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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 is monetary value 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.
Key Terms in a Real Estate Purchase Contract
A purchase contract generally contains the following components or terms:
- 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.
- Signature of each party in the transaction.
- 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.
There are three major components covered in a purchase agreement explained in detailed below.
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 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 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.
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.
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.
Here’s more on purchase contracts and their key components.
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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 frame for financing the home, sale of existing property, etc.
Here are some resources on how to write your own purchase contract .
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Meet some of our Purchase Contract Lawyers
Matan is an experienced M&A, corporate, tax and real estate attorney advising closely held businesses, technology start ups, service businesses, and manufacturers in purchases, sales, and other exit strategies. Matan works with founders and first-and-second generation owners to strategically transition businesses.
I am a business law attorney with over 10 years’ experience and a strong background in information technology. I am a graduate of the University of California Berkeley, a member of the Illinois bar and a licensed lawyer (Solicitor) of England and Wales. I actively partner directly with my clients or indirectly, as Of Counsel, to boutique law firms to streamline business practices and manage legal risks by focusing on essentials such as - business contracts, corporate structure, employment/independent contractor agreements, website terms and policies, IP, technology, and commercial related agreements as well as business risk and compliance guidance.
Engaging Transactions Attorney with extensive experience in commercial real estate / project finance that possesses a winning blend of subject matter expertise, skill in client relationship management, and practical experience. Leverages a unique mix of legal, strategic, and analytical expertise, consistently meeting and surpassing client expectations. Specialties: Commercial Real Estate Law, Contract Negotiation, Procurement, Lease/Buy/Sell Transactions, Business Consultations, Team Leadership, and Economic Development
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I am a New Jersey licensed attorney and I have been in practice for over seventeen years. My practice mainly consists of representing public entities (municipalities, school boards, etc) and businesses, both small and large. In that capacity, much of work consists of drafting, reviewing and revising contracts.
Jennifer is an experienced business law attorney who has worked with many startups as well as established corporations. With a strong background in contract creation and review, she will be able to ensure you and your business interests are always protected.
I am a corporate lawyer with expertise working with small businesses, venture capital and healthcare. Previously, I worked at large law firms, as well as head attorney for companies. I graduated from Harvard College and University of Pennsylvania Law School. I speak 5 languages (Spanish, French, Italian and Russian, plus English), visited over 60 countries, and used to compete in salsa dancing!