Real Estate Purchase Agreement FAQ - United States


A Real Estate Purchase Agreement is a sales contract used to document the purchase or sale of real property (also known as real estate or residential property).

LawDepot's Real Estate Purchase Agreement deals with homes and buildings where construction has been completed by the time the contract is executed (or signed). The document contains additional disclosure forms (if required) pertaining to the condition of the property, fixtures and items on the property, potential issues with additions and alterations to the property or its structural integrity, and more.

It should be noted that this kind of purchase agreement for real estate does not transfer title of real property like a Warranty Deed. This contract only details the rights and obligations of the buyer and seller before the title can be transferred legally.

General Information About Real Estate Purchase AgreementsCommon Terms Found in Real Estate Purchase AgreementsReal Estate Financing InformationQuestions Related to the Property in Real Estate PurchasesProperty Disclosure in Real Estate PurchasesQuestions Related to Closing a Real Estate PurchaseSigning and Dispute Information in a Real Estate Purchase Agreement
General Information About Real Estate Purchase Agreements
When should I use a Real Estate Purchase Agreement?

A Real Estate Purchase Agreement is used to document the sale of a home. It is most often used when:

  • A buyer is purchasing a new residential property where construction of the building has been completed before the home is paid for and the buyer takes possession of the property
  • A buyer is purchasing a previously owned and/or lived-in property
What law governs real estate sales?

Real estate transactions can be governed by both common law (laws made by judges in courtrooms) and civil law (laws enacted through state or federal statutes, otherwise known as legislation). This means that the laws can vary from state to state, so it’s important to check laws in your jurisdiction before executing a Real Estate Purchase Agreement.

When can a real estate contract be terminated?

There are two ways to terminate a real estate contract: either by including an option to terminate in the contract or by relying on the regulation set in your state’s legislation.

For example, state laws commonly allow a real estate contract to be terminated if a seller fails to disclose material facts about the condition of the property (such as water damage or mold) to the buyer.

Common Terms Found in Real Estate Purchase Agreements
What is specific performance in contract law?

Specific performance is a court action used to compel a contractual party to fulfill their obligations under a contract they’ve signed.

What does consideration mean in a real estate contract?

Consideration in real estate refers to something of value exchanged for real property. Money is the most common form of consideration, but it can be other things of value like another property.

What is earnest money?

Earnest money is the deposit that the buyer is required to provide to the seller up front, in order to convey to the seller that the buyer is serious about purchasing the property. It is a cash deposit paid to the seller as evidence of the buyer’s good faith to complete the purchase transaction.

An earnest money deposit can be credited to the sales price (sometimes applied to the down payment) upon closing but can be forfeited if the buyer defaults. It ensures that the buyer is serious about obtaining the necessary financing and fulfilling the other conditions necessary to purchase the property.

Without making an earnest money deposit, some buyers may not be motivated to obtain financing and may keep looking for a better deal on other houses. Often, if the buyer does not proceed with the transaction, the seller can keep the earnest money as damages (money paid to compensate a contractual party for losses).

However, if the buyer backs out due to one of the contingencies in their offer (e.g. poor results on the home inspection), the deposit is generally returned.

What is escrow in a Real Estate Purchase Agreement?

Escrow refers to the situation where the seller’s property title is held by a neutral third party (the escrow agent) until closing (when all the terms of the contract have been satisfied). At closing, the escrow agent transfers the title of the property to the buyer.

What is an escrow agent?

An escrow agent is an independent third party who holds property in a trust until the terms of the home purchase contract are met. The agent is responsible for collecting payments from the buyer and giving those payments to the seller.

From an administrative standpoint, an escrow agent is beneficial for all parties to a sale transaction as they handle all funds and documents relating to the sale. Both the seller and the buyer can give instructions to the escrow agent.

For example, if the seller has failed to perform one of their obligations under the agreement (like having a home inspection completed), the buyer can have the funds necessary to fulfill that obligation (such as the cost of hiring a home inspector) withheld from the seller out of the monthly mortgage payment.

