At the end of the day, a real estate sale is no different from any other sale. Whether it is a house or a cup of coffee, the transaction ends with the seller having the buyer's money and the buyer holding the seller's property. What differentiates a real estate transaction from most other deals is what happens before the exchange is made. The purchase agreement is the document that governs that process.
Purchase Price and Earnest Money
For most parties, the most important part of a real estate purchase agreement is the definition of the purchase price. Typically speaking, a buyer and seller will agree to consummate a sale at a set purchase price. To initialize the commitment, the buyer submits a check for a portion of the purchase price as an earnest money deposit. This serves as good faith proof of the buyer's intent to close, and can also frequently be retained by the seller if the buyer fails to perform.
Many real estate purchase agreements contain contingencies. A contingency is a way for the buyer to say that he will only buy the property at the agreed upon price if a certain condition is met. One of the most prevalent contingencies is a financing contingency. In a financing contingency, the buyer spells out what type of mortgage or other financing he intends to obtain, and makes the purchase of the property dependent on his ability to get that loan. If he cannot obtain that loan, he can then walk away from the transaction and, usually, retain his deposit.
Inspection contingencies let buyers take a look at the property. With the exception of certain as-is agreements where the buyer agrees to purchase the property in its current condition, whatever it may be, just about every purchase agreement contains an physical inspection contingency, allowing buyers to carefully review the condition of the building and the underlying land. Rentals will also usually offer a financial inspection, allowing the buyer to confirm the property's income potential and may also offer an opportunity for the buyer to investigate the financial status of the tenants. As with the financing contingency, buyers can cancel the purchase if the property fails to pass muster.
Disclosures, Representations and Warranties
Many sellers and buyers also place disclosures, representations and warranties into the purchase agreement. These can range from simple and seemingly obvious things such as representing that the seller is the actual owner of the property to a number of other issues. A seller may choose to inform the buyer of issues with the property such as environmental contamination as a part of the purchase agreement. A buyer who has a real estate license should disclose that to the seller in the purchase agreement, as well.
Purchase agreements can also contain any number of other items. These can include the date and terms of the closing. If the seller is leasing back space in the building, the terms of that lease should be in the agreement. Purchase agreements also frequently contain descriptions of any work to be done after the closing of the transaction and who will be responsible for it.
Solomon Poretsky has been writing since 1996 and has been published in a number of trade publications including the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." He holds a Bachelor of Arts, cum laude, from Columbia University and has extensive experience in the fields of financial services, real estate and technology.