Home Purchase Agreements

Tips for how to go through a home purchase agreement. 

By Emily Southey | 16 minute read

A house purchase agreement is a crucial step in the homebuying process. Whether you’re buying a home with cash or a mortgage or have enlisted the help of a REALTOR® or not, a purchase agreement will be drawn up that must be signed by the buyer and the seller. This contract outlines the details of the transactions, including the purchase price, closing date, contingencies, and more. Since purchase agreements are legally binding, it’s important to be thorough when going through them. 

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What is a house purchase agreement?

House purchase agreements are legally binding contracts that detail the prices and terms of real estate transactions. Every component of the home sale is covered in the purchase agreement, ranging from the earnest money deposit to inclusions and exclusions. The purpose of real estate purchase agreements is to protect both the buyer and seller and ensure everyone is on the same page. Even if the information included is similar, the exact terms of purchase agreements vary by transaction. This is because the purchase price (and therefore the earnest money deposit) of homes vary, as do the agreed-upon conditions. Regardless of the details of your real estate purchase agreement, these documents represent one of the most important elements of  buying a home in Ontario.

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What is included in a real estate purchase agreement

Real estate purchase agreements are all-encompassing, meaning they include a wide range of information about the home sale. The most common information found in real estate purchase agreements in Ontario is as follows: 

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Property address and names of the parties involved

First and foremost, a house purchase agreement will include the most basic details of the transaction. Namely, the address of the property being purchased and the names of the parties involved (the buyer, the seller, and any others involved in the sale). 

The contract should include the full address of the property, along with a clear legal description of the home in question. Further, the identities of the seller and the buyer(s) should also be included. If there is more than one buyer, the purchase agreement will feature the details of their co-ownership agreement (specifically, whether the buyers will act as joint tenants or tenants-in-common).

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Purchase price

The purchase agreement generally includes the purchase price (that is, the price offered by the buyer and accepted by the buyer). Beyond listing the price, this portion of the purchase agreement typically also mentions the means by which the price will be paid. The most common methods of paying for a home include cash, an existing mortgage, or a combination of the two (e.g. making a cash down payment and financing the rest through a mortgage). If the payment method is not stated immediately beneath the purchase price, it may be outlined in a financing addendum. 

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Earnest money deposit

Real estate purchase agreements also include details of the buyer’s earnest money deposit. Earnest money is given by the buyer to the seller as a sign of good faith. Deposits vary but are generally between 1% and 3% of the purchase price, which means buyers are likely paying a minimum of $1,000. In most cases, the earnest money deposit is returned to the buyer on the closing date, where it can then be put towards the down payment or mortgage payments. However, it’s important to stipulate in what situations the deposit will and will not be refunded. For example, some purchase agreements will include a contingency added by the seller stipulating that the buyer forfeits their earnest money deposit if the sale falls through due to financing issues. 

Closing date

The closing date of the sale must clearly be listed in the purchase agreement. Most agreements will also include a stipulation that any changes to the closing date must be agreed to in writing. The closing date is crucial for both parties, as this is the date that the title of the property typically transfers from the seller to the buyer. 

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Closing costs

Any applicable closing costs, for both the buyer and the seller, will also be outlined in the house purchase agreement. A breakdown of these costs and which party will cover each is typically included. In most cases, the buyer covers the majority of the closing costs. However, sometimes the seller agrees to pay for the closing or the two parties split the costs. Whatever the parties agree to should be clearly described in the purchase agreement.  

For those that don’t know, closing costs are a mix of legal and administrative fees paid when a house closes. As these costs can vary, homebuyers should budget to spend between 1.5% and 4% of the purchase price on closing costs.

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Real estate taxes

Purchase agreements typically also include details of any applicable real estate taxes. Tax rates and types vary depending on what province you’re purchasing a home in but may include a sales tax and a land transfer tax or property transfer tax. For example, if you purchase a home in Toronto, the buyer will be responsible for paying a provincial land transfer, as well as a municipal land transfer tax. 

