A purchase and sale agreement is the written, signed contract that binds a buyer and a seller to the terms of a property or business transaction. It fixes the price, the closing date, and every condition that has to be satisfied before ownership actually changes hands. In residential real estate, it’s what turns an accepted offer into an enforceable deal, and it governs what happens if either side later tries to walk away.
Why It Has to Be in Writing
Every state has adopted a legal doctrine called the statute of frauds, and it requires any contract for the sale or transfer of real property to be in writing and signed by the parties. A verbal promise to buy or sell a house isn’t enforceable in court, no matter how specific the terms were. The writing has to contain at least the essentials: who is buying, who is selling, enough description to identify the property, and the price. That’s why these agreements exist as formal documents rather than text threads or email exchanges.
What the Agreement Covers
A thorough agreement addresses every material part of the deal. At minimum, it identifies the buyer and seller by legal name, describes the property (for real estate, the legal description, physical address, and any fixtures or personal property included in the sale), and states the purchase price. It specifies how the buyer will pay, whether through financing, cash, or a mix, and it sets the closing date.
Beyond those basics, the agreement typically covers the earnest money deposit, contingency deadlines, which side pays which closing costs, what happens if one party fails to perform, and how any disputes get resolved. Vague terms are an invitation for disagreement later, and disagreements at the closing table are expensive. The more precisely the agreement is drafted, the fewer surprises on closing day.
Earnest Money
Earnest money is the deposit a buyer puts down after signing to show genuine intent to go through with the purchase. Residential deposits usually run 1% to 3% of the purchase price, though sellers in competitive markets sometimes expect more. The money sits in an escrow account, typically with a title company or attorney, until closing.
If the deal closes, the earnest money is applied toward the buyer’s down payment or closing costs. If the buyer cancels for a reason covered by a contingency, the deposit comes back. If the buyer walks without a valid contractual reason, the seller can usually keep the earnest money as liquidated damages, meaning a pre-agreed amount that compensates for the time the property was off the market. Many agreements name the deposit as the seller’s sole remedy in that situation.
Contingencies That Protect Both Sides
Contingencies are conditions written into the agreement that have to be met before the sale becomes final. They give either party a defined way out if something goes wrong. Three show up in almost every residential deal.
- Financing contingency. This gives the buyer a specified window to secure a mortgage. If the buyer applies in good faith and can’t get approved, the agreement terminates and the earnest money is returned. Without this clause, a buyer who can’t close on a loan could lose the deposit or face a breach claim.
- Inspection contingency. The buyer gets a set period, commonly 7 to 10 days, to hire a professional inspector and review what they find. If the inspection turns up significant problems, the buyer can negotiate repairs, ask for a price reduction, or cancel the agreement with the deposit intact.
- Appraisal contingency. When the purchase is financed, the lender orders an independent appraisal. If the appraised value comes in below the agreed price, this clause lets the buyer renegotiate, cover the gap in cash, or walk away. Without it, the buyer has no leverage and could be stuck paying more than the property is worth on paper.
Waiving contingencies has become common in hot markets as a way to make offers more competitive, and it’s a real gamble. A buyer who waives the inspection and later discovers a cracked foundation has no contractual recourse. Saving a deal this way can cost far more than losing it.
From Offer to Binding Agreement
In many markets, the process starts with a shorter purchase offer, sometimes called a letter of intent or offer to purchase. It lays out the buyer’s proposed price, key terms, and any major conditions. Once the seller accepts, the parties draft the comprehensive purchase and sale agreement, which supersedes the initial offer and incorporates all negotiated terms, deadlines, and legal protections.
In some states, the offer form itself is designed to become the binding contract once both parties sign, so the line between “offer” and “agreement” varies by local practice. What matters is that once both parties sign the final document, they are legally bound.
Lead Paint Disclosure for Pre-1978 Homes
Federal law adds a specific requirement for sellers of residential property built before 1978. Under the Residential Lead-Based Paint Hazard Reduction Act, the seller must disclose any known lead-based paint hazards, give the buyer a lead hazard information pamphlet, share any existing lead inspection reports, and allow the buyer at least 10 days to arrange an independent lead inspection before the contract becomes binding.1Office of the Law Revision Counsel. 42 USC 4852d – Disclosure of Information Concerning Lead Upon Transfer of Residential Property
The agreement itself has to carry a Lead Warning Statement in large type on a separate page, along with the buyer’s signed acknowledgment that they received the pamphlet and had the chance to inspect. The 10-day window can be adjusted by mutual agreement, but it can’t be eliminated outright. A seller who ignores the rule can be liable for up to three times the amount of damages, plus legal costs.1Office of the Law Revision Counsel. 42 USC 4852d – Disclosure of Information Concerning Lead Upon Transfer of Residential Property
What Happens Between Signing and Closing
Once the agreement is fully signed and the earnest money is deposited, the transaction moves into due diligence and closing preparation. Several things happen in parallel, and missing a deadline during this period can kill the deal.
