10 Essential Elements of a Purchase Agreement

10 Essential Elements of a Purchase Agreement

A real estate purchase agreement is a critical part of the home buying process. Certain elements are required for the agreement to be legally binding, and other elements are recommended to protect the parties’ interests and to clarify terms to make the transaction as transparent and smooth as possible. Below are 10 essential elements of a good purchase agreement. Be sure your contract contains these items, and before signing, consult with your real estate agent or attorney to ensure you fully understand their meaning.

Identification of Parties and Property

purchase agreement must detail the property to be sold, identifying the exact address and including the property’s legal description as contained in official records of the local jurisdiction. Additionally, the identity of the seller (or sellers) and the buyer (or buyers) must be noted.

If more than one buyer is involved, then the buyers should specify whether they intend to act as joint tenants or tenants in common. Joint tenants enjoy the right of survivorship, with the property immediately passing to the other upon death. Tenants in common each own a share of the property, which aren’t necessarily equal and can be transferred to someone else. Most buyers who will be living together do so under a joint tenancy.

Earnest Money Deposit

When buyers make an offer, they usually pay some amount of money, known as an earnest money deposit, to demonstrate the sincerity of their intent to purchase the home. That money, held in escrow until closing, should be specified in the purchase agreement. Whether the earnest money deposit will be credited toward the final purchase price or not should also be noted.

Items Excluded and Included in Sale

In addition to the land, structures and fixtures attached to those structures are typically included in the sale of the property. If an item is permanently joined to the property, the fixture is assumed to be included as part of the sale unless it is specifically excluded in the purchase agreement. Examples of fixtures that could be excluded or included in the sale include:

  • Light fixtures, such as chandeliers
  • Heating and cooling equipment
  • Windows
  • Built-in kitchen appliances
  • Bathroom fixtures


Both sellers and buyers can make the sale of the property contingent upon meeting certain requirements. Purchase agreements detail these requirements in contingency clauses. A few of the most common contingencies include the following:

  • Inspection: Purchase agreements typically are contingent upon the buyer’s satisfaction with the results of a home inspection completed by a third party of the buyer’s choosing.
  • Appraisal: If the purchase will be financed through a mortgage, the lender will require an appraisal. If the property’s appraised value is lower than the purchase price, then the buyer must make up the difference in price or negotiate a lower purchase price.
  • Financing: A financing contingency protects the buyer from the possibility of mortgage financing falling through. If the buyer cannot obtain the necessary funding, then the buyer can back out of the purchase.
  • Title: A title contingency assures buyers that the seller owns the home and they will receive the property’s title upon closing. As part of this contingency, completion of a title report may be required prior to closing.


Sellers are legally obligated to disclose information they are aware of that could the safety or value of the property. States have different requirements for mandated disclosures; the following are a few of the common disclosures that must be made:

  • Methamphetamine lab: Many states require sellers to disclose any knowledge of methamphetamine production on the property.
  • Lead hazards: Structures built before 1978 might be required to include a lead paint addendum that details the presence of any lead-based paint.
  • Well locations: Some states require disclosure of the location and status of any wells located on the property. Known wells must be identified on a map, and the seller must indicate whether the well is in use or sealed.

Price and Terms

The purchase agreement must include the price accepted by the seller as well as how the buyer will be paying. The most common methods of payment include:

  • Paying in full with cash
  • Making a cash down payment and a new mortgage loan
  • Some arrangement involving an existing mortgage

Closing Date and Costs

The date of the sale’s closing, which is when the property typically transfers to the buyer, should be specified. Both the seller and buyer’s closing costs should be detailed, along with the party responsible for paying them. Closing costs typically total between two and five percent of the final price of the home. These commonly include property and transfer taxes, title insurance, recording fees, pre-payment of insurance premiums, and loan origination fees.

Terms of Possession

The terms of possession simply is a statement of when and how the keys to the property will be handed over to the buyer.


Buyers and sellers are provided multiple opportunities to cancel the purchase agreement within terms of the agreement, such as when a contingency is not satisfied. But if the buyer or seller does not meet certain demands in the agreement, then he or she could be considered in default of the contract. The purchase agreement should specify the steps to take or the appropriate action, such as forfeiting the earnest money deposit or pursuing litigation, if the other party defaults. Some common default situations include:

  • Seller does not move out on time
  • Buyer or seller cancels the sale
  • Seller fails to complete contractually obligated repairs

Signatures of Each Party

The statute of frauds in U.S. common law requires certain contracts, including real estate agreements, to be made in writing and signed by both parties to be valid and enforceable.

If your purchase agreement doesn’t have these 10 elements, consider reaching out to your trusted real estate advisor. Here at LemonBrew, it is our priority to be advocates for our clients, so ask all the questions and be informed as you conquer the real estate process from start to finish.