What is a Purchase Agreement?

Historically, when one thinks of a purchase agreement, it is not odd to automatically be reminded of real estate. This is because a large number of contracts, purchase agreements, and other forms and documents remain under the purview of the real estate industry and markets.

A purchase agreement also referred to as a purchase and sale agreement is a type of legally binding real estate contract that outlines the various conditions that are outlining what terms both the buyer and seller need to abide or complete for the sale of real property via a residential purchase agreement.

The purchase and sale agreement is associated specifically with the sale and purchase of real property and its fixtures, rather than any type of services (contracts for services are often called “service agreements”).

Real estate purchase and sale agreement being signed by the home buyerA proper purchase agreement should include all of the information that is pertinent or relevant to the deal, such as the buyer and sellers’ information, the price of the home being purchased, the terms for which the completion of the sale is contingent on, and much more.

Any real estate contract must be clearly-written to prevent any misunderstandings relating to the various terms, concessions, and contingencies.

Real Estate Transactions: Title Company, Earnest Money Deposit, and the Sales Contract

What is Earnest Money?

Earnest money also called an earnest money deposit or good faith deposit, is an amount of monetary funds, personal or otherwise, that a buyer pays to the seller at the time of entering into a purchase agreement or real estate contract. The primary purpose of the earnest money deposit is to ensure that the home buyer is serious about following through on the purchase agreement terms.

Generally used in real estate transactions, earnest money may be used to offer the homebuyer more time while looking for funding. It also provides the seller with an incentive to continue the sale of their residential or commercial property if the buyer runs into trouble.

The earnest money is not paid directly to the owner of the home for sale. The creation of an escrow account is necessary to make sure the appropriate disbursement of funds, after the real estate transaction’s conclusion, is handled by a professional third-party to the real estate transaction.

Once the owner of the property accepts an offer for purchase, the buyer is required to sign a purchase agreement to make the transaction legal and binding. This contract is generally referred to as the “purchase agreement” or the “purchase and sales agreement.” This contract starts the earnest money procedure, which enters both the home seller and home buyer into a legally binding contract for the purchase of the home at the agreed-upon terms, less any home inspection contingencies, or addendums to contract.

File system for managing title company clients

Title companies can perform title searches for you or the real estate brokerage you are using and is the third party typically responsible for holding and transferring the earnest money deposit as well.

As soon as the purchase agreement is signed, the purchaser or their real estate agent is then required to make the earnest money deposit to be held in escrow by a third party title company. When all the provisions of the sales contract are complete, the title company pays out the earnest money deposit to the seller as part of the purchase price. If the purchaser is unable to find funding for the purchase of the property, she/he can get their earnest money back, provided that he/she included the correct inspection contingency in the purchase and sale contract.

How Much Should My Earnest Money Deposit Be?

Honestly, the amount of earnest money deposit can be as much or as little as you want it to be. Many times you will run into the ever-dreaded “subject to our terms” clause, but legally, there is no set amount of money, or a percentage of the cost to buy a home that your earnest money deposit need be. As long as the parties involved come to an agreement on the amount as well as concessions to the transaction, your earnest money deposit can be any amount you want it to be.

The earnest money will generally have to come out of your own pocket as there are not really any mortgage lenders willing to increase their risk of loss by funding the earnest money deposit as well.

Contingent Meaning In Real Estate?

The contingent definition in real estate means the seller of the home has accepted an offer to purchase their home, but for the real estate transaction to be completed, the buyer must meet or bring to fruition whatever terms or “contingencies” have been negotiated in the home-buying contract.

For instance, the house might have to pass the appraisal, the buyer may still need to secure financing for the deal (also known as a financing contingency), and a number of other possible contingency clauses or addendums. In either case, the listing is still essentially active up until the home buyer satisfies the contingency, money changes hands via the title company or escrow, and the real estate transaction is completed.

Once the offer is accepted, all that’s left is the final paperwork and closing, then the status of the real estate transaction will change from contingent to pending.

There are various kinds of both contingent and also pending conditions, each one suggesting a various level of chance for other enthusiastic purchasers.

  • Contingent – Continue to Show: The seller has actually accepted a deal that depends upon one or numerous contingencies. While the purchaser is functioning to clear up those contingencies, various other buyers can proceed to view the residential or commercial property and also submit deals.
  • Contingent – No Show/Without Kick-out: The seller has actually accepted a deal with contingencies. However, the seller will certainly no longer be showing the house or accepting offers.
  • Contingent – Release/Kick-out: There’s a target date whereby the purchaser has to meet their contingencies. The seller is still showing the home as well as approving additional bids.

What is an Inspection Contingency and Why are they Important?

In real estate, a “contingency” refers to a condition of the Purchase and sale agreement that requires to take place for the real estate transaction to keep moving on. As the buyer, there are numerous contingencies that you can pick to include in your purchase and sale agreement or contract for sale.

In a real estate transaction, home inspections are for your benefit, as the buyer. They permit you to get a full image of the condition of the home that you plan to purchase.

Photo of small white house with a red roof sitting atop a fanned out pile of money with they keys

The home inspection contingency along with many other purchase or sale contingencies helps you as a home buyer hold on to your money if and when you need to back out of a deal for legitimate reasons.

