding legal document.
A purchase and sale agreement is precisely that. It’s a legal document that outlines every aspect of a home sale, such as the sale price, key dates, conditions that have to be met, and more.
The importance of a purchase and sale agreement can’t be understated, so it’s essential to understand what it is and how it works before you buy or sell a home:
- What Is a Purchase and Sale Agreement?
- Who Writes the Purchase and Sale Agreement?
- What a Purchase and Sale Agreement Includes
- Property details
- Buyer and seller details
- Purchase price
- Earnest money deposit
- Down payment
- Financing requirements
- Title requirements
- Escrow details
- Representations and warranties
- Closing costs
- Closing date
- Personal property included in the transaction
- Option to terminate
- Example of a Purchase and Sale Agreement
- Purchase and Sale Agreement FAQ
- The Bottom Line on Purchase and Sale Agreements
What Is a Purchase and Sale Agreement?
A purchase and sale agreement is a written document that details every aspect of a home sale transaction. It’s often referred to as simply a P&S, or a PSA real estate document. It includes things like:
- A description of the property and the plot involved.
- What furniture and appliances will stay in the home.
- The price the buyer will pay.
- Commissions for the real estate agents.
- Whether the buyer is making any cash deposits.
- Reasons either party can back out of the transaction.
- Dates for specific events, such as the closing and when the buyer takes possession.
- Any warranties or insurance provided by the seller.
It’s important to note that a P&S is distinct from the similarly named purchase agreement. A P&S sets out the details of a transaction, but signing it doesn’t finalize the sale. Signing the purchase agreement is the final step in completing the transaction and transferring the property from the seller to the buyer.
Who Writes the Purchase and Sale Agreement?
In general, after an offer is made and the seller accepts, the seller will inform the buyer that they have accepted the offer. The purchase and sales agreement is usually drawn up by the real estate agent for one of the parties involved, though some states require a real estate attorney to draft the deal.
Do I need a lawyer to write the contract?
In many cases, you do not need to work with a lawyer to write a purchase and sale agreement or any other contract. However, many professionals suggest having a lawyer write or review the agreement.
“It is always recommended to have (a lawyer), especially if you are not familiar with the legal aspects of buying a property,” says Nate Claire, founder of the real estate company Buying Jax Homes in Jacksonville, Florida. “The risk of not using a lawyer for a P&S agreement is that you may miss important details or contingencies that could have a significant impact on the transaction. A lawyer can review the agreement and ensure that all the terms are fair and legal, and that the transaction is in your best interest.”
What a Purchase and Sale Agreement Includes
A purchase and sale agreement details every aspect of a real estate transaction. That includes information on the property, who the buyer and seller are, when the transaction will happen, and how the money will change hands.
The first thing you need to include in a P&S is a description of the property involved. Often, the description will be in the form of something like: “All land and buildings known and numbered as 1234 Main St., Anytown, State, in Registry of Deeds Book X, Page Y.”
Buyer and seller details
This describes the buyer and the seller, typically by name and current address.
This describes the total purchase price of the home, as well as details such as any earnest money provided. The agreement may read something like: “The agreed purchase price is $500,000, of which $24,000 having been paid with the signing of the P&S, $1,000 already paid with the offer to purchase, and $475,000 to be paid at the time of delivery of the deed.”
Earnest money deposit
This describes the total amount of earnest money offered by the buyer to show their commitment to the purchase. It may be described alongside the purchase price.
The down payment is the percentage of the home’s purchase price that the buyer will pay in cash rather than with a mortgage.
This describes the buyer’s plans to get a mortgage to finance the purchase of the home, including the amount to be borrowed and the date by which the buyer must secure financing.
This covers how the title will be provided to the buyer. Typically, that means the seller will provide a quitclaim deed to the buyer and the title will be free of encumbrances, such as tax liens.
This describes any deposits that each party must provide and where they will be held. For example, the buyer will deposit the earnest money into an escrow account rather than giving it directly to the seller.
Representations and warranties
In this section, the buyer acknowledges that they haven’t been influenced into the transaction and haven’t been provided with any warranty or representation about the property. If the seller has provided a warranty or representation, such as a guarantee that there’s no lead paint present, that will be noted here.
Some states have legally mandated disclosures that sellers must provide to buyers. For example, in Massachusetts, sellers must disclose if a property is served by a septic system rather than a local sewer, or the presence of lead paint in a home if they are aware of its presence.