What does the closing date refer to in a real estate contract?

The closing date is the date the seller delivers the title deed of the property to the buyer and the buyer pays for and takes possession of the property. Closing dates are typically 30, 60, or 90 days after the contract is signed.

People who are financing the purchase through a mortgage should ensure that the closing date will occur before the mortgage commitment letter expires. A mortgage commitment letter is a letter from a lender stating their commitment to lending money to the buyer for the purchase of real estate.

What is the effective date in a real estate contract?

The effective date is the date the parties become bound to the terms of the real estate contract. It is typically the day that both parties sign the contract, or if the parties are signing on different days, the date the last party signs the contract.

What are prorations in real estate transactions?

Prorations are expenses or benefits that are shared between the buyer and the seller. Common prorations calculated in real estate transactions include property taxes, mortgage insurance, and utilities.

Essentially, these prorations are meant to account for expenses that are paid while the title of the property is switching from the seller to the buyer.

For instance, if the closing date for the purchase agreement lands in a time period for which the seller has already paid property tax, the cost of the tax will be prorated from the closing date to the end of the time period the taxes were paid for. The buyer would then reimburse the seller for the time when the seller’s name was no longer on the title.

What is a residential services contract?

A residential services contract is a contract from a home warranty company to maintain, repair, or replace all or any part of the appliances, structural components, electrical, plumbing, heating, or air conditioning systems of a residential property. The contract is usually for one year.

What is a Mello-Roos community?

In California, the term Mello-Roos community is used to refer to new communities (sometimes called Community Facilities Districts or CFDs) that are formed by local governments to obtain additional public funding. In these communities, a special tax is imposed on property owners in order to help cover some of the costs of developing and maintaining the infrastructure of the community.

What is a legal description of property?

A legal description of a property (sometimes referred to as a legal land description) refers to the format used in your jurisdiction to officially describe sections of land for the purpose of government records. In other words, it is how your land is defined on government records.

In North America, most jurisdictions use a township and ranges system for rural areas or a lot and block system for urban or metropolitan areas. The legal land description may be documented in various ways. However, the most common identification system is a series of numbers and letters, such as SW19-57-8-W5.

Your legal land description can be obtained from the County Recorder’s Office and may be found on your land title, in tax assessment information, and in your mortgage agreement. A legal description of property is not the same as your street address (or municipal description).

What is unimproved property?

Unimproved property is land without significant buildings, structures, development, or site preparation. Essentially, it is a raw piece of land.

What is an environmental assessment report?

An environmental assessment report is created by an environmental specialist who examines the property to determine if any elements are causing a negative environmental impact. For example, this report would inform the buyer if there were any underground storage tanks on the property that were leaking a contaminant into the soil.

What are riparian matters?

The term riparian refers to bodies of water such as rivers and lakes which are located on or adjacent to property. Riparian matters refer to a property owner’s legal rights to such bodies of water.

Real Estate Financing Information
What is real estate financing?

Real estate financing refers to the process of paying off a real estate purchase over time rather than in a lump sum. A buyer borrows money from a lender (like a bank or loan office) and pays back the loan over time as dictated by the loan agreement. This process can also be referred to as amortization.

It should be noted that there is a “no financing” option in a Real Estate Purchase Agreement for buyers who pay in full with their own funds without requiring any sort of loan.

What is third-party financing?

Third-party financing refers to when a buyer takes out a loan from a bank or another lending institution to pay the sale price of the property the buyer is purchasing. The loan is then paid back over time (usually with interest) based on whatever agreement the buyer makes with the loaning institution. One of the most common forms of third-party financing is a Mortgage Agreement.

What is owner financing?

Owner financing (or seller financing) is often used when a buyer is not able to secure a loan from a financial institution. In such a case, the seller can set up a repayment plan with the buyer and enforce it with either a Promissory Note or a Loan Agreement.

What is an assumption of a mortgage?

