Making Sense of a Real Estate Purchase Agreement (With FAQs)

Updated September 30, 2022

Buying a home can be a monumental event in your life, regardless of whether you're buying a starter home or your dream home. You may find purchasing a home overwhelming because a considerable legal component is involved when you enter into a real estate contract, notably when signing a sales contract. Understanding the various elements of a sales contract can allow you to feel more comfortable when entering into your next real estate contract. In this article, we discuss what a purchase agreement is, look at who can prepare them, explain the different elements, and answer some frequently asked questions.

Read more: Real Estate Agent Salary and Career Opportunities in Real Estate

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What is a purchase agreement?

A purchase agreement is a legally binding document outlining the home or property sale details. In this contract between the buyer and the seller, the buyer proposes the terms of the agreement, including the offer price. The seller can agree, decline, or negotiate the offer that the purchaser has made, and the negotiations can continue until both parties are content with the terms. Once both parties authorize the conditions and sign the sales contract, all parties consider the transaction under contract.

The real estate industry refers to purchase agreements as a real estate purchase, home purchase, house purchase agreement, or a real estate sales contract.

Related: How to Become a Commercial Real Estate Agent in Canada

Who prepares the sales contract?

The buyer's real estate agent prepares the sales contract in most cases. Unless the real estate agent is a lawyer licensed to practise law, they can't develop their own legal contracts. The forms for this process are often regulated form contracts that permit agents to fill in the blanks with specifics about the sale. Provincial or territorial real estate associations provide their registered agents with a sales contract that is legally binding for that region. To gain access to the forms, they require membership as a realtor with the real estate association in their specific region.

What is in a home sales agreement?

If you compare various real estate sales agreements, you may notice the contracts appear different since each real estate transaction is distinctive. Some of the essential items that you can find in all sales contracts are as follows:

  • Seller and buyer information

  • Details on the property sold

  • Sales price and how the buyer is financing the purchase

  • Appliances and fixtures that the sale includes and excludes

  • Closing date and possession date

  • Deposit amount

  • Closing costs and who's in charge of paying them

  • Conditions, if present, that would permit termination of the contract

  • Conditions or contingencies that both parties are accountable for meeting for the sale to close successfully

Understanding the elements of a sales contract

There are various parts of a sales agreement that are straightforward, like the buyer's price and the date of closure. You may find other elements of the contracts complex, especially if you're a first-time homebuyer. It's essential that you understand the complete sales contract thoroughly before signing it. Here is a summary of the different elements and why they are present:


A real estate sales contract includes details regarding how the buyer pays for the house at closing. If the buyer isn't dispersing the purchase price in cash, they require a financing option, like a mortgage loan, to purchase the home. You write out the financing details in the agreement. For example, the contract states whether the purchaser is getting a mortgage to buy the house or using an alternate. Another option is for the seller to provide financing. With this option, the purchaser makes mortgage payments to the seller rather than a conventional mortgage lender.


A deposit shows the seller that the buyer is genuine about purchasing the home. Providing a deposit gives sellers confidence that the buyer is prepared to fulfil the agreement through closing. If the buyer decides to cancel the sale for a reason not stated in the agreement between the time the deal is signed and the closing, the buyer loses the deposit, and the seller gets to keep it.

The purchaser can get their deposit back if the reason they cancel the sale is in the agreement. A third party usually holds the deposits on the sale of a home in a trust. They add the funds to the down payment or the closing costs due at the time of closing.


Real estate contracts can have different contingencies that benefit both the buyer and the seller. It's vital to understand all contingencies that your sales contract includes. Contingencies are terms that both parties are required to meet before the sale process can continue.

Some of the common contingencies you may find in a sales agreement include:

  • Financing contingency: The home sale depends on the buyer's ability to secure financing. If the seller cannot confirm funding to buy the house, this contingency secures the buyer.

  • Inspection contingency: The purchaser can cancel the sale if they aren't happy with the results of a professional home inspector's evaluation of the home.

  • Appraisal contingency: This contingency declares that the house appraisal is at an estimate equal to or higher than the price the buyer agreed to pay.

  • Home sale contingency: The home purchase depends on the purchaser's ability to sell their current home. The purchaser requests this contingency because the sale of the existing home allows them to secure the financing on the house the buyer intends to buy.

Closing costs

There may be a requirement for the buyer or seller to pay specific costs and fees at closing. The amount depends on what both parties agreed to in the contract. Closing costs can involve the agent's commission, inspection and appraisal fees, taxes, insurance, and lender's fees. For purchasers, closing costs can be 3% to 6% of the price of the home, and the closing fees for sellers may be marginally higher.

Read more: How Do Commissions Work?

Can you cancel a sales contract?

If you want to cancel a real estate purchase, it's best to do it before signing the contract. After you've signed the agreement, you're under contract, and the other party might penalize you if you try to cancel the contract for purposes you haven't stated in the agreement. Before signing a sales contract, ensure it includes details about the terms under which you can terminate the contract.

Related: Top Negotiation Skills You Should Possess

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Frequently asked questions about sales contracts

Here are the answers to some commonly asked questions about real estate purchase contracts:

How do you create a sales agreement?

The buyer or seller of a home or property doesn't usually prepare a sales agreement, an agent typically prepares it. Regional real estate associations prepare documents to ensure that the contracts agents use are legally binding. Contracts have purchaser and seller information, a legal description of the home, deposit amounts, closing dates, contingencies, and other information that is essential for the sale.

Is a sales contract legally binding?

Sales contracts are legally binding contracts. For that reason, you may choose to state acceptable reasons for a purchaser to cancel a sale. If those reasons aren't stipulated before both parties have signed the contract, you can lose your deposit if you choose to terminate the contract. As the seller, you can cancel a sales agreement for several reasons, like any challenges arising from the sale contract's contingencies.

Do sales agreements expire?

Sales agreements can expire, and both parties can clearly state any expiry date in the sales contract. Standard timeframes are 30, 45, or 60 days. If you have a sales contract and are unsure of the expiry date, you may choose to consult with a lawyer.

Are commercial and residential sales contracts the same?

Commercial and residential sales contracts are not the same. Commercial sales contracts usually have a more extended conditional period to allow both parties to do their due diligence. Another difference is that the buyer may ask the seller to provide records relating to the business, including surveys, operating statements, leases, reports, expenses, and income. In commercial sales agreements, the buyer may ask the seller to provide short-term financing to get permission for planning and development, which the buyer can then use to obtain traditional financing.

Post-closings are another feature of commercial sales agreements that don't exist in those for residential properties. When you buy a home, you get the keys and move into your new house with little, if any, post-closing communication. In commercial real estate, there is always follow-up. As the buyer learns about the property, they may discover surprises. Any surprises can mean the buyer comes back to the seller on representations and warranties.

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