Real Estate Purchase Contract

A real estate purchase contract (also called a purchase agreement, offer, or purchase and sale agreement) is the binding legal document that spells out the terms under which a buyer and seller will complete a home transaction. It fixes the price, closing date, contingencies, and remedies if either party fails to perform.

Why a written contract is essential

Real estate is the largest purchase most people make. A handshake or text message is worthless. The purchase contract is the legal scaffolding that translates a verbal offer into binding law.

Once both buyer and seller sign, the contract becomes enforceable in court. If the seller backs out after signing, the buyer can sue for specific performance (forcing the sale) or damages. If the buyer refuses to close after meeting all contingencies, the seller can sue for breach and keep the earnest money or pursue additional damages. The written contract eliminates ambiguity and gives both parties recourse if the other reneges.

The core terms

Purchase price is the most obvious element. The contract states the exact amount in dollars, the currency (almost always US dollars in the United States), and when it must be paid (typically at closing).

Earnest money is a deposit the buyer places in escrow to demonstrate good faith. Typically 1–3% of the purchase price, it is held by a title company, escrow agent, or sometimes the seller’s agent. If the buyer closes on schedule, earnest money is applied toward the down payment. If the buyer breaches (backs out without a valid contingency), the seller often keeps the earnest money. If the seller breaches, earnest money is returned to the buyer.

Closing date specifies when the buyer will receive the deed, the seller will receive the net sale proceeds, and title transfers. Most contracts allow for a window (e.g., “on or before 60 days from acceptance”) rather than a fixed day, giving both sides flexibility for final inspections, appraisal, lender review, and title clearing.

Financing terms describe how the buyer will pay. The contract typically states the purchase price, the down payment amount, and the loan amount. If the buyer cannot secure a loan (even if a financing contingency exists), the buyer is in breach unless the financing contingency clause has a specific exception.

Contingencies: the escape hatches

A contingency is a condition that must be satisfied for the contract to remain binding. If the contingency fails, either buyer or seller may walk away without breach.

Financing contingency allows the buyer to exit if the buyer cannot secure a mortgage or deed of trust at the stated terms (or any commercially reasonable terms, depending on the contract language). This is the most critical contingency for most buyers. Without it, a buyer who loses a job or whose credit score plummets between offer and closing is obligated to buy anyway or forfeit earnest money.

Inspection contingency gives the buyer a window (often 7–14 days) to hire a home inspector and review the property’s condition. If material defects are found, the buyer can request repairs, a price reduction, or can withdraw without penalty. Seller is not obligated to agree to requests but must respond.

Appraisal contingency protects the buyer if a lender’s appraisal comes in lower than the purchase price. If the home appraises for $350,000 but the contract price is $400,000, the buyer can renegotiate, cover the gap with cash, or walk away. Lenders will not lend more than the appraised value, so this contingency is how buyers manage that gap.

Title contingency requires that the seller deliver clear title (free of liens, encumbrances, and claims) by closing. If a lien cannot be cleared, the buyer can withdraw. Title insurance is typically purchased at closing and is not the same as title contingency, though they are related.

Homeowners association contingency (if the property is in an HOA) allows the buyer to review HOA documents, financials, and covenants, and to withdraw if the terms are unacceptable.

Survey contingency allows the buyer to verify the boundary of the property and check for encroachments (fences, structures on neighbor’s land or vice versa).

Each of these contingencies has a deadline. If the buyer does not act by the deadline—inspect, obtain appraisal, review title—the contingency may be deemed waived, and the buyer is obligated to proceed.

What the seller warrants

The contract usually includes representations and warranties by the seller about the property: that the seller has title, that there are no known major defects, that the property is not subject to pending litigation, and so on. In many states, these are modest (caveat emptor—buyer beware—still applies in real estate). In others, the seller must affirmatively disclose known defects, material facts, and environmental issues.

If the seller knowingly hides a material defect and the buyer discovers it after closing, the buyer may have a claim for fraudulent misrepresentation or breach of warranty, but the contract often caps or disclaims these liabilities. This is why the inspection contingency is so important.

Prorations and closing costs

At closing, the seller and buyer settle property taxes, homeowners insurance premiums, HOA fees, and utility bills. These are prorated—split based on who owned the property during each period. If property taxes for the year are $3,000 and the buyer closes on day 200 of the year, the buyer typically pays 165/365 of the annual tax, and the seller pays 200/365.

Closing costs include lender fees, appraisal, title insurance, attorneys’ fees, recording fees, and others. The contract usually specifies who pays which costs; in some regions, the buyer pays all; in others, the seller pays a portion (e.g., realtor commission, title insurance). This is negotiable.

When the contract is binding

The contract is binding once both parties have signed (or initialed key pages) and one party has delivered a signed copy to the other. In some states, there is a three-day right of rescission (the buyer can cancel without cause within three days), but this is rare in residential real estate transactions and more common in certain financing contexts.

Once binding, neither buyer nor seller can unwind the deal except by mutual written agreement, or if a contingency has failed. If one party refuses to sign, there is no binding contract, and the other party has no recourse except to find a different buyer or seller.

Addenda and state variations

Real estate purchase contracts vary widely by state. California uses the California Residential Purchase Agreement (CAR form); Texas uses TREC forms; New York uses attorney-drafted contracts; others use standardized state bar forms. Each reflects local law, customs, and protections.

Agents and attorneys typically fill in blanks on standardized forms and add addenda (amendments or additional terms) to address local issues—HOA contingency in a planned community, addendum about lead paint disclosure in older homes, etc. Buyers should review every page and ask their agent or attorney to explain any unfamiliar clauses.

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