10 Things to Do Before Signing a Purchase Agreement

A purchase agreement is a legally binding contract detailing the property transaction between the buyer and seller. It is sometimes called the real estate sales contract, the home purchase agreement, or the real estate purchase contract.

Some states use a short document called an "offer to purchase," also known as a binder. In this case, if the seller accepts the offer to purchase, it leads to a sales contract, which is a longer document and lists the more specific details of the purchase.

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Here are some of the main points outlined in a purchase agreement:

• Seller and buyer names.
• Property description.
• Offer price.
• Financing terms.
• Earnest money deposit.
• Contingencies (inspection, appraisal, your own home sale, etc.).
• Closing costs and terms.
• Deadline for acceptance.

When you sign a purchase agreement for a home, you are, in fact, agreeing to purchase it. Here's what you should do before making this big commitment.

You're about to make an offer on a home, which would indicate that you have more than a passing interest in the property. But does it fit your needs? It goes without saying that a home is a major purchase, and your buyer's remorse will be sizeable if you don't consider the property and its location in terms of your short-term and long-term housing needs.

ALSO READ: Can You Back Out of a Home Purchase Agreement?

You might have big plans for expanding or renovating your new property, but you'd better make sure the city or town will allow you to execute them. For example, you might have plans to build an in-law suite over the garage, but local zoning laws will not permit you to turn a single-family home into a two-family home.

You should also look into what other development plans are in place. That vacant lot across the street could mean that something's being built there eventually, so you'll need to be on board with having new neighbors.

To show the seller you are serious about buying the home, you should make an earnest money deposit -- typically 1% to 3% of the purchase price -- as part of the purchase agreement. In tighter markets, you might consider making an even bigger deposit for a more competitive offer.

The earnest money is put into an escrow account and will later be applied to the home's down payment or closing costs.

If you or the seller back out of the deal for a valid reason listed as a contingency in the purchase agreement, such as an unsatisfactory home inspection, you will get this money back. But if you simply decide you no longer want the house, you'll lose your earnest money deposit.

ALSO READ: Shopping for a Home? Be Ready to Make an Earnest Money Deposit

The hot seller's market has made bidding wars commonplace throughout the country, but what about the supply and demand in the local market where you're looking to buy?

Does every other house on the block have a For Sale sign in the front yard, or is the one you're interested in the only house available in town? In areas where there is more of a housing supply, you might have some breathing room with your offer. A real estate agent can help you decide on a competitive offer based on recent comparable properties sold.

ALSO READ: Will 2022 Be a Seller's Market?

The property's history may offer important details about the home's condition. Has the property had the same owner for decades? Or has the home been listed and relisted several times in the past few years?

It could just be the owner has had poor timing with the market, or it could mean that would-be buyers are backing out of deals because of property issues. When you get more information about why the home is being sold, you can make a more informed decision about your purchase.

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If your offer is already coming in at the top of your budget range, will you have the cash left to make any needed repairs? It's one thing to hold off for a while on cosmetic renovations, but what if your new home already needs a new roof?

This is one reason a home inspection is an important part of the process. If you find that there are substantial repairs that need to be done, you can request that the seller do them, but if they decline, you must consider whether you are willing to take them on instead or pull out of the deal.

Your mortgage payment is a fixed expense, but it's only part of your budget as a homeowner. You'll need to figure out whether you can cover all the expenses of your new home, including utility bills and ongoing maintenance costs.

If you have to make a higher-priced offer to remain competitive with other buyers, know that you could be eating into the cash that should be earmarked for your monthly operating expenses.

You already know, of course, that you must pay taxes on your property. But if you are planning to make improvements to the property, understand that you could see an increase in what you owe because the property will be assessed for a higher value. If you already find the tax bill burdensome, you must consider that it could go even higher.

ALSO READ: 3 Reasons to Fight Your Property Tax Bill

Unless you are an experienced real estate agent, you will need help navigating the homebuying process. If you aren't already working with an agent, now's the time to find one. In some states, like New York, you will also need a lawyer to review real estate contracts.

You're likely already in regular contact with your mortgage loan officer. You should also get recommendations for a reputable property inspector so that you are ready to schedule an inspection should your offer be accepted.

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In housing markets with low inventory, houses listed at the beginning of the week are in contract by the end. This could happen with your offer, or the seller might be willing to negotiate with you. Or you might have your offer declined outright, which can be devastating if you had your heart set on that property.

Even if your offer is accepted, know that there’s still a lengthy process before the property is officially yours. Remain in close communication with your real estate agent, attorney, and loan officer so that you can keep the property transaction moving along as quickly and smoothly as possible.

The decision to buy a home is not to be taken lightly. There are many factors to consider before signing that purchase agreement -- so that you can avoid making a very expensive mistake.

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