A purchase agreement is a legal document that outlines the terms and conditions of a sale. It ensures the buyer and seller understand the arrangement, and it can be useful when selling real and personal property, including a home, business, car, or another personal item.
Purchase Agreements By Type
What Is a Purchase Agreement?
A purchase agreement is a legal contract between a buyer and a seller. It describes the circumstances of the sale, including the property being sold and the agreed-upon purchase price.
It fulfills three main purposes:
- It identifies the property the seller is selling.
- It explains the steps necessary to complete the transaction.
- It outlines each party’s obligations, liabilities, warranties, and rights.
Purchase Agreement vs. Purchase Order
A purchase order expresses a buyer’s intent to make a purchase. It includes details like the items’ price, quantity, and type. A purchase agreement follows a purchase order to settle a buyer’s wants.
Purchase Agreement vs. Bill of Sale
A seller and a buyer sign a purchase agreement before exchanging money or property. It’s a testament between the parties to enter into a future transaction, and it helps both parties understand and agree to the decided terms.
While a purchase agreement documents a sale, a bill of sale transfers property ownership from the seller to the buyer. The parties typically sign it during the exchange of money and property. It can serve as a receipt of the transaction.
A buyer can only use a bill of sale, not a purchase agreement, to prove property ownership.
When to Use a Purchase Agreement
This agreement is useful for high-value items or custom orders where the buyer and/or seller need assurance that both parties follow the agreed-upon terms. It’s also beneficial for more complicated transactions with several components, including payment and goods delivery.
You can use a purchase and sale agreement for various transactions, such as buying/selling:
- Real estate
- Used equipment
- Personal property like antiques
- Motor vehicles
Either the buyer or the seller can prepare the purchase agreement and ensure the other party is happy with the terms and conditions of the contract.
Suppose you and the other party negotiate additional terms that aren’t in the original agreement. In that case, you can use a purchase agreement addendum or a real estate purchase agreement addendum (if purchasing or selling real estate).
How Binding Is a Purchase Agreement?
A purchase agreement becomes legally binding when the seller and buyer sign it. The buyer must also obtain notice of the seller’s acceptance.
If you’re buying or selling any property, it’s a good idea to document the sale with a purchase agreement. Having a written contract in place lets everyone involved consider and clarify the details of the sale. When both parties sign a purchase contract, they confirm they understand how the transaction will occur.
Purchase agreements also legally bind each party to follow through with the terms of the sale. If a buyer and seller verbally agree to a sale but don’t use this contract, there will be no clear course of action in a dispute (such as if the item isn’t in the condition the buyer expected or if one party backs out at the last minute).
What to Include in a Purchase Agreement
Explore the clauses you should include in a purchase agreement to clarify its scope:
Property Description
Be as specific as possible in your property description to ensure the buyer and seller understand the property that’s being transferred.
If you’re selling or purchasing real estate, use the property’s real description. If you’re selling a piece of personal property, provide as many details as possible about its size, shape, color, condition, and other identifying factors.
Financial Terms
Indicate the purchase price, which is the amount the buyer is willing to pay. The seller must also agree to it.
Depending on the nature of the entire agreement, you may also include an earnest money deposit that will go into an escrow account. This payment shows the buyer is serious about their intent to go through with the purchase.
If the buyer and seller agree to seller financing, you can include this information within the financial terms clause.
Conveyance Method
Specify the method for conveying the property. You might use a bill of sale for personal property or a real estate deed for a home.
Contingencies
Include any contingencies so neither the buyer nor the seller goes through with the sale without complete satisfaction. For example, the purchase agreement may be contingent on the buyer’s receipt of financing, a thorough property inspection/appraisal, or a clean mortgage loan inspection.
A seller may also want to wait to hear from a credible financial institution verifying a buyer’s credit report. This documentation can give them more confidence the buyer will be able to pay back the amount they owe.
Timing
Explain key dates that pertain to the arrangement, like a period for the buyer’s due diligence or the intended date of the final sale.
Seller Representations and Warranties
Include representations and warranties from the seller. For example, the seller can attest that they have the legal right to sell the property. They may also promise that the property is in the condition they claim it to be.
Seller’s Duties
The seller may have ongoing duties once the buyer purchases the property. For example, the seller may have to perform maintenance for the item for a certain period following the sale.
Depending on the parties’ negotiations in a real estate purchase agreement and the laws in their jurisdictions, a seller might remain responsible for paying a property’s real estate taxes for a specified period after the sale.
How to Write a Purchase Agreement
Follow the below steps to write a solid purchase agreement:
Step 1 – Write the Buyer and Seller Details
List the details of all parties involved. You must include the seller’s and buyer’s information, including their name, address, and contact details such as phone numbers or email addresses.
Step 2 – List the Item Being Sold
Describe the item that’s being sold. If a seller sells multiple items at once, they can include them in this section on individual lines.
Step 3 – Include the Payment Details
Detail the total purchase price that the buyer will pay the seller. Ensure that you include any applicable sales tax and other relevant costs.
Then, outline the payment details. Indicate how the buyer will pay the seller and the schedule they’ll follow. If the buyer will pay in installments, clarify how much the individual payments will be.
Step 4 – Highlight the Terms and Conditions
Cover other relevant terms and conditions. Include the seller’s representations, governing law, procedures for dispute resolution, and any other necessary clauses.
Step 5 – Obtain Signatures
Finally, all parties must sign to ensure the purchase agreement is legally binding and that both the buyer and seller have read and understood the contract.
Purchase Agreement Sample
Below, you can see a purchase and sale agreement sample. Download our free blank purchase agreement template in Word or PDF format:
Frequently Asked Questions
Can a buyer back out of a purchase agreement?
A buyer can usually back out of a purchase agreement but may face penalties such as losing their deposit or paying a fine.
The purchase agreement should clearly state any consequences of backing out of the sale.
Can a seller back out of a purchase agreement?
Sometimes, sellers can back out of a purchase agreement if the agreement specifically allows it or if contingencies in the contract aren’t met.
If the buyer fulfilled their end of the agreement and the contract doesn’t include a clause permitting the seller to back out, the seller could be legally required to follow through with a sale or face legal action.
What happens after I sign a purchase agreement?
Once you’ve signed a purchase agreement, you’re legally bound to the terms of the agreement. The buyer must pay the seller the agreed-upon amount by the date in the agreement, and the seller must hand over the property.
The parties should use a bill of sale to transfer ownership from the seller to the buyer legally. If an individual uses a purchase agreement to sell real estate, they should use a warranty deed to transfer ownership rights. While a licensed real estate agent typically doesn’t prepare this document, a lawyer can.