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

The purchase agreement is a working document until signed

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.

Types of purchase agreements

Here are the three main types of purchase agreements:

State/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 New Mexico Association of Realtors.

General purchase agreement: This is a shortened version of the state/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.

Review the purchase agreement in depth before you sign

Once you sign the purchase agreement, it becomes a legally binding contract. Both parties commit to the sale and may only negotiate or cancel the sale without repercussions if the agreed-upon contingencies and deadlines are unmet.

As a seller, it is very difficult to back out of a sale after both parties have signed the purchase agreement. Most of the “loopholes” in the purchase agreement protect the buyer, not the seller. 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. Without a relevant contingency or significant buyer error, you would need to fight the contract in court, which can be a drawn-out and expensive battle.

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’

There are plenty of reasonable requests buyers make in the purchase agreement, but there’s also potential to include easy-out clause masquerading as minor contingencies.

Depending on what issues or complications arise after signing, you may face closing delays — or worse, lose your buyer through a loophole. As a result, the buyer walks away with their earnest money in hand, leaving you with a sale gone sour.

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

Inspection contingency

This contingency requires a professional home inspector to evaluate the home and allows the buyer to back out if they’re not satisfied with the assessment. Typically, this contingency expires in seven to 10 days, during which time the buyer can arrange for an inspection.

Even if you’ve conducted a pre-listing inspection, some buyers may still request their own inspection and request that you complete or compensate for needed repairs before closing. Some of the most common repairs that 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.

Fortunately for sellers, Cummings says buyers are less likely to make repair requests in today’s hot seller’s market, where more homebuyers compete for few properties. “Sellers are like, ‘Hey, we’ll go to one of our ten backup offers,’” he says.

Appraisal contingency

An appraisal contingency stipulates that a buyer can back out of a sale if the home appraises for less than the agreed-upon price.

Appraisals can take anywhere from a few days to a few weeks, depending on your home’s size and the current market conditions. The appraisal typically takes place after a home inspection.

If the appraisal values a home under the contract value, the buyer can renegotiate their offer or leave the deal. The seller may have to 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 does include a mortgage contingency, it can take a month or two for the buyer to close on their home loan. In fact, according to a May 2024 report from the National Association of Realtors (NAR), “Delayed settlements” accounts for 13% of delayed contracts and 9% of terminated contracts.

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 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.

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 if the property had the right energy.

Confirm the purchase price and closing costs responsibilities

A purchase agreement outlines the money exchanged in the home sale. Review these numbers carefully before you sign:

Purchase price: This is the total value a buyer offers to purchase your home.

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 (EMD) 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 a buyer pays up-front 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.

“Right now, with multiple offers, 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,” Cummings explains, noting the fierce buyer competition in today’s market.

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 covers the real estate agents’ commissions.

Closely review the closing deadline

The closing date depends on several factors, including when a seller can move to their new home and when the lender can process the loan for the new homeowner.

The closing date is also sometimes referred to as the possession date, indicating the day a buyer takes possession of a home, but the two are not always synonymous. According to the NAR, 1 in 4 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.

In today’s competitive market, 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 increase the likelihood that a home sale will proceed on schedule.

“The buyers that are winning in these multiple offer situations, they’re putting 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.

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

A purchase agreement may seem straightforward, but this is a complex legal document, and the contents can make or break a deal.

To help you sift through legal jargon and ensure a smooth sale, you need to partner with a top real estate agent. A top agent 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.

Header Image Source: (Antonio Guillem / Shutterstock)