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A purchase contract for a house outlines the legal terms and conditions for buying the property, agreed upon by both the buyer and the seller. In effect, when a potential buyer makes an offer to acquire a new house, the buyer will submit terms for the sale and key financial facts such as their offer price. A house seller will then have the option to accept, reject, or negotiate the conditions of this offer. At this point, the for-sale property and any participants in the arrangement are both considered "under contract." This contract expresses all parties' intent to engage in a selling transaction. It specifies which criteria must be satisfied for the sale to close and for ownership of the property to transfer to the new buyer. This blog explains the key elements of a purchase contract, who prepares the contract, etc.
What is a Purchase Contract?
A purchase contract is a legal contract between a buyer and a seller made during a real estate sale, sale of company stock, or sale of other assets. All parties must have the legal capacity to make the purchase. The purchase contract is also based on consideration, which is what monetary value is being exchanged for the real estate, company stock or other assets. A real estate purchase agreement must be written and signed for it to be legally enforceable.
Components of a Purchase Contract
A purchase contract can contain certain contingencies upon which the sale will be dependent. These can include the following:
- Loan Contingency: A loan contingency can be used when the buyer is purchasing real estate through a loan. This would provide details on the type of loan that the buyer intends to acquire to buy the property. If the buyer fails to secure the loan, a loan contingency can help the buyer get out of the purchase contract.
- Inspection Contingency: An inspection contingency allows the buyer to have a certain amount of time to conduct home inspection for any issues. If the home fails this inspection then this contingency allows the buyer to cancel the purchase.
- Sale of Existing House: A contingency for selling an existing home makes the sale contract contingent on the sale of a current home. If the current home doesn’t sell and the sale doesn’t go through, this type of contingency still allows the buyer to back out of the purchase contract.
- Appraisal Contingency: An appraisal contingency allows the buyer to exit the purchase contract in case that the appraisal, or appraised value, of the real estate is lower than the sale price.
- Earnest Money Deposit: Earnest money contract is a legally binding document between parties made during the exchange of the earnest money. Earnest money is a monetary deposit made in good faith on a home loan or real property to the seller from the buyer during a home sale. Purchase contracts will typically contain all information pertaining to the earnest money deposit used in the transaction. It will also outline terms and conditions of refund, contingencies and escrow details of the earnest money deposit.
- Financing: The purchase contract can include information on how the property or asset is financed. For instance, if the buyer is buying a home through a mortgage, the purchase contract will mention that.
- Closing Costs: The purchase contract will also note closing costs associated with the purchase. Closing costs can differ from state to state for buyers and sellers. Typically, they are about 2-5% of the purchase price of the home. This covers the taxes and fees related to transfer the property like recording the deed, and payments to title company. A purchase contract can mention the fees and costs that will need to be paid by each party, as negotiated in the contract and based on the state where the contract is executed.
Who Prepares a Purchase Contract?
Generally, the buyer’s agent will write the purchase contract. However, if they are not legally licensed to practice law, real estate agents might not be able to write their own purchase agreements. They can use real estate lawyers or law firms to write up the purchase contract.
Here is a sample of a purchase contract.
Can I Write My Own Purchase Contract?
It is advised to use professional help to draw up a purchase contract to ensure it doesn’t lead to legal troubles in the future. However, you can write your own purchase contract as long as you include certain specifics of your home. Keep some of these important steps in mind:
- Legal Address and Relevant Laws Applicable: List the legal address of the property along with any restrictions, zoning laws and special permits that are applicable to the property. Do not forget to mention other property details such as permanent fixtures, appliances, etc.
- Purchase Price: Specify the purchase price of the property. Mention any amount that will go into escrow like the earnest money deposit. Lay out all terms and conditions of payment.
- Closing Date: Upon agreement from the buyer you can add the closing date of the sale to the purchase contract. You can add penalties in case of default or breach.
- Buyer’s Rights: Mention buyer’s rights in the sale process, such as inspection and appraisal.
- Seller’s Responsibilities: Mention the responsibilities of the seller such as any intention to make improvements or change fixtures.
- Conditions and Provisions: Add all additional conditions and provisions regarding the sale. These could be time frames for financing the home, sale of existing property, etc.
Advantages of a Purchase Contract
A purchase contract offers several benefits in the USA, such as:
- Grants Legal Protection: A purchase Contract stipulates terms and conditions that are legally enforceable, defending the rights and interests of both the buyer and the seller throughout the transaction.
- Offers Clarity and Certainty: It provides both parties with clarity and certainty by outlining the particular terms of the transaction, such as the purchase price, payment terms, property description, and other important data.
