Purchase agreements are like diapers, uncomfortable but necessary to protect you throughout the home buying (selling) process. Purchase agreements cover the legal aspects of a real estate transaction between a buyer and a seller. You might focus on the most important item in the purchase agreement, the purchase price, but there are lots of other items that are there to help prevent miscommunication between all the parties involved in real estate transactions.
Buyers put down a good faith deposit and the agreement documents who holds the deposit. Buyers need to understand agency relationships and many buyers don't understand that unless they have a buyer's agent, their agent is really working for the seller. Other contingencies include securing a loan, obtaining and approving specific inspections (home inspection, water test, radon test, etc), the ability to secure insurance (flood zones along coastal areas, earthquake zones in California) and anything else the parties must agree upon prior to the closing.
Purchase Agreements and Money
Let's review what's documented on the first page of the purchase agreement:
- Lists the Seller, the Buyer and the date the agreement.
- Legal property address, including the tax assessor parcel book and page numbers. This ensures the right parcel is transferred and the title company issues title insurance on the correct parcel.
- Good-faith deposit – the amount of the buyer's check and how it will be handled, i.e. cashed and put into an escrow account when the buyers and sellers completely agree on the terms of the agreement. This deposit is a good faith deposit and may be kept by the Seller if the Buyer backs out for any reason that is not covered in the purchase agreement.
- Additional deposits required after financing has been secured and all property inspections have been completed and accepted.
Purchase Agreements and Property Conditions
Purchase agreements contain a checklist of inspections the Buyer can opt to have completed on the property. Here are the most common inspections completed during real estate transactions:
- General home inspections should be used by every buyer unless you're going to demo the building(s).
- Sewage disposal where there is a septic system.
- Water quality if the water supply is a well.
- Radon tests are more common now for air quality, and important when the Buyer becomes the Seller.
- Different parts of the country rely on pest reports and inspection of possible hazardous materials, i.e. asbestos.
- An energy audit may be included in the Seller is claiming features that reduce ongoing utility costs.
Inspections must be performed quickly as the purchase agreement sets a date to remove the contingency. If the Buyer finds any reports unacceptable, these must be communicated to the Seller within the specified time period. Purchase agreements protect both Buyer and Seller with regard to these inspections. The Seller is under no obligation to fix everything, and the Buyer is also under no obligation to purchase the property if something unacceptable is revealed.
Purchase Agreements and the Legalese
Purchase agreements contain standard clauses covering the deed, how title will transfer and how possession of the property will occur. These are spelled out in the contract and all parties should be aware of the legally binding nature of these clauses. If a Seller is selling a home that has a tenant living in it, investigation needs to be made as far as the tenant's rights prior to the purchase agreements being signed.
Buyers should also be aware that purchase agreements can be made with or without a loan contingency. This becomes an advantage for the all cash buyer who is competing where there are multiple offers. An all cash offer will be more appealing to the Seller as there's less risk that the deal will fall through.
Purchase Agreements May Include Addenda
Purchase agreements may include one or more addendums that must be initialed and/or signed by all parties with the execution date clearly shown. The date on the first page is not necessarily the execution date, unless it has been rewritten and initialed. The execution date on the purchase agreement is the most important date, as that's when the clock starts ticking on all contingencies. Everyone needs to clearly understand this date as financing and inspection contingencies are often stated as 10 days from the execution date.