There can be so much paperwork involved in buying or selling a home. A purchase and sale agreement (PSA) may be one of the first legal documents you come across. A PSA is a contract that acts as a kind of preliminary agreement between the buyer and seller about the price and terms of the transaction. It’s a legally binding contract, but it doesn’t finalize the sale.
Before you sign on the dotted line, make sure you understand what a PSA is, what’s included in it and what you’re committing to when you sign one.
Key takeaways
A purchase and sale agreement, or PSA, is a contract that’s commonly used in real estate transactions, like buying a home.
You can think of a PSA as a kind of preliminary agreement between the buyer and seller. It declares the buyer’s intent to purchase the home from the seller and the seller’s intent to sell the home to the buyer. It’s a legally binding contract, but it doesn’t finalize the sale of the home.
A PSA is typically drafted once the buyer and seller have agreed on the price of the home and the terms of the sale. That may include contingencies and other requirements that need to be met by the buyer, seller or both before the sale can be finalized. PSAs also typically include information like the closing date, estimated closing costs, inclusions and exclusions.
PSAs are typically prepared by the seller’s real estate agent or real estate attorney. State laws may affect who’s allowed to prepare PSAs.
Even though a PSA doesn’t finalize the sale, it’s still a legally binding contract. And if all the terms of the PSA are met by a specified date and the buyer or seller still decides to back out of the deal, the other party may be able to pursue legal action.
Though the two terms are often mistakenly used interchangeably. A PSA is not the same as a purchase agreement.
A purchase agreement is the final version of the contract that’s created after all terms of the PSA have been met. Purchase agreements are also sometimes called purchase contracts or real estate contracts. Once all parties sign the purchase agreement, the home officially transfers to the buyer.
PSAs typically include basic information about the transaction and the property, including the buyer and seller’s names and the home’s square footage. PSAs also outline the terms of the transaction. Each PSA may be a little different. But here’s an overview of what may be included.
The purchase price that the buyer and seller have agreed to will be stated in the PSA. But this isn’t necessarily the final price of the home. If a contingency isn’t met, for example, the buyer or seller may be able to renegotiate the purchase price.
Earnest money is a good faith deposit the buyer makes to the seller. Typically, the earnest money deposit is held by a third party, such as an escrow account, until the sale is completed. The PSA will include the amount of earnest money required.
A PSA typically includes the agreed-upon closing date, which is the day the sale will be finalized.
Contingencies are clauses in the PSA that lay out what requirements must be met for the sale to move forward. There are many different types of contingencies. And both the buyer and the seller can require them.
One common contingency is that the buyer, seller or both need to complete other home sales or purchases before this transaction can go through. For example, the buyer may add a contingency that they need to sell their current home before moving ahead with buying the new one. And if they aren’t able to sell their current home by a specified date, they may be able to pull out of the deal.
Some other common contingencies include:
A PSA typically includes an estimate of the closing costs and who is responsible for paying them.
This section of the PSA outlines what is or isn’t included in the sale. For example, the PSA will note whether a home’s appliances, like a washing machine or refrigerator, are included in the sale or not.
Here are some frequently asked questions about PSAs.
Who prepares the purchase and sale agreement?
The seller’s real estate agent or real estate attorney generally prepares the PSA. State laws can affect who is allowed to prepare PSAs.
Can you change your mind after signing a purchase and sale agreement?
Once the PSA is signed by both parties, it’s a legally binding contract. If any of the contingencies aren’t met by a certain date, the buyer or seller may be able to back out of the deal or renegotiate the terms.
If all contingencies are met and the buyer or seller still pulls out, there could be financial and legal consequences.
What happens after the purchase and sale agreement is signed?
There are a lot of steps in the home buying process. And what you need to do after the PSA is signed can vary. For example, if you’re planning on using a mortgage and haven’t gotten approved for one already, you’ll have to secure financing. The buyer and seller will also have to take steps to meet all contingencies and terms laid out in the PSA.
It can be a lot to keep track of, especially if you’re a first-time homebuyer or seller. Your real estate agent or attorney may be able to help guide you through the process.
A PSA is a contract that’s used in the early stages of a real estate transaction. It outlines things like the purchase price, closing costs, and any contingencies and terms that must be met before the transaction is finalized. While it is a legally binding contract, a PSA doesn’t complete the sale of the home.
If you’re just starting your home buying journey, these guides on figuring out how much house you can afford and important questions to ask when buying a home may help.
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