The Inspectify Report

How do real estate contracts work?

Jan 14, 2021 1:00:46 PM / by Joshua Jensen

Real estate contracts are binding agreements between two (or more) parties for the transfer of ownership of a home or piece of property. If you’ve never been involved in a real estate transaction, you might underestimate how important and detailed each aspect of a contract is.


Understanding the components that comprise a real estate purchase agreement before you begin the process of buying or selling a home will ensure that the contract is written to protect your best interests, while staying competitive.


What is a purchase agreement?

In a real estate transaction, a purchase agreement is the name given to the binding contract between the buyer and the seller detailing the home sale transaction.


Generally, the buyer sets the conditions of the purchase agreement, which includes their offer price, and submits it to the buyer for approval, rejection, or counter-offer. Once the offer is negotiated and agreed upon by both sides, it’s signed by both parties – changing the status of the transaction to “Under Contract”.


Types of purchase agreements

Not all real estate transactions are the same, and as such, there are a variety of purchase agreement types that can be used depending on the details of the deal. Here’s a brief description of different purchase agreement types:

  • State/Association Purchase Agreement: If you’re using a real estate agent to help you through the process, they’ll most likely use this type of purchase agreement based on local realtor association guidelines.
  • General Purchase Agreement: This is a shortened version of the state/association purchase agreement, and is most often utilized when buyers and sellers are interacting directly rather than through a realtor.
  • Property-specific Purchase Agreement: This type of purchase agreement is used almost exclusively for purchases of properties that fall outside of a traditional home (e.g. vacant land or mobile home purchases) and is similar to the others, but includes certain clauses that are specific to the property type in the transaction.


Who prepares the purchase agreement?

Standard practice calls for the buyer’s real estate agent to draft the purchase agreement. However, as purchase agreements are legally binding documents, realtors generally cannot create their own contracts. Instead, they use standardized contracts provided by license lawyers and fill in the blanks with the details of the transaction.


What’s in a purchase agreement?

Purchase agreements can be intimidating if you’re new to the world of real estate. Here are some common components you should know about:



Every purchase agreement includes a section on financing – i.e. how the home will be paid for. Unless the home will be paid for in cash, the buyer will need some kind of financing (loan). The purchase agreement will detail the specifics of the financing type as well as the mortgage lender. Some contracts also include a contingency (see below) for a buyer to get out of the agreement if they are unable to secure financing.


Earnest Money

When the contract is signed, the buyer will often pay a small percentage of the asking price as a sign of good faith that they are serious about purchasing the property. This money is held in escrow by a third party until the contract’s closing date. The specific amount to be paid will be detailed in the contract and is credited to the buyer towards the final purchase price at closing.



Contingencies are requirements that must be met for the purchase to be completed. There are several different types of contingencies that can be included in a purchase agreement, but here are a couple of the most common:


  • Inspection contingency: This allows for the buyer to back out of the transaction without penalty if a professional home inspector reports major problems with the home.
  • Appraisal contingency: This contingency says that the home must appraise at an equal or higher value than the agreed upon purchase price
  • Home sale contingency: This means that the home purchase is contingent on the buyer selling their current home.
  • Financing contingency: As mentioned above, this type of contingency protects the buyer by canceling the transaction if they are unable to secure a mortgage.


Other standard components to a purchase agreement: 

  • Identification of both parties
  • Price & timing
  • Description of the property for sale
  • What is or isn’t included in the sale (appliances, fixtures, accessories, etc.)
  • Closing costs & payment details
  • Signatures


Do you need a lawyer?

There are several states that require an attorney’s involvement at real estate closings. These states are: Alabama, Connecticut, Delaware, District of Columbia, Florida, Georgia, Kansas, Kentucky, Maine, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, North Dakota, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia and West Virginia. 


This list is subject to change at any time, so check with your realtor to learn more about the requirements for your state.


Can you cancel a real estate contract?

As purchase agreements are legally binding, it’s likely that you will be penalized if you choose to back out once the contract has been signed. With that in mind, be sure to thoroughly review the contract, checking that all the information and conditions are spelled out the way you want them to be before signing.



For most people, buying a home is the largest transaction they’ll make in their lives – not something to be taken lightly. Doing your due-diligence before entering into a contract will give you confidence in the process and allow you to negotiate the terms to fit your best interests.

Joshua Jensen

Written by Joshua Jensen