Elements of a Real Estate Purchase Agreement
Learn the elements of a comprehensive Real Estate Purchase Agreement to sell or purchase a house with confidence.
A real estate purchase agreement is a legally binding contract that details an agreement between the buyer and seller of a property. For real estate agents, buyers, and sellers alike, learning the elements of a real estate purchase agreement is critical to executing a successful home-buying transaction.
First, we must highlight an important distinction – a purchase and sale agreement is not the same as a purchase agreement. In this article, we will only cover what’s in the purchase agreement which is the final document used to transfer a property from the seller to the buyer. In contrast, a purchase and sale agreement specifies the terms of the transaction. The purchase agreement is signed only after both parties have complied with the terms of the purchase and sale agreement.
For the elements and clauses contained in a typical Real Estate Purchase Agreement, we refer to the guidance from C.A.R. (California Association of Realtors). Whether you’re buying or selling property, make sure that your purchase agreement includes all these elements listed below to avoid confusion or problems during the purchase process.
24 Elements in a Real Estate Purchase Agreement
1. Identity of the Parties
Include the names of the parties in the transaction. Parties in the agreement may be individuals or organizations. Ensure that you write their full legal names and their contact information.
2. Description of the Property
Describe the property in absolute detail. Make sure that the description identifies the property without any ambiguity. If the subject matter is a product, state the quality of the product and specifications. The description of the property should be specific and detailed. Accuracy of description avoids any doubt and assists if needed in the enforcement of the listing on that ground.
3. The Purchase Price
State the price the parties have agreed on for the purchase of the property or product.
4. Type of Payment
State how the buyer will pay the seller for the product or property. Payment can be in cash, shares, financing, etc.
5. Terms of Delivery
Write when and how the seller will supply the product. In the case of a property transaction, it would instead be how and when the seller will transfer property ownership.
6. Closing Date for the Sale
State the date the parties will come together to close the sale. Closing involves the signing of the document to transfer the property from the seller to the buyer.
7. Definition of Terms
Include the definition of the meaning of key terms used in the agreement. Parties may use some terms differently or may want to limit or expand the meaning of certain words. A definition section will help you to do that.
8. Warranties
Detail any warranties that the seller is making in the agreement. A seller in an agreement for the sale of goods may make certain warranties as to the quality of the product.
9. The Deposit Amount
Agree on the amount of money the buyer will pay as deposit or earnest money and where it will be held in escrow. The deposit is put in an escrow account pending when parties complete the transaction or if the transaction falls through.
10. Contingencies
State any conditions that any party must meet before the transaction can be completed. For example, you can provide an inspection contingency that will allow the buyer to back off if, during the inspection, they discover something about the property that they cannot overlook. Other contingencies can be financial, title, or appraisal.
11. Penalty
Agree on the consequences if any party defaults or fails to follow through with the agreement without a valid reason.
12. Exclusion and Inclusions
Other than fixtures and fittings that are attached to the property, which are included, and personal property, which are excluded, specifically write in items the seller is including or excluding from the sale. If there is any doubt or potential confusion it is best to specifically point out items that are included or those items that are excluded.
13. Listing Price and Terms of Sale
If cash is acceptable to the seller, indicate the price in cash. Complications may arise when the seller demands assumption of the existing loan or loans, or indicates a willingness to pay part of the assumption fees or new set-up charges if the buyer assumes the existing loan or refinances with the existing lender. Such terms of sale should be spelled out in detail.
14. Broker’s Compensation and Negotiability of Commission
The amount of real estate commissions is not fixed by law. They are set by each broker individually and may be negotiable between the seller and broker. It will state simply that the broker is entitled to the compensation, indicated either as a percentage of the purchase price or a dollar amount, if the property is sold by the broker.
15. Ownership, Title, and Authority
In a typical transaction the seller indicates that they are the owner with the right to sell the property and no other persons or entities have title. Any exceptions to ownership, title and authority should be noted.
16. Seller Representations
The seller typically represent that, unless specified in writing, they are not aware of any of the following: Notice of Default; Loan Delinquencies; Bankruptcy or insolvency affecting the property;
Threatened or pending litigation; Current, pending or proposed special assessments; And to notify the broker if the seller becomes aware of any changes in the items listed.
17. The Broker’s and Seller’s Duty
In return for the exclusive rights granted by the owner, the broker agrees to use due diligence in attempting to find a suitable buyer and negotiate a sale. Thus, the listing is a bilateral contract.
The listing states that the right of the broker is “irrevocable.” Basically, this means that it cannot be revoked by either party without the other’s consent. However, if there is a breach of contract (e.g., failure of the broker to use due diligence), the contract may be subject to legal rescission.
18. Agency Relationships
The broker is required to give the seller a Disclosure Regarding Real Estate Relationships, e.g. the C.A.R. (California Association of Realtors) Agency Disclosure form. In the event the selling broker also represents more than one buyer, the consent of both the buyers and the seller is required by using the C.A.R. form, Disclosure and Consent For Representation Of More Than One Buyer Or Seller – DA or equivalent.
19. Security and Insurance
This clause advises the seller to take reasonable precautions in safeguarding valuables and discloses that 3rd parties such as inspectors, virtual tour providers, prospective buyers, appraisers and others will access the property and they may take pictures and videos. The clause also discloses to the seller that the broker does not maintain insurance to protect the seller and is not responsible for loss of or damage to personal or real property.
20. Keysafe/lockbox
Authorizes the agent to place a key repository on the listed property.
21. Attorney’s Fees
In the event of any legal action to resolve a dispute, this clause provides that the prevailing party will be paid reasonable attorney’s fees.
22. Additional Terms
Additional provisions could include: date for possession; rent if possession is delivered on a date other than closing day; repairs to be made by owner; and termite work. Also, if the seller has a prospect, which the seller personally located, the seller may wish to exclude a sale to that person from the seller's obligation to pay a commission.
23. Dispute Resolution
The seller and broker agree to first mediate any dispute regardless of the arbitration election.
24. After Mediation
The parties will arbitrate, if signed by all parties to the contract. There are certain exclusions from mediation and arbitration, most notably foreclosure, probate, bankruptcy and small claims actions.
Get Help with Escrow
Refer to this document sample from C.A.R. to understand the details of a Purchase Agreement With Escrow and steer clear of potential pitfalls as you go about acquiring or selling property. If you’re interested in finding out more about refinancing, selling or purchasing a new home contact us at American Plus Escrow for a free consultation.