The majority of buyers know about the house inspection contingency, which covers a basic assessment of the exterior and interior of the home, as well as its systems, but did you understand house inspections can likewise be useful to sellers too?

When it comes to real estate contracts and protecting yourself as a home buyer, it is important to understand what the different inspection contingencies and real estate contingencies are, and how they can help you. Following is an example of three of the most important contingencies you should include in your purchase and sale agreement:

Most Purchase Agreements are Contingent on What Two Items?

The two contingencies most real estate contracts are contingent upon are the financing contingency and the inspection contingency.

The financing contingency will typically look a little something like this: “This offer to purchase the property located at xxx xxx xxx is contingent on the purchaser being able to secure proper financing for the transaction.”

The inspection contingency states that the sale is contingent upon verification of the home’s structure and safety by a third party; a licensed home inspector. The amount of time you have to satisfy the inspection contingency can vary widely depending on the terms of the contract, but five to seven days is pretty typical.

If a satisfactory inspection report is not obtained, the inspection contingency allows the buyer the option to terminate the contract or cancel the contract, ultimately making the current offer null and void unless new terms are negotiated between the buyer and seller.

What Is Seller Financing And Does It Require An Inspection Contingency?

With seller financing, the seller handles the role of the loan provider. Rather than offering cash to the buyer, the seller extends adequate credit to the buyer for the house’s purchase cost, minus any deposit or down payment. To make it official, the seller and buyer sign a sellers note or promissory note, a legal document entitling the seller to the ownership of the loan. Then the purchaser repays the loan in time, generally with interest.

These loans are often short-term, for example, amortized over a time frame of 30 years however, with a balloon payment due in five years. Within a couple of years, the theory is that the house will have appreciated enough in value, or the purchasers’ financial circumstances will have improved enough that they can refinance with a conventional loan provider.

Sellers often do not want to be exposed to the dangers of extending credit longer than required. Seller financing is also a great way to avoid having to market the property.

Seller financing is most likely to be used when the house is free and clear of a home loan– that is, when the seller’s mortgage is paid off or can, at least, be settled using the buyer’s down payment.

The Three Most Common Home-Buying Contingencies of a Real Estate Purchase Agreement Explained

  1. Financing Contingency – If you are planning on using financing, conventional or otherwise, in which there is the possibility of being declined, you are going to want to include a financing contingency in your home-buying contract. The financial contingency can say that if you, as the home buyer, are unable to secure financing by the given date, you can back out of the real estate transaction with minimal to no losses.
  2. Appraisal Contingency – When you purchase a home, you expect to receive what you were led to believe you purchased, right? Right! What the appraisal contingency clause can do for you is protect you as the buyer if and when an appraisal of the property comes back significantly under the initially stated value and price of the home.
  3. Home Inspection Contingency – Buying a home sight unseen is just plain stupid if you don’t REALLY know what you are doing. When you purchase a home without a home inspection, it is akin to buying a home sight unseen, in that you never know what kinds of problems might be hiding behind the walls of the home. It is crucial to have a certified home inspector inspect the house you are buying, and if that inspection report comes back unsatisfactory to you for whatever reason, the Inspection Contingency Clause allows you a way out of the deal without breaking the contract. Without this clause, you might end up being forced to purchase a junker of a home when it looked like you were getting a sweet deal… And no one likes it when that happens. The length of time or number of days you have to complete your inspection contingency can be negotiated between you and the seller as long as it is before the date of delivery of the funds.

What To Look For When Buying A House For The First Time Home Buyer: A Complete Guide To Real Estate Transactions

Anyone thinking about purchasing or making an offer on a new home should read, re-read, and make good use of the knowledge contained in this book. The writer takes you step-by-step through the purchase or sale of a house via a traditional real estate transaction. This book is loaded from front to back with tips, tricks, checklists, and recommendations to help you become knowledgeable and confident when dealing with your property’s purchase or sale.

If you are looking for practical information and lists for home buying and home selling, the documentation needed by the home loan provider for mortgages, and how to go about choosing the most competent and compatible realtor. In that case, there is no better place to start than with this book!

This book is loaded from front to back with tips, tricks, checklists, and recommendations to help you become knowledgeable and confident when dealing with your property’s purchase or sale.

*Note: This is not legal advice, but meant to educate. Always make sure to speak with your real estate attorney on matters related to an actual real estate contract you have or are trying to form.

Real Estate Transactions, Contracts, And Contingencies F.A.Q.s

Two of the most prevalent and used contingencies in a real estate purchase agreement or contract to buy are the mortgage or financing contingency, as well as the inspection contingency.

Where real estate and real estate transactions are concerned, the idea of a sales contract or purchase agreement being contingent or having contingencies means that there are certain criteria or obligations that must be fulfilled before closing on a house can take place.

If you are wondering; How long does it take to buy a house, chances are what you want to know is the time it takes from making an offer on a house to closing on a house and the close of escrow. Typically, closing on a house will take about 30 days but can be as quick as a week or as long as a few months, depending on the situation. According to research done by LendingTree, in 2019 in the United States, real estate transactions, from start to finish, were taking an average of 47 days to close.

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