What is a purchase agreement?
A purchase agreement is a legally binding contract between a buyer and a seller that outlines the terms and conditions of a sale. It defines what is being sold, the purchase price, payment terms, conditions that must be met before the sale closes, and what happens if either party backs out.
Purchase agreements are used for significant transactions — real estate, vehicles, business acquisitions, large equipment purchases, and wholesale goods. For smaller or simpler sales, a bill of sale may be sufficient.
Purchase agreement vs. bill of sale
These two documents serve different purposes and are used at different stages of a transaction:
- Purchase agreement — signed before the sale; sets the terms, conditions, and timeline for a future transaction. It's a promise to buy and sell under specified conditions.
- Bill of sale — signed at or after the sale; confirms that ownership has been transferred. It's proof that the transaction happened.
For a simple cash sale (buying used furniture, for example), a bill of sale is usually enough. For transactions with contingencies, inspections, financing, or a closing process, you need a purchase agreement first, then a bill of sale at closing.
Essential terms in a purchase agreement
A well-drafted purchase agreement should include these key elements:
Parties
The full legal names and contact information of the buyer and seller. For businesses, include the company name, registered agent, and state of incorporation.
Description of the item or property
A detailed description of what's being sold. For real estate, this includes the legal description and property address. For goods, include make, model, serial numbers, condition, and quantity. Ambiguity here leads to disputes — be as specific as possible.
Purchase price and payment terms
The total price, how and when it will be paid (lump sum, installments, escrow), the currency, and any deposit or earnest money requirements. If financing is involved, specify the terms and what happens if financing falls through.
Conditions and contingencies
Conditions that must be met before the sale can close. Common contingencies include:
- Inspection contingency — buyer has the right to inspect and back out if issues are found
- Financing contingency — sale is contingent on the buyer securing a loan
- Appraisal contingency — property must appraise at or above the purchase price
- Title contingency — seller must provide clear title free of liens
Warranties and representations
Statements by the seller about the condition and status of what's being sold. Warranties can be:
- Express warranties — specific promises about condition, performance, or quality
- Implied warranties — warranties that apply by law unless explicitly disclaimed (merchantability, fitness for a particular purpose)
- "As is" clause — disclaims all warranties, meaning the buyer accepts the item in its current condition
Closing date and process
When and how the sale will be finalized. For real estate, this involves title transfer, recording, and escrow. For goods, it's typically delivery and payment. Specify who pays closing costs, transfer taxes, and any other fees.
Real estate purchase agreements
Real estate purchase agreements are the most complex type and typically include additional provisions:
- Earnest money deposit — a good-faith deposit (usually 1% to 3% of the price) held in escrow
- Disclosure requirements — seller must disclose known defects, environmental hazards, and property history
- Home inspection period — typically 7 to 14 days for the buyer to inspect the property
- Title search and insurance — verifying the seller has clear title and purchasing title insurance
- Closing costs allocation — who pays for title insurance, recording fees, transfer taxes, and attorney fees
- Possession date — when the buyer can take physical possession (not always the same as the closing date)
Most states have standard real estate purchase agreement forms used by real estate agents. These standardized forms cover the most common scenarios, but complex transactions may need custom provisions.
General purchase agreements for goods
For non-real-estate transactions — vehicles, equipment, inventory, business assets — purchase agreements are simpler but still important. Focus on:
- Detailed item description — make, model, year, serial number, condition
- Delivery terms — when, where, and how the item will be delivered; who pays shipping
- Risk of loss — at what point the buyer assumes responsibility for damage or loss
- Return policy — whether and under what conditions the buyer can return the item
- Dispute resolution — how disagreements will be handled (mediation, arbitration, litigation)