A home purchase typically involves a lot of money and can get complex quickly. After the seller accepts the buyer’s purchase offer, both parties may need some time to do their due diligence on the property sale. A purchase and sale agreement, which defines the terms of the sale, helps ensure the seller and buyer are protected in the weeks leading up to closing day.
Here’s a closer look at what a purchase and sale agreement is and what it includes.
What is a purchase and sale agreement and how does it work?
A purchase and sale agreement, sometimes known as a P&S or PSA, is a legal document that outlines the terms and conditions of a real estate transaction. The purchase and sale agreement is typically negotiated after the seller accepts the buyer’s purchase offer.
Either a real estate attorney or a real estate agent can prepare the agreement, depending on state law. Once the seller and buyer review and sign the agreement, it’s legally binding. The home is considered “under contract” until the sale is finalized on closing day.
What information is in a purchase and sale agreement document?
In most states, the purchase and sale agreement is a standard document that can be revised as needed. These may vary in each state or from one transaction to the next, but they often include many of the same details. Here are some of the major pieces that are included in a purchase and sale agreement:
- Property description and parties to the contract: The purchase and sale agreement identifies the seller and buyer, along with the property’s full address and legal description. This section may also contain important information that affects the property, such as applicable easements, and a description of anything the seller will leave behind, such as fixtures and appliances.
- Purchase price and terms: The purchase price states how much the buyer will pay the seller for the property and how they’ll finance the purchase, such as with cash or a mortgage. It will also include details about the earnest money deposit, the closing costs and date, and how real estate taxes will be prorated.
- Contingencies and disclosures: Buyers and sellers have the option of including home sale contingencies, which are clauses that allow either party to walk away from the deal if certain conditions aren’t met. Any contingencies in the contract should include a time frame along with any consequences or remedies for each condition.
- Representations and warranties: The buyer and seller can use this section to make statements and assurances about the property and the transaction.
- Default and remedies: This portion of the contract defines what constitutes a breach of contract and what actions each party can take if this happens.
- Additional provisions: The buyer and seller can add anything that’s not addressed in the previous sections, such as special conditions or modifications to any clauses.
- Signatures: Both the buyer and seller must sign and date the document to make the agreement official.
What is not included in a purchase and sale agreement?
Purchase and sale agreements capture high-level details of a home sale, so it typically won’t include a full breakdown within each section. Closing costs, for instance, are specified on a closing statement.
Is a purchase and sale agreement required?
A purchase and sale agreement is not legally required for a home purchase. Because it protects both the buyer and the seller, it’s often a good idea to create one of these agreements with any real estate transaction — even if the buyer and seller know each other.
The purchase and sale agreement is legally binding once it’s been signed and usually can’t be changed unless both parties agree to it. For instance, the buyer may be able to negotiate a reduced purchase price if their home inspection reveals a problem with the property.
Purchase and sale agreement FAQ
Is a purchase and sale agreement the same as closing?
No. The purchase and sale agreement outlines the terms of the sale leading up to the closing date. At closing, the buyer and seller sign a purchase agreement, which is the final version of the contract. Once the buyer and seller sign the purchase agreement, the home officially transfers to the buyer.
What happens if the buyer or seller changes their mind?
If the purchase and sale agreement contains contingencies that haven’t been met, the buyer or seller may be able to back out of the sale without losing money. The agreement outlines when this can happen. However, if all of the terms and contingencies are met and either the seller or buyer pulls out, that decision could have financial and legal consequences.
What happens after the purchase and sale agreement is signed?
The next steps depend on the details of the agreement, but typically the buyer deposits earnest money, secures financing, conducts a title search, and schedules a home inspection. The seller prepares to move out of the home. The buyer and seller then receive a finalized copy of the purchase agreement, which they will sign on closing day.
Can you make changes after signing a purchase and sale agreement?
The purchase and sale agreement is a legally binding contract once it’s been signed by the buyer and seller. If one party wants to renegotiate, change the terms, or cancel the agreement, they can usually only do so if the contingencies have not been met by the dates specified in the contract.
What happens if contingencies are not met?
If contingencies aren’t met by the dates outlined in the contract, the buyer or seller may be able to back out of the contract. The details depend on what’s in the agreement.