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Items that are included or excluded

If the seller has agreed to include certain items with the sale of the properties, this will be thoroughly detailed in the house purchase agreement. Similarly, items excluded from the sale will also be outlined. Included or excluded items can be everything from kitchen appliances and light fixtures to doors, windows, HVAC units, bathroom fixtures, and detached structures, such as gazebos or above-ground pools. 

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Contingencies

Next, real estate purchase agreements will include any contingencies listed by the buyer or the seller.  Conditions are designed to protect both parties during the homebuying process. Buyers and sellers can include whatever contingencies they like. However, the other party does not have to agree to them. Contingencies are usually a key part of counter offers in real estate. Some of the most common contingencies included in purchase agreements are as follows: 

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Financing contingency

Most people cannot afford to buy a home with cash. This means that in order to purchase a home, the buyer must be approved for a mortgage. To ensure you aren’t spending beyond your means, it’s crucial to get pre-approved for a mortgage before you start house hunting. Ultimately, if you are a buyer who is financing their home with a mortgage, a financing contingency should be included in the purchase agreement. Such a contingency stipulates that the purchase offer will only go through if you obtain financing at a specified interest rate. If you are depending on a special type of loan to finance your home, this should be specified in the agreement. 

Seller assist contingency

If you are a homebuyer and you want the seller to pay for part or all of your closing costs, you must list it as a contingency in the purchase agreement. When you add a seller assist contingency, you are asking the seller to cover some or all of the closing expenses. Buyers are often surprised to learn that a seller agreeing to absorb some or all of the closing costs is more common than you might think. In some cases, the buyer might even agree to pay a little bit extra for the home if the seller agrees to cover the closing costs. As part of a seller assist contingency in a house purchase agreement, you should list the specific dollar amount of the closing costs you want the seller to pay or the closing costs as a percentage of the home’s purchase price. 

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Home inspection contingency

A home inspection contingency is one of the most common conditions included in purchase agreements. Unless you plan to tear down the entire property and rebuild it, home inspection contingencies are critical for buyers. When you make your offer contingent on a home inspection, you have the right to walk away from the deal if the home inspection reveals a major flaw in the home. During a home inspection, a professional home inspector examines the property’s interior, exterior, and HVAC system to ensure it is in working condition. Specifically, they will inspect the home for structural problems or damages. If the inspector finds a problem, the buyer has the right to cancel the home sale under the home inspection contingency. However, the buyer can also choose to request repairs from the seller or negotiate a price reduction rather than walk away from the sale completely. 

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Appraisal contingency

An appraisal contingency allows the buyer to cancel the transaction if an appraiser finds that the value of the property is less than the agreed-upon price. If an appraisal contingency is included in the purchase agreement and the appraisal reveals the home is worth less than the purchase price, the buyer has the right to back out of the agreement and receive a refund of their earnest money deposit.

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Home sale contingency

One final type of contingency often found in real estate purchase agreements is a home sale contingency. If you currently own a home and are dependent on the funds from the sale of that home to buy the new property, you should try to include a home sale contingency in the purchase agreement. The home sale contingency should include the time frame you require to sell your existing home. This time frame should be reasonable and based on current market conditions (30 or 60 days is common). If the seller agrees to this contingency, the purchase agreement will only be legally binding once the buyer’s existing home has been sold. It’s worth noting that while home sale contingencies are favoured by buyers, sellers generally try to avoid them as there is no guarantee that the buyer will be able to sell their home in the specified time frame. 

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Disclosures of defects and hazards

Sellers in Canada have a legal obligation to disclose information that may affect the safety or value of the property. This means that a seller cannot intentionally conceal known defects, especially if they put the future homeowner’s health at risk. Any known defects or hazards relating to the property will be included in the purchase agreement. However, buyers must keep in mind that sellers are not required to actively search for defects, only to list the defects they are currently aware of. This is why home inspections are so important. They can make buyers aware of potential defects or hazards unknown to the seller. 

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Signature block

The final section of a home purchase agreement is the signature block. If both parties agree to the terms of the contract, they will sign and date the purchase agreement here. Most purchase agreements require witnesses, so there will likely be a spot to enter each witness’s name and signature.