What is a Purchase and Sale Agreement in Real Estate?

When it comes to selling or buying a home involves a lot of paperwork, and one of the most important documents is the purchase and sale agreement. This contract outlines the terms of the sale, including the final price, key deadlines, and any contingencies that must be met before closing.

To help you understand this crucial document, we’ll cover what a purchase and sale agreement is, what it includes, and what happens after it’s signed.So whether you’re selling a home in Boston, MA, or buying a home in Dallas, TX, here’s what you need to know.

What is a purchase and sale agreement?

In real estate, a purchase and sale agreement, also known as a PSA or P&S, is a legally binding contract that finalizes the terms of a real estate transaction.. It is signed after the buyer and seller reach mutual acceptance on an offer, and states the final sale price and all terms of the transaction. A PSA can vary depending on what state you live in. They typically consist of the final sale price, earnest money details, closing date, title information, and contingencies. Timelines for home inspections, securing financing, and the closing date, along with any other deadlines and anything else the buyer or seller requests, will be detailed in the agreement.

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Deciding between renting or buying your next home?

Compare the costs of renting vs buying and find a lender to secure your mortgage.

What does the purchase and sale agreement consist of?

The specific items in this contract vary by state, but will almost always include the following:

1. Parties involved

The purchase and sale agreement includes the names of all parties involved in the real estate transaction. This can refer to organizations or individual people. The agreement should include the full names and contact information of all involved parties.

2. Property details

The agreement should include a full and detailed description of the property. Details such as the type of property and the address should be included.

3. Final purchase price

The PSA will include the  purchase price agreed upon by the buyer and seller. Note that this price might change during negotiations before the closing date. For instance, if the buyer’s home inspection turns up a problem with the home, the buyer may be able to negotiate a reduced purchase price.

4. Earnest money deposit

The purchase and sale agreement will include information on the earnest money deposit, such as the dollar amount and instructions for making the deposit. In most areas, the buyer will need to deposit a personal or cashier’s check which is held with a neutral third party. These third-party companies can be escrow companies, title companies, or law firms. They will need to deposit within one to three days of mutual acceptance.

5. Closing date

The closing date will be included in the purchase and sale agreement. On this date, the transfer of property is recorded with the local government, and the seller receives payment for the home. While the closing date is specified in the PSA, it may change due to unforeseen events, such as delays in financial paperwork.

6. Title company

Information about your title company will be included in the purchase and sale agreement. As the buyer, you always have the right to select a title company. You should talk to your agent or attorney if you have any questions about choosing a title company.

7. Title condition

The purchase and sale agreement will include an agreement that the seller will provide a clear or marketable title of ownership to the buyer. 

8. Contingencies

Contingencies are conditions that must be met in order for the home purchase to be completed. A buyer or seller may cancel a sale if one of the contingencies can’t be met. Here are some examples of common contingencies.

9. Definition of key terms

To prevent confusion, key terms in the agreement should be clearly defined. Some parties may use certain terms differently, so clear definitions can clear this up.

10. Dispute resolution

This section lays out how the involved parties will resolve any disputes. Mediation and arbitration are two common ways to settle disputes.

11. Penalties for breach of contract

If one of the involved parties fails to uphold their end of the agreement without a valid reason, this section clearly outlines the consequences that party will face.

Purchase and sale agreement FAQs

What’s the difference between a purchase and sale agreement and a purchase agreement?

The purchase and sale agreement may sound similar to the purchase agreement, but they are not the same. Here’s the difference between these important real estate documents.

• Purchase and Sale Agreement (PSA): This document outlines the agreed-upon terms of the real estate transaction, including the sale price, contingencies, and key deadlines. Both parties sign it to confirm their acceptance.
• Purchase Agreement: This is the final paperwork that both parties sign to complete the sale of the home. After all the terms outlined in the PSA have been met, the purchase agreement is signed, finalizing the real estate transaction.

Who drafts the purchase and sale agreement? 

The buyer’s agent or a real estate attorney drafts the PSA, depending on state laws. In states where escrow agents handle closings, the buyer’s agent typically prepares the document. In attorney-handled closings, the attorneys draft it. Both the buyer and seller sign it to finalize the agreement.

Who pays for the purchase and sale agreement?

In most cases, the costs associated with preparing the purchase and sales agreement are left to the buyer. Since it’s considered a closing cost, the buyer and seller can negotiate to split the cost. Sellers may also agree to cover some of the cost as an incentive to the buyer.

Are purchase and sale agreements legally binding?

Yes, a PSA is a legally binding contract. If any party fails to hold up their end of the agreement, legal action or lawsuits can be pursued to recover any damages. Having a real estate lawyer go over the PSA can lessen the risk of violating the terms of the agreement.

What happens after the purchase and sale agreement?

Once the PSA is signed:

• The buyer deposits the earnest money.
• Inspections, title searches, and financing steps begin.
• Any contingencies must be met before closing.
• The final purchase agreement is signed at closing.

The process can take several weeks, depending on factors like inspections or financing delays.