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If you’re buying or selling a home, you can expect to sign a lot of documents, from contracts to checks to insurance policies. But the purchase and sale agreement is one of the first documents you’ll sign once you’ve found a home you love, or someone who loves your home.
This document signifies a buyer’s intent to purchase a property and the seller’s intent to sell it to that buyer. Here’s what the purchase and sale agreement is, what information it includes, and how legally binding it is.
What is a purchase and sale agreement?
A purchase and sale agreement, also abbreviated as P&S or PSA, is a standard form that buyers and sellers complete as part of a real estate transaction. It’s generally drawn up by the seller’s agent or a real estate attorney after a buyer and seller agree on a home’s purchase price.
Like the name says, this document serves as a preliminary agreement to purchase a home, and it includes key details of the real estate transaction. Although a home is often referred to as being “in contract” after the PSA is signed, this document is not the same as a final contract, though – and the sale of the home is by no means complete or finalized.
What should a purchase and sale agreement include?
The purchase and sale agreement includes several important pieces of information about a potential home purchase. Here’s what buyers and sellers can expect to see in this document.
The buyer and seller’s agreed-upon home purchase price will be included on the P&S agreement.
Earnest money deposits, sometimes called good faith deposits, are delineated. These act as a security deposit made by the buyer to the seller before a home purchase.
Inclusions or exclusions
If the seller is planning to leave certain items or appliances, like the washing machine or dryer, to the buyer as part of the home sale, that information will be included on the P&S. Likewise, if they plan to take certain fixtures with them, that will also be detailed.
Contingencies are actions that need to be taken by the buyer or seller before the home purchase can move forward. If they aren’t met, the buyer or seller could back out of the deal. For instance, buyers often include a satisfactory home inspection contingency as part of their agreement to purchase a property, or make their purchase contingent — that is, dependent on — their selling their own house first. A seller might stipulate the home is being sold “as-is,” and that they will make no repairs. Or they might reserve the right to continue showing the home.
Closing costs generally include any expenses related to the purchase and sale of a home that the buyer or seller will pay at closing. While closing costs are often the buyer’s responsibility, sometimes the seller will agree to pay a portion or all of them to incentivize a buyer to purchase their home. Spelling out who pays what is often part of the PSA.
The closing date is the date the buyer and seller complete the final paperwork to transfer ownership of the property, and the money changes hands.
If a home warranty is included as part of the transaction, the information about it will be detailed on the purchase and sale agreement.
What’s not covered in a purchase and sale agreement?
The purchase and sale agreement outlines the real estate transaction, but it typically doesn’t include the fine print. For instance, you won’t see the breakdown of all the actual closing costs on a P&S; you’ll simply see an estimated total of the major ones. The full breakdown will be included on the closing statement you receive later in the home buying process, generally three business days before the closing day.
How binding is a purchase and sale agreement?
Before you complete a purchase and sale, it’s important to be aware that, despite the innocuous sound of “agreement,” a P&S is an official contract, a signed declaration that Party A will sell the property to Party B. “It may not finalize a transaction, but it is legally binding,” says Michaela Green, licensed real estate agent and member of the Houston Association of Realtors. “If either the buyer or the seller does not uphold the terms of the contract, the other party has the right to take legal action.”
That said, if your P&S outlines certain contingencies, those contingencies must be met before the home purchase or sale can move forward. If they aren’t met, it’s possible for the buyer or seller to back out of the contract.
For instance, if the home inspection reveals several costly and fundamental problems with the property that the seller is unable or unwilling to fix, a buyer may be able to refuse to go through with the purchase. Or if the buyer fails to obtain financing by a certain date, a seller might declare their deal off, and entertain new offers. It all depends on which contingencies the buyer and seller have agreed upon. As for what happens to the earnest money — that’s often spelled in the P&S too.
Purchase and sale agreement vs. purchase agreement
While the purchase and sale agreement and purchase agreement are similar in name, they serve different purposes. The P&S is drafted early in the homebuying process, and it signals intent to transfer a piece of property. The purchase agreement is generally signed at closing and is the actual contract to purchase/sell a property. Essentially, the P&S is an initial declaration, and the purchase agreement — signed on closing day — finalizes the transaction. It might outline many of the same things as the P&S, but as a done deal, no longer an intent to buy.
That said, the purchase and sale agreement is sometimes referred to, colloquially but rather confusingly, as a “purchase agreement” for short.