The Components of a Real Estate Purchase Contract

Couple talking to broker in new house
••• Getty Images/Roberto Westbrook

A real estate purchase contract is a binding agreement, usually between two parties, for the transfer of a home or other property. The parties must both have the legal capacity to make the purchase, exchange, or other conveyance of the real property in question, and the contract is based on a legal consideration, which is whatever is being exchanged for the real estate. It's almost always a certain amount of money, but consideration could also be other property or a promise to pay a given amount of money later.

Written and Signed

The statute of frauds in U.S. common law—which requires certain contracts to be made in writing in order to be valid—includes real estate contracts. If a contract to purchase real estate is not written and signed by both the buyer and seller, it is not enforceable. Handshakes and verbal commitment are not enough. The purpose is to prevent fraud and avoid situations where a court has to believe the word of one party over another. If it isn't in writing, it doesn't exist.

Purchase Contract Components

In addition to the agreed-upon consideration, a real estate purchase contract should include the following items:

  • Identification of the parties
  • A description of the property
  • Essential details, rights, and obligations of the contract
  • Contingencies or conditions that must be met before the sale can go through
  • The condition of the property
  • Which fixtures and appliances are included in the sale and which are excluded
  • The amount of the earnest money deposit
  • Itemized closing costs and who is responsible for paying them
  • Prospective date of closing
  • Signatures of each party
  • Terms of possession (when the keys to the property will be handed over)

Various templates and forms that allow you to create your own purchase contract are available but consider consulting an experienced real estate attorney or agent.

Contingencies

The list of contingencies might include a loan contingency, which provides details on the type of loan the buyer intends to arrange for and allows them to get out of the contract if they are unable to obtain that financing. An inspection contingency allows the buyer to cancel the purchase if their professional house inspector finds significant problems with the home. Alternatively, the buyer can ask the seller to accept a lower purchase price or to make certain repairs that would be costly to the buyer or a matter of health and safety.

In some states, home inspections are completed in advance of executing a final purchase contract, so an inspection would not be listed as a contingency.

There is also a chance that the sale is contingent on another real estate transaction taking place before this one. For instance, the buyer might say they wouldn't be able to complete the purchase until they have first sold their own home. The mortgage company typically requires the buyer to get an appraisal to determine whether the home is worth what the buyer has agreed to pay.

Earnest Money Deposit

When the buyer signs the contract, they often pay a small amount—generally 1–3% of the home's selling price—to indicate they are serious about purchasing the home. The money is held in escrow until closing by a third party, such as the seller's real estate attorney or a title company. The amount should be specified in the contract, and the money is credited toward the final negotiated purchase price. Most people apply it to the downpayment or closing costs.

Closing Costs

The types of closing costs and the party who's responsible for them vary from state to state, but they typically amount to 2–5% of the purchase price of the home. This includes taxes and fees related to the transfer of property, such as the recording of the deed and payment to the title company, which conducts research to trace the chain of ownership of the property and makes sure no one has a monetary or ownership claim on it. The title company also offers title insurance protecting against any future claim. The real estate agents' commission is an additional cost at closing and usually amounts to around 6% of the purchase price.

Article Sources

  1. Cornell Law School. "Statute of Frauds." Accessed March 30, 2020.

  2. Central Michigan University. "Agreement to Purchase Real Estate." Accessed March 30, 2020.

  3. IRS. "Publication 530 (2019), Tax Information for Homeowners." Accessed March 30, 2020.