Home Purchase Agreements

Tips for how to go through a home purchase agreement. 

By Emily Southey | 16 minute read

Jul 28

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. 

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.

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: 

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).

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. 

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. 

“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.”

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. 

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.

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. 

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. 

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: 

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. 

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. 

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.

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. 

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. 

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. 

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Tips for drafting a home purchase agreement

Our top tips for drafting and reviewing a home purchase agreement can be found below.

Draw up the correct type of agreement

Not all purchase agreements are the same. The purchase agreement drawn up depends on the circumstances of the home sale. For example, if you are buying vacant land, a pre-construction home, or an existing home, the purchase agreements will differ. To ensure you are using the right purchase agreement template, speak with your realtor. 

Hire a real estate lawyer to review the agreement

Just as you are required to include the purchase price and earnest money deposit in the purchase agreement, you should also disclose your down payment. Depending on the price of the home, your down payment may be anywhere from 5% to 20% of the purchase price. Beyond listing the down payment as a percentage of the purchase price, you will also need to state how you intend to pay for the down payment. For example, some buyers make the down payment with a loan while others pay with cash or through stocks, real estate, or other assets. 

Specify the date of possession

It’s not uncommon for homebuyers to overlook the date of possession, believing the date of possession and the closing date are the same or forgetting about it entirely. The reality is that the closing date and the date of possession are two different dates. Typically, the date of possession closely follows the closing date, but it doesn’t always happen like this. The date of possession is the date the buyers can legally move into the property. It’s also the date by which the current homeowners must vacate the premises. For this reason, it’s crucial for buyers to specify the date of possession. Failing to list the date of possession in the purchase agreement can lead to major problems down the line, with deals falling apart due to buyers and sellers having unreasonable expectations surrounding this date. 

Clearly outline who pays what fees

Closing fees are negotiable in purchase agreements. Therefore, it’s important to clearly outline which party is responsible for paying what fees. All fees should be listed as a dollar amount or as a percentage of the purchase price. If you aren’t sure how much closing fees will cost, contact your realtor and ask for the average closing costs in your neighbourhood. Fees may include everything from the title registration to municipal land transfer taxes. 

Address your concerns upfront

As a buyer, if you are concerned about any aspect of the deal, make your concerns known. There is nothing more irritating to a seller than finding out halfway through a transaction that a buyer has a concern they’ve never addressed before. Instead, address all issues you want investigated from the start. For example, you might be concerned about mould or the state of the roof or HVAC system, even after the home inspection. If this is the case, let the seller know and try to negotiate for repairs or hire another inspector that specializes in a certain field, such as an electrical inspector, pest inspector, or lead-based paint inspector.

Include an expiration date

The next tip for drafting a purchase agreement is to include an expiration date. Expiration dates should be reasonable and reflect the current market conditions. It’s not uncommon for deals to go south because a buyer doesn’t give a seller enough time to review and respond to an offer. If you aren’t sure how much time to give them, have your realtor contact the seller’s realtor and ask how much time they require. The listing agent might make you aware of issues you were unaware of, such as the sellers travelling or dealing with a family emergency. 

Once you have an idea of a realistic expiration date, add it to the purchase agreement. Expiration dates typically work as follows: The offer is void if the expiration date passes without a response from the seller. In such an instance, the buyer can choose to walk away from the sale and find a new home or extend the expiration date.

Check it twice and then check it again

As mentioned, a purchase agreement is a legally binding document once signed by both parties. Therefore, only send an agreement that you have thoroughly reviewed. Read it through yourself multiple times, have your realtor read it, and finally, have a real estate lawyer review it. Specifically, you should be proofreading it for typos or other spelling or grammar mistakes. However, you should also be carefully checking the terms of the agreement, including the purchase price and contingencies. Ask yourself if you are satisfied with the agreement as is. If there is a certain contingency you aren’t happy with or the wording is a bit vague or ambiguous, work with a lawyer to amend it. Only send a real estate purchase agreement to the seller once you are completely satisfied with the contract and are prepared to fulfill its terms should it be accepted. 

Frequently Asked Questions

Can a buyer or seller back out of a real estate transaction?

In certain situations, a buyer or seller can back out of a real estate transaction. For example, if the offer is conditional and the conditions are not met, you may have the right to walk away. An example of a contingency not being met is if the buyer fails to obtain the necessary financing on or sell their home in the agreed-upon time frame. In either instance, the seller might have the right to cancel the deal according to the purchase agreement. Similarly, if the home sale is contingent on a home inspection but the buyer doesn’t schedule an inspection within a certain time frame, the deal could be broken. Alternatively, if the home inspection is conducted and a major flaw is revealed, such as structural damage, the buyer may have a right to cancel the deal. 

Failing to meet a condition listed in the purchase agreement is the main circumstance in which a buyer or seller can back out of a real estate transaction. Once a purchase agreement has been signed, it’s difficult if not impossible to back out of the deal simply because you got cold feet, or in the seller’s case, because they received a better offer. Overall, modifying a purchase agreement is more common than cancelling one completely, as both parties tend to have a vested interest in making the transaction work. 

Can the house purchase agreement be amended?

Yes, a purchase agreement can be amended. However, both parties must agree to the modifications. After the real estate purchase agreement has been signed by both the buyer and seller, it is possible to amend the document. For example, amendments may be made to correct a misstatement or spelling error. Addendums can also be added to the agreement after it has been signed. Addendums might be added if unusual circumstances arise, such as a global pandemic, or if specific events take place that delays the sale of the home. For example, if the buyer fails to close on time, both parties might agree to a new closing date, which will be listed as an addendum. Other examples of addendums include post-occupancy addendums (in the event the seller cannot secure a new home by the closing date) or escalation clause addendums (in which a buyer agrees to raise their offer to a certain capped amount above the highest bidder to secure the home). It’s worth noting that all amendments made to a house purchase agreement are made by a real estate lawyer.  

What is included in a real estate purchase agreement?

Real estate purchase agreements vary from property to property. However, most standard house purchase agreements will include the following information: 

 

  • The address of the property

  • The full names of all parties involved (the buyer and the seller)

  • The purchase price 

  • The down payment

  • The earnest money deposit

  • Any and all contingencies (e.g. home sale contingency, home inspection contingency, financing contingency)

  • The closing date

  • The date of possession

  • The offer expiration date

  • The real estate taxes

  • The closing costs

  • The items included or excluded with the home sale 

  • Disclosures of any known defects or hazards

  • A signature block (including witness signatures)

Emily Southey

Wahi Writer