- Avoids Conflict: Since everyone knows their duties, potential disagreements and misunderstandings can be reduced with clearly stated terms.
- Improves Opportunities: Having a purchase agreement in place may improve the buyer's prospects of getting financing from lenders since it shows the buyer is serious and committed to the acquisition.
- Aids in Negotiation: It acts as a stage for negotiations, enabling the parties to settle on terms and conditions that suit them both.
- Specifies Legal Recourse: In the event of a contract violation, the harmed party may pursue the legal options and remedies specified in the agreement.
- Provides Confidentiality and Non-disclosure: In some situations, purchase contracts may include these provisions that assist in safeguarding sensitive information and trade secrets, providing additional protection to the transaction.
- Clarifies Payment Schedules: The purchase contract specifies payment schedules and terms, demonstrating the buyer's will to meet their financial responsibilities.
- Ensures Delivery Assurance: The supplier will deliver the stipulated products or services, giving the consumer confidence.
- Includes Warranty: To provide the buyer further assurance, the purchase contract may include warranties or guarantees, such as warranties on appliances or the state of the property.
- Evaluates State of Property: Buyers can insert inspection and contingency provisions, which allow them to evaluate the state of the property and, if necessary, renegotiate or withdraw from the deal.
- Prevents Mistrust: To prevent mistrust during the final phases of the transaction, the contract stipulates how closing fees will be split between the buyer and seller.
Types of Purchase Contracts
There are various purchase contracts, each tailored to specific transaction scenarios. Here are some important types of purchase contracts:
- Standard Purchase Contract: A standard purchase contract for products or services. It defines key terms, including pricing, quantity, delivery, and payment conditions. It may be used for a wide range of transactions.
- Real Estate Purchase Contract: The contract is useful for purchasing or selling real estate, such as land, residential or commercial properties. It provides information regarding the property, the purchase price, contingencies, and the transaction period.
- Vehicle Purchase Contract: This contract or agreement is used particularly for purchasing or selling automobiles and includes information related to the vehicle, the purchase price, any warranties, and the terms & conditions of the sale.
- Purchase Order (PO): A PO purchase order is a document the buyer provides to the seller that formally demands the delivery of goods or services at a set price and under particular terms and conditions. It's common in business-to-business deals.
- Installment Purchase Contract: In an installment purchase contract, the buyer commits to make periodic payments over time until the purchase price is entirely paid. This agreement is frequently used for high-value commodities such as appliances, electronics, or furniture.
- Bulk Sales Contract: Typically used in business acquisitions, a bulk sales agreement details the sale of a significant amount of a company's assets other than inventory. It protects creditors' rights and ensures the buyer knows of outstanding liabilities.
- Asset Purchase Contract: In corporate acquisitions, this contract is used when one firm buys particular assets (e.g., equipment, intellectual property) from another company rather than the entire business. It specifies the assets to be bought as well as the terms of the transaction.
- Blanket Purchase Order (BPO): BPOs are used for continuing, repeated purchases, most typically between businesses. They provide the terms and conditions for future transactions, allowing the buyer to place several purchases under the same agreement, frequently at a fixed price and delivery date.
- Franchise Acquisition Contract: This agreement controls the terms of acquiring a franchise business. It includes information on the franchise price, royalty payments, territory, and other franchise-specific parameters.
Key Terms for Purchase Contracts
- Buyer and Seller Details: Such as name and contact information.
- Property Details: Such as dimensions, description, year built, etc.
- Essential Rights and Obligations: Such as purchase price, representations and warranties, financing, mortgage note, contingencies, title insurance, closing costs, lead-based paint disclosure, dispute resolution clause, etc.
- Conditions: The condition of the property.
- Fixtures and Appliances: What’s included in the sale and which are excluded.
- Earnest Money Deposit: The amount of the earnest money deposit.
- Itemized Closing Costs: Outline all closing costs and who is responsible for paying them.
- Closing Date: When the transaction is expected to close.
- Terms of Possession: When the keys to the property will be handed over.
- Contingencies: Conditions that must be met before the sale can go through.
Final Thoughts on Purchase Contracts
A real estate purchase agreement is an official legal document outlining the terms and circumstances of the sale of a property. It's meant to assist in avoiding difficulties by considering aspects related to a property purchase and sale. It's built to safeguard buyers and sellers and ensure a smooth transaction. One may avoid potential hazards when buying or selling a home by understanding the fundamentals of this article. One must provide other pertinent terms and conditions. Include the seller's statements, applicable legislation, the resolution of disputes, and any other terms that may be required. All parties must sign the purchase agreement to be enforceable and show that everyone has read and understood it. Thus, the counselor for the purchase contract plays an important function for the parties.
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