An assumption of a mortgage occurs when a buyer agrees to take responsibility for an existing mortgage on the property they are purchasing. Before taking this option, the buyer should speak to the mortgagor (typically the seller) to determine if this is the best course of action for both parties.

What is the Federal Housing Administration (FHA)?

The Federal Housing Administration is a government agency that provides housing mortgage loan insurance to qualified applicants who get loans from certified lenders, guaranteeing the mortgage if the buyer defaults on (doesn’t pay off) the loan.

The FHA assists those with poor credit history, those who cannot afford a large down payment, and others who for one reason or another are unlikely to obtain a mortgage from a regular mortgage lender. The program allows those who typically would not be able to afford a mortgage to qualify for one because the FHA will pay the mortgage in the event of a default.

What is the Veterans Administration (VA)?

The Veterans Administration (also known as the US Department of Veterans Affairs) is a cabinet-level government agency that provides various social programs and benefits to veterans.

The agency provides housing mortgage loan insurance to qualified veterans who are trying to get loans from certified lenders in the event the homebuyer defaults on the loan. The program helps people with poor credit to qualify for a mortgage because the VA will guarantee to pay off the loan if the individual defaults on their mortgage payments.

Questions Related to the Property in Real Estate Purchases
How do you find the legal description of a property?

You should be able to obtain the legal land description of your property from the County Recorder's Office (also called the County Clerk or Register of Deeds Office). The legal land description of your property may also be found on your land title, in tax assessment information, and in your Mortgage Agreement.

What is the municipal description of my land?

The municipal description of a property is the street address of that property as it would be written on a postage envelope. For example, 1234 Oak Street, Los Angeles, California 90001.

Does a lease on a property need to be described if the property is being sold?

A lease refers to a situation where a tenant is paying rent to live in the property.

You do not need to include a description of the lease if it terminates prior to the closing date since the lease will not affect the buyer. However, any leases that extend beyond the closing date must be accurately described in the purchasing agreement, and a copy of the lease should be provided to the buyer.

What fixtures are typically included in a house sale?

Fixtures are items of personal property that have been attached to land or buildings in such a way that they cannot be removed without damaging the item, the land, or the building.

As a seller, you may choose to exclude some fixtures from the sale of your home because they have sentimental value, they are hard to replace, or for another reason.

Examples of fixtures include:

  • Chandeliers
  • Custom-made drapes
  • Window blinds
  • Built-in appliances
  • Built-in cupboards
  • Light fittings
  • Wall-to-wall carpeting
What happens if I forget to exclude a fixture from the sale of my property?

If the item has been affixed (or permanently joined) to the property, it is assumed to be included in the sale unless it is specifically excluded in the purchasing agreement. This means if the seller forgets to exclude a fixture (like a chandelier), it would be considered sold as part of the property. At that point, the buyer would essentially own it and could sell it back to the home seller if the homebuyer so chooses.

In such situations, it’s best for the buyer and seller to have a clear discussion about what is included (in regards to fixtures) in the sale of the property before signing any agreements.

Property Disclosure in Real Estate Purchases
What should a seller of real property disclose to a buyer looking to purchase it?

Each state has different requirements as to what should be disclosed to a buyer, but sellers should include as much information as possible regarding the condition of the property.

For instance, if the property is brand new, you’ll be prompted to discuss the quality of the property’s insulation, including the material used, the thickness, the insulation’s r-value, and which parts of the house are insulated.

To protect yourself from any disputes regarding the condition of the property before the sale is finalized, you should disclose any material defects that are affecting the property (such as mold or water damage, etc.) that you are aware of, and you should complete the state-specific disclosure form provided with the purchase agreement.

What are the statutory disclosure requirements for the sale of real estate?

Statutory disclosure requirements vary from state to state, but generally the seller is required to disclose any known defects in the physical condition of the property that may materially affect its value, including malfunctioning appliances, pest control problems, mold problems, structural issues with the home, roof defects, and more.

