Key Takeaways

  • A purchase contract outlines terms for transferring property, including pricing, financing, and contingencies.
  • Common contingencies include financing, inspection, appraisal, and sale of an existing home.
  • Earnest money deposits signal buyer commitment and are subject to refund rules based on contingencies.
  • Additional clauses like time is of the essence and default provisions enforce contractual timelines and penalties.
  • Understanding inspection, appraisal, and title clauses helps buyers and sellers mitigate risk.

Purchase contracts are legal agreements between a party selling real estate or another form of property, like a co-op apartment, and the party making the purchase. 

What Is Included in a Purchase Contract?

Real estate purchase contracts should cover information like:

  • The names and other identifiers of the buyers and sellers (especially when there are multiples of either)
  • Basic details including the rights and obligations of the parties involved
  • Property conditions (necessary repairs, location or foundation issues)
  • Certain items or parts of the property included or not included in the purchase
  • Details of pricing and financing
  • Insurance information
  • Dispute resolution
  • Termination options
  • Party signatures
  • Property possession terms

Common Contingencies in a Purchase Contract

Purchase contracts typically include several contingencies—clauses that allow a party to cancel the agreement if certain conditions aren't met. Common contingencies include:

  • Financing Contingency: Enables the buyer to walk away if they cannot secure financing within a specified timeframe.
  • Inspection Contingency: Lets the buyer cancel or renegotiate if major defects are found during a home inspection.
  • Appraisal Contingency: Protects the buyer if the property's appraised value is lower than the purchase price.
  • Title Contingency: Allows cancellation if issues arise in the title search, such as liens or ownership disputes.
  • Home Sale Contingency: Gives the buyer time to sell their current property before finalizing the new purchase.

These clauses help reduce the risk for both parties and should include clear timelines and conditions for execution.

Finance Terms

Most home buyers will need a bank loan or mortgage in order to afford the purchase of property, so the contract will need to specify that the offer is contingent on whether or not a loan is obtained. Buyers will want to do research to find the best interest rates and possibly obtain pre-approval for a loan or mortgage.

It is a good idea to figure out exactly what type of interest rate you can afford and put that in the purchase agreement so that you don't get stuck with an unaffordable mortgage. If an offer is accepted without a specified rate, and you are unable to find the rate you need, you may need to back out of the offer and therefore lose your earnest money deposit.

Some buyers will be dependent on obtaining specific types of loans like FHA or VA loans, so they'll want to stipulate that in their purchase contract as well. In the case that a home buyer can make the purchase with cash, they should specify that in the contract, because many sellers will find that particularly attractive. When mortgages and loans aren't necessary for the purchase, everything happens a lot quicker and with less chance of anything falling through. 

Earnest Money and Payment Schedule

Most purchase contracts require an earnest money deposit, typically 1–3% of the property price. This deposit is held in escrow and demonstrates the buyer's commitment.

  • Refund Conditions: Earnest money is refundable if the buyer cancels the agreement for a valid reason stated in the contract.
  • Forfeiture Risks: If the buyer defaults without cause, the seller may keep the deposit.
  • Payment Schedule: The contract may outline a timeline for payments, such as the deposit, remaining down payment, and any escrow contributions.

A clearly defined payment structure ensures transparency and protects both parties from misunderstandings.

Closing Cost Details

Sometimes buyers require sellers to cover closing costs or at least a portion of them. If this is the case, it will need to be specified in the contract. Closing cost coverage should be stipulated in either dollar amounts or a percentage of the property price. 

Certain fees are considered a part of closing costs including:

  • Escrow fees
  • Title search fees
  • Title insurance
  • Notary fees
  • Recording fees
  • Transfer tax

A real estate agent will help decide who should be held responsible for which fees depending on the state and local practices and real estate law.

Fixtures and Appliances

Certain fixtures and appliances may be included in the buying or selling of a home. These inclusions should be detailed in the purchase contract. Regularly included items are:

  • Refrigerators
  • Dishwashers
  • Ovens
  • Stoves
  • Washers
  • Dryers

Closing Date

Closing dates usually allow 30 to 60 days to finalize the purchase of a home. Any issues or situations that will change the closing date should be specified in the purchase contract. The desired closing date will be included in the contract and held to unless there are any allowances for a change.

Sale of Existing Home

Frequently the purchase of a home depends on the sale of the buyer's current home. Most home buyers cannot afford to own two homes at once, so they make the purchase of their new home contingent on the sale of their current home. This is often taken into consideration for the closing date, and buyers should allow themselves a realistic amount of time for selling their home, usually up to two months. 

Usually, the seller won't want to take their home off the market while the buyer waits for their home to sell, but there are agreements that can be made to keep things fair for both parties. A real estate agent can help to work out these details. Sample agreements are available online for the area in which you are buying or selling a property and should be reviewed before creating an offer. 

Property Inspection and Appraisal Clauses

These clauses are essential to protecting the buyer's investment:

  • Inspection Clause: Grants the buyer a right to professional inspections and outlines remedies for discovered issues, including repair requests or withdrawal from the deal.
  • Appraisal Clause: Often required by lenders, this ensures the home meets or exceeds the loan amount. If the property appraises for less, the buyer may renegotiate or cancel the agreement.

Both clauses should have firm deadlines and procedures for responding to findings.

Termination Options

Sometimes buyers will need to terminate the agreement before the sale is complete and will need to give adequate notice to the seller. The purchase contract may stipulate specific options and consequences for termination.

Time Is of the Essence and Default Clauses

Many contracts include a “time is of the essence” provision, which makes all deadlines strictly enforceable. Missing a key date—like securing financing or completing inspections—can constitute a breach.

A default clause details what happens if one party fails to fulfill the contract. Remedies may include:

  • Retaining or returning the earnest money
  • Seeking specific performance (forcing the sale to go through)
  • Terminating the contract and pursuing damages

These clauses ensure both parties meet obligations and clarify legal consequences if they don’t.

Frequently Asked Questions

1. What is a purchase contract used for?

It’s a legal agreement that outlines the terms and conditions of a real estate or property sale between a buyer and seller.

2. Can a purchase contract be canceled?

Yes, but usually only under contingency clauses like failed financing, inspection issues, or inability to secure clear title.

3. What does “time is of the essence” mean?

It means all deadlines in the contract are strictly binding. Missing one could result in breach of contract.

4. Who holds the earnest money?

A neutral third party—usually a title company or real estate broker—holds it in escrow until closing or contract cancellation.

5. What happens if the buyer breaches the purchase contract?

The seller may keep the earnest money and pursue legal remedies, depending on the terms outlined in the default clause.

If you need help with purchase contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.