The basics of purchase and sale agreements

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 PSA is a legal contract that states the buyer’s intent to purchase a home and the seller’s intent to sell it. 
• PSAs generally include some basic information about the buyer, seller and property. A PSA also details the terms of the transaction, including the purchase price, earnest money requirements, estimated closing costs and closing date, contingencies, and any inclusions or exclusions. 
• If all the PSA’s terms and contingencies aren’t met by a certain date, the buyer or seller may be able to back out of the deal or negotiate the price and terms. If all terms and contingencies are met and either party pulls out, that decision could have financial and legal repercussions. 
• PSAs are not the same as purchase agreements. Purchase agreements are signed after all the terms laid out in the PSA are met. The purchase agreement finalizes the sale of the home. The PSA does not. 

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:

• Mortgage contingencies
• Home inspection contingencies
• Title contingencies
• Home appraisal contingencies
• Homeowners insurance contingencies

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.

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. 

If you want to know where your credit stands, you can use CreditWise from CapitalOne to access your TransUnion® credit report and VantageScore® 3.0 credit score without hurting your credit scores. 

You can even explore the potential impact of financial decisions, like getting a mortgage, before you make them with the CreditWise Simulator. CreditWise is free for everyone, whether you’re a Capital One customer or not.