One of the most important things to look at in a purchase and sale contract is the list of contingencies. These are the conditions that must be met before the transaction can go through. If these contingencies aren’t met, it allows one of the parties to back out of the deal without penalty.
A home inspection contingency is common but might be waived in hot markets. This gives the buyer the right to hire a professional home inspector to examine the property. The inspector will prepare a report detailing the condition of the home that may reveal the need for major repairs.
The contingency may outline a specific threshold of repairs that the buyer is willing to pay for. If the house requires further repairs, the buyer could back out or request concessions from the seller.
One thing to keep in mind is to watch out for any clauses that could put you in a less favorable position, such as an inspection date right before closing, says Charles Chandler, chief operations officer of My Tennessee Home Solution, a Nashville-based real estate company.
Most home purchases involve an appraisal where a third-party professional examines the home and determines its value. Often, the appraiser works with the lender to ensure that the home is worth enough to secure a mortgage against it.
With an appraisal contingency, the buyer reserves the right to back out if the home appraises for less than a certain value. For example, if the buyer offers $500,000 for a home and has an appraisal contingency of $425,000, and the home appraises for $400,000, the buyer could back out.
This gives buyers the opportunity to cancel a purchase if they fail to qualify for a mortgage. Usually, these contingencies state that the buyer must make reasonable efforts to qualify for a loan. They can’t intentionally torpedo their application to back out of a purchase.
Title contingencies require the seller to offer a clear title to the home. Issues tend to arise during foreclosure disputes or short sales, so it isn’t common to deal with problems related to this contingency.
If the buyer is selling a previous home and moving, this contingency lets them require that they find a buyer for their old home before completing the purchase of a new home. This is common if the buyer plans to use proceeds from the sale of their previous home to purchase the new property.
This details which side pays which closing costs, such as lender fees, prepaid taxes, and title and recording fees.
The P&S will note on or by which date the closing will occur.
Personal property included in the transaction
This part of the P&S notes which property in the home will transfer with the sale. Often, this includes things like appliances, but it could include other belongings such as furniture.
Option to terminate
This covers any additional situations in which the buyer or seller can terminate the deal and what penalties, if any, they must pay to do so.
Either party can add addendums to the purchase and sale agreement to cover any other details not explicitly spelled out in a typical agreement.
When both parties are satisfied with the document and are ready to agree to the terms, they sign the document.
Example of a Purchase and Sale Agreement
Searching online for a purchase and sale agreement template for your state should provide plenty of examples. Also, the Federal Deposit Insurance Corp. has a sample P&S agreement you can download and review.
Purchase and Sale Agreement FAQ
Before entering a real estate transaction, it’s important to understand how purchase and sale agreements work.
It’s usually a good idea to have a lawyer draft or review your P&S, says Ari Chazanas, president and CEO of Lotus West Properties, a Los Angeles-based property management and investment firm.
“It’s not only about the risk of not using one; it’s also about the risk of using one who doesn’t know what they’re doing,” he says. “I’ve seen too many cases where people sign a purchase and sale agreement without consulting an attorney first, and then they find out later on that they’ve made some serious mistakes in their contract — and that they can’t go back and fix them. That’s why you need to make sure your contract is solid before you sign on the dotted line.”
A good P&S will outline all the common situations and disputes that buyers and sellers could encounter, but no document can cover every possibility. If a dispute that isn’t covered in the agreement comes up, there are a few options.
First, the buyer and seller can negotiate how they want to handle the issue. This could work well if the issue isn’t major, and both sides work together with clear heads.
If negotiation doesn’t work out, mediation or arbitration also are options. In the worst case, one party may choose to bring the other to court.
The cost to create a P&S varies. If you put one together with no input from a lawyer, it can be free — though that’s dangerous. Each lawyer sets their own fees for creating a P&S, but you can expect to spend about $600.
The purchase and sale agreement takes effect once both parties sign it. The timeline for signing the document is typically outlined in the buyer’s offer, and often happens between one and two weeks after the seller accepts the initial offer.
The Bottom Line on Purchase and Sale Agreements
Other than the documents you sign at closing, the purchase and sale agreement is the most important document involved in a real estate transaction. It outlines every detail of the transaction and the timeline the transaction will follow. Make sure you work with a professional to review your P&S, and that you understand the rights and responsibilities you have based on the information in the document. If you do, you’ll be ready to complete the transaction.