If you’ve successfully made an offer on a home, then it’s time to sign the purchase and sale agreement. Also known as a PSA, the purchase and sale agreement defines the terms of the sale, including the price, the contingencies of the sale, and the timeline for closing.
Here’s what you can expect to find in a purchase and sale agreement.
One of the first items on the purchase and sale agreement will be the property details. This includes the address of the home being bought and sold, and a description of what’s included.
Buyer and Seller Details
This part clearly establishes the buyer and seller, including full names and legal addresses.
The purchase and sale agreement lists the agreed-upon purchase price of the home. However, this may not end up being the final sale price. If the home inspection reveals problems or damage, the buyer may want to negotiate the price even if the purchase and sale agreement has already been signed.
Earnest Money Deposit
Buyers typically pay earnest money — also known as a good faith deposit — to show the seller that they’re serious about purchasing the home. The purchase and sale agreement includes details about the earnest money deposit, such as:
- Deposit amount.
- When it needs to be paid.
- Contingencies that would entitle the buyer to a refund.
- When the buyer could lose their earnest money deposit.
- Deadline for conducting the home inspection.
- The escrow or title company that would hold the deposit until the deal is closed.
The down payment is the portion of the sale price that the buyer pays upfront and out of pocket for the home. The purchase and sale agreement lists the down payment amount.
This part includes details about how the buyer will pay the rest of the purchase price, typically with a mortgage. The PSA will include the loan amount and set a deadline for the buyer to obtain financing.
The PSA will outline details of the title search, title transfer, and title insurance. This includes the name and address of the title company, as well as who pays for title insurance.
The purchase and sale agreement includes escrow details and lists any deposits that each party will provide. It defines which escrow company holds the funds, including the name of the escrow agent.
Representations and Warranties
This is the part where the buyer confirms that they haven’t been pressured into buying the home and will not be getting any representation or warranty about the property. If the seller has included a guarantee of any type, then it must be listed in the PSA.
Depending on which state you live in, you may be legally required to include certain disclosures in the PSA. For example, sellers may need to disclose whether the property is connected to a local sewer or has it its own septic system.
Contingencies are the conditions that must be met for the sale to close. If any contingencies are not met, then the buyer can back out of the deal and keep their earnest money. Common contingencies include:
- Home inspection contingency. If the home inspection reveals any damage or safety problems with the home, then the seller must complete those repairs before the closing date. Alternately, the seller can compensate the buyer with a lower purchase price. Otherwise, the buyer can cancel the sale without penalty.
- Home appraisal contingency. Mortgage lenders typically won’t lend buyers more than a home is worth. If the home appraisal comes back lower than expected, and the parties can’t agree on a lower price, then the buyer may be able to cancel the sale.
- Financing contingency. If the buyer is unable to get approved for a mortgage, then they can cancel the purchase.
- Home sale contingency. If the buyer is unable to sell their current home by a certain date, then this contingency lets them back out of the deal.
- Title contingency. If the title search reveals unexpected liens or claims against the property, then the buyer can walk away.
Closing costs are the fees you have to pay to complete the real estate transaction. How much you’ll pay in closing costs varies, but typically totals 2% to 5% of the sale price. The PSA indicates which party is covering which closing costs.
The PSA schedules a closing day for the sale. The home appraisal, inspection, underwriting process, and title search all need to be completed before this date.
Personal Property Included in the Transaction
If any personal property — such as appliances and furniture — is to be included in the sale, then it needs to be listed in the purchase and sale agreement.
Option To Terminate
This section covers any additional instances where the buyer or seller has the option to back out of the deal, as well as any penalties they would incur.
Addendums are extra documents covering details and requests that might not be included in a standard purchase and sale agreement.
Last but not least, both parties will need to sign and date the purchase and sale agreement to make it valid.
Example of a Purchase and Sale Agreement
The Federal Deposit Insurance Corp. has made this example of a purchase and sale agreement available for you to view and download.