When it comes to a real estate transaction like buying a home, a lot of important paperwork needs to be completed before you can call a home yours. One of these important pieces of paperwork is a purchase and sale agreement.
To help you navigate this document, we’ll go over what a purchase and sale agreement is, what makes up the agreement, and what happens after the agreement is signed. So whether you’re selling a home in Boston, MA, or buying a home in Dallas, TX, read on to learn more about what goes into a purchase and sale agreement during a real estate transaction.
What is a purchase and sale agreement?
A purchase and sale agreement, PSA or P&S for short, is the document received after mutual acceptance on an offer. It states the final sale price and all terms of the purchase in a real estate transaction. PSAs can vary by state but they typically consist of the final sale price, earnest money details, closing date, title information, and contingencies agreed upon by the buyer and seller. Additionally, other details will be outlined in the agreement regarding timelines and anything else the buyer/seller requests.
Who drafts the purchase and sale agreement?
Depending on the state where your dream home resides, either the buyer’s agent or the real estate attorney will draft up the contract. In states where escrow agents handle the closing process, the buyer’s agent is responsible for preparing the PSA document. In areas where attorneys handle the closing, the attorneys will prepare the document. The buyer, seller, and their respective agents will sign the document.
What does the purchase and sale agreement consist of?
The specific items in this contract vary by state, but will almost always include the following:
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Final sale price: This is the purchase price agreed upon by the buyer and seller. Note that this price might change during negotiations before the closing date. For instance, if the buyer’s home inspection turns up a problem with the home, the buyer may be able to negotiate a reduced purchase price.
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Earnest money details: The PSA will include information on the earnest money deposit, such as the dollar amount and instructions for making the deposit. In most areas, the buyer will need to deposit a personal or cashier’s check within one to three days of mutual acceptance. The check will be held by a neutral third party until the completion of the deal.
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Closing date: On your closing date, the purchase will be completed, the transfer of property will be recorded with the local government, and the seller will receive the money for their home. Usually, you’ll sign all the necessary paperwork a day or two before your closing date. Your closing date may change, however, due to unforeseen events, such as your financial paperwork taking longer than expected.
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Title insurance company: Information about your title company will be included in the PSA document. As the buyer, you always have the right to select a title company. You should talk to your agent or attorney if you have any questions about choosing a title company
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Title condition: The PSA will include an agreement that the seller will provide a clear or marketable title of ownership to the buyer.
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Contingencies: Contingencies are conditions that must be met in order for the home purchase to be completed. If one of these contingencies is not met, the sale may be canceled by the buyer or seller. Here are some examples of common contingencies:
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Inspection contingency: This contingency allows the buyer to have the home inspected before going ahead with the purchase. If the inspection turns up a problem with the home, the buyer can renegotiate with the seller, who may repair or offer a credit for the problem. If the problem is severe, the buyer can back out of the purchase without losing the earnest money deposit.
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Financing contingency: This contingency requires the buyer to get approved for a mortgage before making the purchase. If the buyer is unable to get mortgage approval they can back out of the deal.
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Title contingency: This contingency gives the buyer the right to review the home’s title for problems or conflicting claims of ownership. If the title review turns up a serious problem with the title, the buyer can require the seller to satisfy them before the closing date. If these items are not cleared before closing, this contingency allows the buyer to walk away from the deal.
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Appraisal contingency: This contingency allows the buyer to back out of the deal if the home appraisal reveals that the home is not worth as much as the buyer intended to borrow and pay for it.
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Home sale contingency: Less common than the other contingencies listed above, this contingency gives the buyer the right to back out of the deal if she is unable to sell her current home.
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Addendum: An addendum, also known as a rider, is any additional request from the buyer to the seller that is not included in the actual PSA document. Examples may include a buyer’s request that the seller pays part of the buyer’s closing costs, or that the seller includes appliances or furniture not originally included in the home’s sale price.
Purchase and sale agreement vs. purchase agreement
The purchase and sale agreement may sound similar to the purchase agreement, but they shouldn’t be confused with each other. A PSA outlines the specific terms in the transaction between the buyer and seller while the purchase agreement is the final paperwork signed by both parties for the sale of the home. Once the details of the purchase and sale agreement have been signed and covered, the parties will move forward with the sale of the home by signing the purchase agreement.
What happens after a purchase and sale agreement is signed?
After the buyer and seller agree and sign upon the terms of the PSA and the earnest money is deposited, the buyer and third-party companies will begin the home inspections, title searches, loan agreements, and anything else outlined in the agreement that needs to be checked. It can take several weeks for the finalization of the purchase and sale agreement if problems arise during an inspection which can lead to negotiations and counters. Once the PSA is signed the buyer has finished the inspections, and other requests are outlined, the buyer will sign the purchase agreement at closing and receive the keys to their new home.