What Is a Purchase Agreement and How It Works

Key Takeaways

• A purchase agreement is a legally binding contract that sets the terms of a sale of goods or property.
• These agreements are most common in large or complex transactions, such as real estate or high-value goods.
• Key elements include buyer/seller details, purchase price, contingencies, financing, closing terms, and dispute resolution.
• Specialized types of purchase agreements exist, such as real estate contracts, business acquisition agreements, and volume purchase contracts.
• Drafting or reviewing a purchase agreement with an attorney helps prevent disputes and ensures your interests are protected.

The definition of purchase agreement is a type of contract that outlines various terms and conditions related to a sale of goods.

What a Purchase Agreement Is Used For

A purchase agreement is a legally binding contract between a buyer and seller. These agreements usually relate to the buying and selling of goods instead of services, and they can cover transactions for just about any type of product. In real estate, a purchase agreement outlines the purchase price and other conditions under a title transfer.

Usually, purchase agreements are used when the purchase price is more than $500, but they may also be used for smaller transactions. They're common in real estate and home sales.

They're widely used in the telecommunications industry. For instance, a customer may buy different communications packages, so that agreement is a “volume purchase agreement.”

Purchase agreements protect buyers and sellers from the risk of a breach of contract.

Consider this example: John and Anna want to buy a home. They fall in love with one, so they start negotiating with a realtor. Everything looks good, and they sign a purchase agreement. The agreement details the following:

• The couple's move-in date
• How John and Anna will pay for the home
• A contingency clause that explains the couple must first sell its old home and move funds into an escrow account

In the purchase agreement, the seller must declare that the home has no lead paint. Once John and Anna's old house sells, the escrow account confirms this, and the sale is complete.

Types of Purchase Agreements

Purchase agreements come in many forms depending on the nature of the transaction:

• Real Estate Purchase Agreement – Common in home sales, covering price, closing date, inspection rights, and contingencies.
• Business Purchase Agreement – Outlines the transfer of ownership in a business, including assets, intellectual property, and liabilities.
• Stock Purchase Agreement – Used when acquiring company shares, addressing ownership percentages and shareholder rights.
• Asset Purchase Agreement – Specifies which business assets are being sold while excluding others.
• Volume Purchase Agreement – Seen in industries like telecommunications, where multiple goods or service packages are sold under negotiated pricing.

Understanding which type applies is crucial, as each has different legal and financial implications.

What to Include

A well-written purchase agreement should include all of a transaction's relevant information. It needs to be clear and specific so that no misunderstandings arise regarding the various terms.

A basic agreement should include the following information:

• Buyer and seller information, such as names, addresses, and phone numbers
• The type of product or goods involved
• The type of sale
• Contact information for witnesses or cosigners
• Sale price
• Quantities
• Agreement date
• Terms related to duration
• Delivery and shipping terms, when applicable
• Dates relating to fulfillment of various requirements
• Whether amendments or revisions to the agreement are allowed
• Options in the event of any legal disputes

Purchase agreements are usually much more complicated than simple purchase receipts or invoices. These agreements often detail the different conditions that each party must meet in order to complete the sale.

Purchase contracts may describe the following:

• Terms of financing, since most people who buy homes can't afford to pay cash for the entire purchase price
• Who's responsible for closing costs
• Home inspection requirements
• Closing date

Your jurisdiction will determine exactly what's included in the contract. The contract may have a contingency that a buyer needs to sell his current home before having the necessary funds to complete the transaction.

You'll find a possession date in a real estate purchase agreement, which specifies the date a buyer can take control of the property. The agreement may also dictate who holds earnest money deposits and outline cancellation in clear terms.

Both parties typically list any repairs the seller is responsible for, his responsibility to declare environmental hazards (such as lead), and his guarantee that no third-party security claims exist, such as a lien. In return, the buyer must legally meet his financial obligations. The contract will outline how a seller can seek legal remedies if the buyer doesn't hold up his part of the bargain.

Common Clauses and Contingencies

Beyond the basics, purchase agreements often include clauses designed to reduce risk:

• Financing contingencies – The agreement is valid only if the buyer secures financing.
• Inspection contingencies – Allow buyers to cancel or renegotiate if property inspections reveal issues.
• Earnest money provisions – Detail who holds the deposit and under what conditions it is forfeited or refunded.
• Disclosure requirements – The seller must disclose known defects or hazards (such as lead paint in real estate).
• Closing cost allocation – Specifies which party is responsible for which expenses.
• Default and remedies – Outlines the legal recourse if either party fails to perform.

These protections are especially valuable in high-value or complex transactions where the potential for disputes is greater.

Do You Need an Attorney?

From simple transactions to complicated business or real estate procurements, purchase agreements are common. You should consult a business attorney if you need help writing or reviewing a purchase agreement.

A lawyer can assist you with the various terms and provisions in a purchase agreement to ensure the protection of your interests. In addition, should a legal dispute arises, your lawyer can represent you if you need to file for damages.

Simple receipts are often fine for small purchases, but for major transactions, it's common to enter into a contract. Make sure you understand all of the terms and conditions before you sign an agreement. The right legal professional can be very helpful for this.

Risks of Not Having a Purchase Agreement

Not having a properly drafted purchase agreement exposes both parties to significant risks:

• Unclear obligations – Without written terms, it’s harder to prove what each party agreed to.
• Disputes over payment or delivery – Ambiguities about timing or method of payment can lead to litigation.
• Hidden liabilities – In business sales, failing to define liability transfer could leave the buyer responsible for old debts.
• Lost deposits – Buyers risk losing earnest money if cancellation rules are not clear.
• Limited remedies – Without defined default clauses, enforcing rights in court becomes more costly and uncertain.

While some small sales can be completed with a bill of sale or receipt, major deals require a purchase agreement to safeguard both sides.

Frequently Asked Questions

1. What is a purchase agreement used for?
   It defines the terms of a sale of goods or property, including price, delivery, and contingencies, protecting both buyer and seller.
2. Is a purchase agreement legally binding?
   Yes. Once signed by both parties, it becomes enforceable in court, provided it meets contract law requirements.
3. What’s the difference between a purchase agreement and a bill of sale?
   A bill of sale confirms that a sale has already occurred. A purchase agreement sets the conditions before the sale is finalized.
4. Who usually drafts a purchase agreement?
   In real estate, it’s often prepared by real estate agents or attorneys. In business transactions, attorneys typically draft it.
5. Can a purchase agreement be canceled?
   Yes, if contingencies (like financing or inspection clauses) are not met, or if both parties agree to terminate under defined terms.

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