Each state has different requirements as to what should be disclosed, so it is recommended that you learn about the statutory disclosure requirements for your state.

Do I have to provide a disclosure statement to the buyer?

Most states require a seller to complete a disclosure statement for a buyer. You will know it is not a requirement in your state if you are given the option to leave out a disclosure statement in our Real Estate Purchase Agreement questionnaire.

Should a buyer request a new survey of the property before they purchase it?

Even if the seller can provide a copy of a survey that was completed within the past year, the buyer should still request a new survey in case there has been a change in the property since the last survey was completed.

Alternatively, the buyer could request a declaration that there have been no additions to the buildings on the property.

Questions Related to Closing a Real Estate Purchase
Do I need other documents to close a real estate sale?

Yes. A Real Estate Purchase Agreement is used to outline the terms of a residential property sale between two parties. It does not have the power to transfer title, so a Warranty Deed is often used in conjunction with the purchase agreement.

Also, if the buyer and seller agree to “owner financing” as an option for financing the sale of the home, a Promissory Note will also be used with the purchase agreement.

What is a Warranty Deed?

A Warranty Deed is a document filed with the County Recorder's Office that grants title to real estate from the seller to the buyer.

A Warranty Deed contains a guarantee from the seller that:

  • They are entitled to sell the property
  • There are no outstanding liens other than those listed on the Warranty Deed
  • They will defend the buyer against any claims brought against the property by individuals claiming to have a prior interest in it
What is a Promissory Note?

A Promissory Note is a legal document that acts as an enforceable promise that a borrower will repay a loan to a lender under the terms agreed upon in the contract. It can be used to document things like the loan amount, the loan date, the repayment plan, and more.

What is a transfer tax on property?

Most U.S. states collect a tax for every transfer of real estate that is registered. Depending on your state, this tax can be referred to as a:

  • Real estate transfer tax
  • Deed tax
  • Conveyance tax

Some states also require additional documentation to accompany the payment of the real estate transfer tax.

What is title insurance?

Title insurance is a form of insurance in which the insurer agrees to compensate the insured party for any loss suffered as a result of a defect in the title to the property that was unknown to the buyer at the time of the sale.

The policy is required by most institutional lenders in order to get a mortgage, and the lenders will pay the value of the mortgage in the event that there is a defect in the title that voids the buyer’s title to the property. Obtaining title insurance is an alternative to getting a municipal compliance certificate or real property report.

Signing and Dispute Information in a Real Estate Purchase Agreement
Does a Real Estate Purchase Agreement have to be notarized in order to be valid?

No, this document does not have to be signed by a notary public since it does not get filed with the County Recorder's Office. The purchase agreement only serves as a written record of a contractual relationship between the seller and the buyer and does not actually transfer the title or ownership of the property from the seller to the buyer.

Do I need witnesses when I sign a Real Estate Purchase Agreement?

No, witnesses are not required, but it is advisable for both parties to insist on having witnesses present who can, if a dispute arises at a later date, testify that the parties did in fact freely sign the contract.

Should unresolved real estate purchase disputes go to mediation?

Mediation is a way to resolve disputes in a less formal, less rigid, and generally more cost-effective manner than going to court. It allows both sides to talk candidly about their issues and bring them to the forefront.

Mediation is generally non-binding to the parties, meaning either party can walk away without a resolution if they feel the process is being handled poorly. That being said, the cost savings of mediation and the opportunity for alternate solutions (as opposed to a win/lose situation in litigation) make the process very appealing for small disputes.

Should unresolved real estate purchase disputes go to arbitration?

Arbitration is an alternative way of resolving disputes outside of court. The disputing parties will offer testimonies and evidence to plead their cases and then the arbiter rules on the case. Unlike mediation, where a resolution is only reached if all sides agree, arbitration can rule in favor of either party.

The parties are free to decide whether or not disputes that are not resolved by mediation should go to arbitration. If arbitration is agreed upon by the parties, the decision of the arbitrator will be binding on both parties.

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