Guide – Purchase and Sale Agreements (PSAs)

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If you are gearing up to buy your first home, you’ll soon come face to face with an overwhelming number of legal forms, documents, and certificates. This article will guide you through one of the more important of those documents—the purchase and sale agreement. 

By the end of this article, you’ll know exactly what’s in a PSA, why PSAs are an essential part of purchasing a home, and who’s responsible for drafting it. 

Let’s begin with a definition.

Defining Purchase and Sale Agreements (PSAs)

In essence, a PSA is a legally-binding document that describes the terms and conditions of a real estate transaction. PSAs are drafted by a real estate agent or a lawyer—depending on which state the transaction takes place in—and signed by both the home seller and home purchaser.

Note that signing a PSA does not complete the purchase of a property. Instead, it simply outlines the terms, conditions, and contingencies both parties (the buyer and seller) must meet to avoid the risk of legal action.

Therefore, PSAs are like an official outline of the closing process. Signing a PSA starts the countdown toward signing the purchase agreement, which is the final document that completes the transaction. If the PSA is like the shot that starts the race, the purchase agreement is the finish line.

Now that we know what PSAs are, we can explore what’s in them.

What’s In a Purchase and Sale Agreement?

Different states will have slightly different requirements for what needs to be included in a PSA. Also, buyers and sellers might propose additional contingencies unique to a specific transaction. 

Usually, a PSA will contain the following items:

The Purchase Price

The purchase price establishes the amount of money the buyer will pay the seller in the transaction. However, most PSAs allow the purchase price to be changed if an appraisal comes back lower than expected or if an emerging issue with the property gives the buyer grounds to negotiate a lower price.

Barring a poor appraisal or sudden damage to the property, most purchase prices end up being the closing price.

Information Regarding the “Good Faith” Deposit

The “good faith” deposit is a promissory deposit that establishes the buyer’s intent to follow through on the purchase. PSAs outline specific details of the “good faith” deposit, also known as earnest money

PSAs will establish—

  • how much earnest money the buyer must pay
  • when they must pay it by
  • who manages the payment 

Additionally, the PSA will establish how much time the deposit holds for the buyer to complete home inspections and appraisals. It also outlines what scenarios allow a buyer to get their deposit back.

The Closing Date

The PSA will also establish a closing date,  which can be thought of as the finish line for the home buying process. Many affairs need to be completed before the closing date, such as the home appraisal, the home inspection, and the title search, among other things. 

Essentially, the closing date is a legally-defined deadline both parties must adhere to once the PSA is signed.

Information Regarding the Title Condition, Title Insurance Company, or Escrow Company

PSAs will also contain information on the title, how it must be transferred, how it is insured, and which company is overseeing this process. Title insurance companies or escrow companies can handle the transfer of the title. 

Depending on the state where the transaction occurs, the title’s transfer might occur at the agency or the property. All of these details are clearly outlined in the PSA.

Other Items That May Be Included in a PSA

Various Contingencies

PSAs will also outline how either party can legally back out of the contract at no additional cost. Usually, these contingencies involve appraisals or home inspections that reveal a lower price than expected or reveal a fundamental issue with the property. 

Other Documents

Certain addendums are often added at the buyer or seller’s request. These cover issues that a standard PSA might not address. For example, if the property has a septic tank, the buyer might request an addendum that requires the seller to perform a septic inspection by the closing date.

How Does the Signing Process Work?

According to Roni Davis, from commercial real estate investing company First National Realty Partners, “Usually, the buyer will send a signed PSA to the seller that contains all of the terms and conditions outlined above. If the seller likes the terms and conditions set out in the PSA, they will sign and return the PSA.”

However, buyers and sellers often negotiate on specifics back and forth by sending counteroffers until an agreement is reached.