Buying or selling a home is a big decision, and a lot of work goes into making sure it happens just right. A big part of that is creating a legal framework to ensure the buyer and seller agree on the particulars of the transaction. That’s why any time a home is sold, a contract called a real estate purchase agreement is created to lay out the conditions of the transaction. Here’s what you should know about real estate contracts.

The basics

When buying or selling a home, the purchase agreement is a binding contract that the buyer and seller agree to for outlining the specifics of the home sale transaction. It begins with the buyer proposing the conditions of the contract, including an offer price for the home, followed by the seller agreeing to, negotiating or rejecting the contract. The two parties may negotiate back and forth until reaching an agreement and signing the contract, at which point, the deal is “under contract.”

Other common names for this document are real estate sales contract, home purchase agreement, real estate purchase contract and house purchase agreement.


A purchase agreement is usually written up by the buyer’s real estate agent. However, unless the agent is licensed to practice law, they typically can’t draw up their own legal contract. Therefore, a standardized contract form will typically be used that allows blanks to be filled in with the details for the specific transaction.


No two home sale transactions are the same, and neither are any two real estate purchase agreements. Nonetheless, there are some standard items that should be included in every purchase agreement.

  • Buyer and seller information
  • Property details
  • Pricing and financing
  • Fixtures and appliances included or excluded in the sale
  • Closing and possession dates
  • Earnest money deposit amount
  • Closing costs and who is responsible for paying them
  • Conditions under which the contract can be terminated
  • Contingencies or conditions that must be met for the sale to proceed

While many of these contract details are self-explanatory, such as the home’s sale price, other components may be a bit confusing, particularly for those who are buying their first homes. Therefore, make sure you understand everything you’re agreeing to before you sign your contract.


Real estate purchase agreements also cover how the home will be paid for. Unless the buyer is paying in cash, they’ll typically require mortgage financing to buy the home, and those related specifics will be included in the agreement.

Earnest money

Sometimes referred to as a good faith deposit, earnest money shows that a buyer is serious about purchasing a home. Sellers want to know their time is not being wasted and that the buyer is going to follow through with the contract to closing, and earnest money helps provide that confidence.

After signing the agreement, if the buyer backs out of the transaction for a reason that’s not stipulated in the contract, they’ll forfeit their earnest money, and the seller will get to keep it. Typically, earnest money is kept in escrow by a third party and is applied toward the buyer’s down payment or closing costs when the transaction closes.


A home sale relies on several important pieces falling into place, and for that reason, there are many types of contingencies that can be included in purchase agreements for both buyers and sellers. As with the rest of the contract, it’s important that you understand any contingencies that are present.

Contingencies are conditions that must be fulfilled before the sale can occur. These are some of the more common contingencies that are found in real estate contracts:

  • Financing contingency: The sale is contingent on the buyer obtaining financing so that they are protected in case they are unable to secure a mortgage.
  • Inspection contingency: The buyer is allowed to back out of the sale without penalty if they are unsatisfied with a professional home inspector’s evaluation of the property.
  • Appraisal contingency: Protects the buyer if the home appraises for less than the agreed upon sale price. However, in such a case, the buyer and seller may still wish to proceed at the appraised price, although this may affect the buyer’s financing and should be discussed with their mortgage lender.
  • Home sale contingency: The buyer must be able to sell their current home before the contract is binding.

Closing costs

At closing, there are specific costs and fees that must be paid. How much each party is responsible for paying will depend on what was agree to in the contract. Examples of closing costs include agent commission, appraisal and inspection fees, taxes (including transfer taxes), lender fees and insurance.

Typically, closing costs are between 2% to 5% of the purchase price for buyers and slightly higher for sellers.


Traditionally, home purchase agreements are paper forms signed with “wet” signatures. In this digital age and amidst the concerns of the coronavirus pandemic, e-signing a digital contract is more common. Lenders such as Draper and Kramer Mortgage Corp. also offer e-signing for related loan forms.


Not surprisingly, the best time to back out of a real estate deal is before you’ve signed the purchase agreement. Once you’re under contract, you may be penalized if you back out for reasons that aren’t stipulated in the contract. Before signing on to a purchase agreement, make sure it contains information about the conditions under which the contract can be terminated.


You don’t have to be a legal expert to understand a real estate contract. Entering a real estate deal is a big decision, but by taking the time to understand your contract, you can help ensure it goes smoothly.