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A purchase contract is an essential part of the process for a real estate transaction. It spells out the initial contract agreement to the final transfer of the property. Purchase contracts are very detailed and legally binding documents and sometimes draws some confusion for both buyers and sellers. To dispel some of that confusion, here is everything San Francisco buyers and sellers need to know about purchase contracts.
What a Purchase Contract Is Not
One thing before going into purchase contracts is that although some people use purchase contracts and purchase and sale agreements (PSAs) interchangeably it is fundamentally different.
“A purchase and sale agreement, or PSA, is a document that is written up and signed after a buyer and seller mutually agree on the price and terms of a real estate transaction. [It] includes details like earnest money needed, the closing date and specific contingencies the buyer and seller have agreed to. The PSA is where the seller and buyer agree on the terms for purchasing the home and sets the transaction in motion toward the closing.”
Though that sounds very much like a purchase contract, it is not. “Signing a PSA does not complete the sale of the home. Signing a purchase contract, however, does complete the home sale. Where the PSA lays out the details of the transaction leading up to the closing date, the purchase [contract] is what you sign to finalize the transaction.
What is a Purchase Contract
Purchase contracts spell out in detail all the agreements under which San Francisco buyers and sellers “agree to engage in a real estate transaction. The completion and signing of a purchase [contract] effectively places both the buyer and seller ‘under contract.’” This contracts states 3 main topics, who, what, and when.
The who is the buyer and seller. For example, when a buyer makes an offer to purchase a home, they will “propose conditions for the sale and spell out the important financial details such as [the] offer price.”
On the other side of the who is the seller who will accept, reject, or negotiate new terms of the contract . After the terms are negotiated both buyer and seller signs the purchase sale agreement. “At this time, the property would be considered “under contract”.
The what is the property location. The property location could be listed as an address but the county of San Francisco uses a different system. San Francisco uses lot and block to identity the property location.
Why? Imagine a house that is sitting on a large piece of land and a developer comes in and splits the land in two. The original house would keep the original address and the “new” split lot would have a new address. How does someone know where the new lot line is? This is where lot and block comes in to keep defined property lines in San Francisco’s county records.
The when in the purchase contracts identifies how long the buyer has to close on the property or else risk losing their earnest money. The earnest money in San Francisco is typically 1-3%, which is tens of thousands of dollars even on the conservative end. Typically the when is 30 days after all parties have agreed to the purchase and sale agreement. It could be even longer due to tax loop holes like a 1031 exchange or a tenant buyout, which can easily take a minimum of 3 months.
Once the who, what, and when has been agreed upon and signed it means “the intent of all parties to engage in a home sale transaction and [explain] which conditions must be met for the ownership of the property to transfer to the new buyer.” Typically, the buyer’s agent will draw up the purchase contract.
Here is a fun fact: Because agents are not attorneys, they cannot create a contract from scratch, so they use a template and adapt it for specific transactions.
Common Elements of Purchase Contracts
Purchase contracts are very detailed documents and specific legal requirements, which can vary from county to county. There are, though, some common elements that you’ll find in purchase contracts, for example”
- Buyer and seller information – Full names and contact information for all buyers and sellers involved
- Property details – Address, property, description, and other pertinent details
- Purchase price – “The total agreed-upon selling price for the property, including any deposits or additional costs associated with the transaction”
- Representations and warranties – “Statements of facts made by the seller regarding the condition, structure, and composition of the property that is being sold”
- Earnest money – “Terms of any earnest money security deposits that must be made to show the seller in good faith that the buyer is interested in purchasing the property”
- Financing – Specific details explaining how the buyer will pay for the property
- Closing date – The exact on which the transfer of title will take place
- Fixtures/appliances – Statement about what fixtures and appliances will or will not be included in the sale
- Title insurance – “A note specifying whether the buyer or seller will be responsible for purchasing title insurance to protect against potential discoverable defects in the property”
- Property taxes – “Citations regarding any property taxes that will be imposed on the property that is being purchased”
- Contingencies – Any condition that must be met before the sale can go through, such as an inspection contingency
- Option to terminate – “[O]ption for the buyer to back out of the deal and terminate the contract up until a certain time before closing”
- Lead-based paint disclosure – Required by law for homes built before 1978
- Signatures – Signatures of all parties involved to finalize the contracts
Purchase Contract Assistance
Purchase contracts and Purchase and sale agreements are designed to protect both buyers and sellers to ensure a smooth transaction throughout the process. To reduce the risk of mistakes it is best to work with me a local San Francisco real estate agent so contact me at 415-830-1423.
