What Is a Purchase Agreement?


A purchase agreement, also called a sales agreement, is a legal document primarily used for complex business sales transactions involving assets and real estate. Its primary purpose is to outline terms and conditions between the seller and the buyer regarding the purchase. The agreement also displays detailed information about the buyer and the seller. Moreover, it includes a detailed description of the property being purchased. Commonly, real estate business transactions that require a large number of items use the sales and purchase agreement. According to an article from Chron, business purchase and sales agreement are essential because it can help a business owner manage finances and business relationships better. Whether the transaction involves an asset purchase or real estate purchase, a purchase agreement is necessary to protect both parties from future conflicts and breach of contract.

According to Investopedia, sale and purchase agreements are commonly used in real estate transactions, public company’s supply chains, governmental trade agreements, and business acquisitions.

In Statista report, sound purchase agreements generated through the North American Free Trade Agreement (NAFTA) in 2014 has led to $630  billion, $250 billion, and $340 billion in additional trade volume between the United States, Canada, and Mexico, respectively.

Statista also stated that 30% of Americans responded that the United States should continue NAFTA, while 44% of Canadian respondents said that their country has benefited from the NAFTA trade agreement.

The Key Elements of a Purchase Agreement

In major business transactions, there is always a written agreement involved. The document holds information about the transaction and the agreed-upon terms and conditions. In the real estate industry, a purchase agreement is one of the essential documents required in the real estate process. It presents the overall terms of the real estate transactions. Knowing what makes such an agreement is necessary to have an idea of what to expect and where to negotiate. Some purchase agreement documents, like a car purchase agreement, may include other clauses, depending on the arrangement. But to help you understand the basic elements, read the post below.

The Parties Involved. In every business transaction, there are always parties involved. That is why every business agreement should specify the identity of the two parties. The purchase agreement should present the full information of the parties involved, such as names, addresses, contact numbers, etc. Doing this is essential because identifying the person accountable for the deal is easy.The Property at Stake. Another important information the sale and purchase contract should reflect is the property at stake. The agreement should present full-length details about it. If it is a real estate property, then the contract should state the exact address of the property and other legal descriptions.The Items Included and Excluded from the Sale. In a purchase and sale agreement for real estate, it is essential to thoroughly identify all the features included and excluded from the deal. Some homebuyers may mistakenly think that every item displayed in the showing of property is included. That is why highlighting the included and excluded items in the purchase agreement are essential.The Price and Payment Terms. The next essential component that should be in the purchase agreement is the price and payment terms. This clause should specify the offered price and the method of payment. The common means of payment may include a full cash payment with a down payment, depending on what the seller and buyer have agreed.The Liabilities and Obligations. Another must-have of a purchase agreement is the liabilities and obligations the seller and the buyer will assume. The business transaction agreement should outline and clarify what liabilities and obligations stay with the seller and the buyer. This is to make sure that both parties will do their part.The Termination Clause. Every business contract has termination terms. It is an agreement between the two parties regarding the events that would result if there is a default. This section should present the grounds that will justify the termination of the contract, as well as penalties for certain defaults. Both parties must discuss this element to avoid misunderstandings.

How to Write a Formal Purchase Agreement

According to an article from Chron, business contracts are necessary because it showcases a mutual understanding between two parties. Whether it is for employment, partnerships, vehicle or home purchase, or other business transactions, business contracts should be well-written and holds accurate information. And, just like any other business agreement, a purchase agreement plays a vital role in business deals. This legally binding contract obligates a seller to sell and a buyer to buy products or services. So, if you are making a purchase agreement, you need to have an idea of the fundamentals in creating one. Without leaving you hanging, here are some tips on how to write a formal and concise purchase agreement.

Step 1: Identify the Parties Involved

Since the purpose of having a purchase agreement is to set forth the arrangement between two individuals, it is only essential that the contract acknowledges them. So, start writing a formal purchase agreement by identifying the parties involved. This should be in the first part of the business agreement. You may start a brief paragraph stating that the contract is between the purchaser and the seller. Nevertheless, make sure that you put full information on both parties, such as names, addresses, phone numbers, etc.

Step 2: Describe the Property or Asset

After identifying the parties involved in the agreement, you need to add a legal description of the property the buyer will purchase. If the item in the sale is a real estate property, it is necessary to list down the features included in it. It should also be clear to the buyer what items are not included in the sale. This section in the agreement should also state any defects of the property during the writing of the contract. Having this information is important because it gives full and precise details about what is being bought, so there will be no questions or misunderstandings in the future.

Step 3: Provide Financing Information

Now that you have already described the property being purchased, it is time to provide the necessary financial details essential for the purchase. This financial information may include the purchased price, amount financed, down payments, and other financial figures, including its timeframe. You also need to add payment terms, such as how often the purchaser will pay and the mode of payment. If payments are not produced on time, the document should also include terms for the termination of the agreement under this section. You may also include financing addendum if necessary. Payment terms and conditions have to be clear for both parties to avoid confusion. Hence, this information should be well-defined in the purchase agreement.

Step 4: Present a Dispute Resolution Statement

It is also necessary for the purchase agreement to have a dispute resolution clause that outlines how both parties will handle misunderstandings and controversies. In some cases, if there are disputes between the seller and the buyer, they usually end up facing each other in the court. However, both parties may also decide and choose alternatives to solve problems such as private mediation. Whatever that is, both parties must agree to it, and they will share any cost of service.

Step 5: Finalize the Purchase Agreement

By finalizing, it means getting the purchase agreement signed by both parties. But before you do that, you need to show the business contract draft first to a lawyer. This is to ensure that every information incorporated in the contract is accurate and relevant to its purpose. Doing so also helps you identify whether the purchase agreement highlights enough information or if it needs more. If the lawyer thinks that the deal is good to go, then it is time to get it signed. At the bottom of the agreement, provide a blank space where the seller and the buyer will write their names and signatures.


Who prepares the purchase agreement?

In many cases, it is the seller who makes the purchase agreement. However, there are also times when the buyer prepares it.

Is a purchase agreement a legally binding contract?

Yes. A purchase agreement is a binding legal document that outlines information about the sale of goods, terms and conditions, as well as the parties involved. Once both the buyer and the seller sign the purchase agreement, it is officially a legally binding agreement.

What is earnest money?

Earnest money is a requirement used to confirm a deal. Property buyers are expected to pay earnest money, which may go toward the eventual down payment. According to Investopedia, earnest money can be considered as good faith money.

What is the difference between a purchase agreement and a purchase order?

The common difference between a purchase agreement and a purchase order is that the purchase agreement is for risky purchases. On the other hand, the purpose of a stand-alone purchase order is to manage lower risk purchases. But, the difference between the two has nothing to do with the time or the volume of purchased involved.

Do I need a lawyer to help in preparing a purchase agreement?

One can use a purchase agreement for both simple and complex business transactions. With that, seeking the help of a professional lawyer would be an excellent choice to help you review the different aspects written in your purchase agreement, and to ensure that the interests of both parties are met.

Aside from making the business transaction official, business contracts are necessary because they can serve as future references. A purchase agreement is one of the most important business contracts that enables the seller and the buyer to set forth the arrangements about a property or asset. The purchase agreement is one of the most significant business documents that business owners should have during transactions. So, if you will engage in a business deal with a buyer, you need to prepare one. For an easy and quick process, you may check the sample purchase agreement templates provided above and choose the one that will suit your needs.