Title Search and Title Insurance
A title search examines public records to confirm the seller actually owns the property free and clear, and to flag any liens, unpaid taxes, easements, or other claims. Anything the search uncovers has to be resolved before closing.
Most financed transactions also involve title insurance. Lenders generally require a lender’s policy to protect their interest if a title defect surfaces after closing. An owner’s policy is separate and optional. It protects the buyer’s equity against problems the search missed, like forged documents or undisclosed heirs.2Consumer Financial Protection Bureau. What Is Lenders Title Insurance?
The Closing Disclosure
For any mortgage-financed purchase, federal regulations require the lender to deliver a Closing Disclosure at least three business days before closing. The document itemizes every cost of the transaction: loan terms, monthly payment, closing costs, and cash due at the table. The three-day window exists so the buyer can review the numbers and catch errors before signing.3eCFR. 12 CFR 1026.19 – Certain Mortgage and Variable-Rate Transactions Certain changes after delivery, like the APR becoming inaccurate or a prepayment penalty being added, force the lender to issue a corrected disclosure and restart the three-day clock.4Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs
Common Closing Costs
Both sides pay closing costs, with the split determined by the agreement and by local custom. Buyers typically pick up loan origination fees, appraisal fees, survey costs, title search fees, and the first year of homeowner’s insurance. Sellers commonly pay for the owner’s title insurance policy and transfer fees. Real estate agent compensation, attorney fees, prorated property taxes, and transfer taxes are negotiable or split based on the market. Combined, closing costs often run 2% to 5% of the sale price, with the buyer’s share usually larger because of mortgage-related expenses.
Closing Day
At closing, the remaining purchase funds are transferred, both parties sign the final documents, the deed is recorded with the local government, and ownership passes to the buyer. In states that require an attorney to handle closings, the attorney coordinates the signing and recording. In other states, a title company or escrow agent manages the process. Either way, once the deed is recorded, the transaction is complete.
Business Purchase Agreements
Purchase and sale agreements aren’t limited to real estate. In business acquisitions, they take one of two basic forms, and the choice has serious consequences for liability and taxes.
In an asset purchase, the buyer picks specific assets and liabilities to acquire. Equipment, inventory, customer contracts, and intellectual property can be bought individually, while unwanted obligations like pending lawsuits or certain debts stay with the seller’s entity. The tradeoff is complexity. Contracts may need to be renegotiated, assets retitled, and employees rehired by the new entity.
In a stock purchase, the buyer acquires the entire company by purchasing its ownership shares. Everything transfers: contracts, employees, assets, and liabilities. The deal is structurally simpler because nothing needs to be retitled or reassigned, but the buyer inherits every liability the company carries, known or unknown. Skipping thorough due diligence on a stock purchase amounts to writing a blank check for the seller’s past problems.
When Someone Backs Out
A signed agreement is a binding contract, and walking away has consequences. The remedies depend on which side breaches and what the contract says.
When a buyer breaches without a valid contingency, the usual outcome is forfeiture of the earnest money deposit. Many agreements name the deposit as liquidated damages, so the seller keeps it as the agreed-upon compensation and both sides move on. That avoids litigation in most cases, though the seller can sometimes pursue additional damages if the agreement allows it.
When a seller breaches by refusing to go through with the sale, the buyer’s strongest remedy is specific performance, a court order compelling the seller to transfer the property. Courts are more willing to grant this in real estate than in other contract disputes because every piece of property is considered unique. No amount of money perfectly replaces the specific house or parcel the buyer contracted for. A buyer suing for specific performance can also file a notice of pending litigation against the property’s title, which effectively blocks the seller from selling to someone else while the case plays out.
Either side can also seek monetary damages for costs caused by the breach, such as inspection fees, appraisal costs, temporary housing expenses, or the price difference if the property has to be resold at a lower price. What’s actually available depends on state law and the language of the agreement, which is why the breach and default provisions are among the most important clauses to read carefully before signing.
Tax Reporting After a Real Estate Sale
Real estate sales generally trigger a federal reporting requirement. The person responsible for closing, usually the settlement agent or closing attorney, has to file IRS Form 1099-S reporting the proceeds for any transaction where total consideration is $600 or more.5Internal Revenue Service. Instructions for Form 1099-S (04/2025)
There is an important exception for homeowners selling a primary residence. If the seller certifies in writing that the home qualifies for the Section 121 capital gains exclusion, the closing agent doesn’t need to file a 1099-S. The exclusion shelters up to $250,000 in gain for a single filer or $500,000 for a married couple filing jointly, provided the home was the seller’s principal residence for at least two of the five years before the sale and there was no period of nonqualified use after 2008.5Internal Revenue Service. Instructions for Form 1099-S (04/2025) Sellers who exceed those thresholds, or who are selling investment property, should expect to receive a 1099-S and report the proceeds on their return.