What is a Purchase Agreement?
A purchase agreement (also called a purchase contract, sales contract, or real estate contract) is a legally binding document between a buyer and seller that establishes the terms and conditions of a real estate transaction. Once both parties sign, the agreement creates mutual obligations: the seller agrees to sell the property and the buyer agrees to buy it under the specified terms. Breaking the agreement without a valid contractual reason can result in legal consequences for either party.
In Texas, the standard residential purchase agreement is the TREC 1-4 Family Residential Contract (Resale), which is a standardized form created by the Texas Real Estate Commission. Most wholesale transactions start with this contract (or a similar investor-specific version) between the wholesaler and the seller. The wholesaler then either assigns this contract to an end buyer or executes a double close.
Key terms in a purchase agreement
- Purchase price: The agreed-upon price the buyer will pay.
- Earnest money: Amount, where it's deposited, and conditions for refund.
- Option period (Texas): Duration and fee for the buyer's unrestricted termination right.
- Closing date: When the transaction must close. Typically 21-30 days for cash deals, 30-45 for financed.
- Title company: Who handles closing and escrow.
- Property condition: Whether the property is sold as-is or if the seller makes repairs.
- Contingencies: Conditions that must be met for the deal to close (financing, inspection, appraisal).
- Assignability: Whether the buyer can assign the contract to another party. Critical for wholesalers.
The assignability clause
For wholesalers, the most important provision in any purchase agreement is whether it allows assignment. The standard TREC 1-4 contract is assignable by default unless the parties add a restriction. Many wholesalers add explicit "and/or assigns" language after the buyer's name to make the assignment right clear.
If the contract prohibits assignment, the wholesaler must either negotiate to remove the restriction, use a double close structure (which doesn't require assignment), or walk away from the deal during the option period.
Contingencies explained
Contingencies are conditions that must be satisfied for the transaction to proceed. They protect the buyer by providing defined exit points:
- Financing contingency: The deal is contingent on the buyer obtaining a mortgage. If financing is denied, the buyer can back out and recover their earnest money. Cash buyers typically waive this contingency.
- Inspection contingency: The buyer has a specified period to inspect the property. If inspection reveals unacceptable issues, the buyer can terminate or negotiate repairs.
- Appraisal contingency: For financed deals, the property must appraise at or above the purchase price. If it appraises low, the buyer can renegotiate or terminate.
- Title contingency: The seller must deliver clear title. If title defects are discovered that can't be resolved, the buyer can exit.
Purchase agreement vs letter of intent
A letter of intent (LOI) outlines proposed terms and is typically non-binding. A purchase agreement IS the binding contract. The LOI is a negotiation tool that leads to the purchase agreement. In most residential wholesale deals, parties skip the LOI and go straight to the purchase agreement because standardized contracts make it efficient to do so.