What is a Purchase and Sale Agreement?
A purchase and sale agreement (PSA) is the legally binding contract between a buyer and seller that establishes the terms and conditions of a real estate transaction. The PSA specifies the purchase price, earnest money deposit, closing date, contingencies, property condition disclosures, and the rights and obligations of both parties. Once executed by both buyer and seller, the PSA creates enforceable obligations that can only be terminated according to the contract's own provisions.
Key components
Price and payment terms: The agreed purchase price, how it will be paid (cash, financing, or a combination), the earnest money amount and where it will be held, and any seller credits or concessions.
Contingencies: Conditions that must be met for the transaction to proceed. Common contingencies include financing (buyer must obtain a mortgage), inspection (property must pass inspection), appraisal (property must appraise at or above the purchase price), and title (clear title must be deliverable). Each contingency has a deadline by which it must be satisfied or waived.
Closing provisions: The closing date, which title company or attorney will handle the closing, who pays which closing costs, and the type of deed to be delivered.
Default and remedies: What happens if either party fails to perform. Typical remedies include the seller retaining the earnest money as liquidated damages if the buyer defaults, or the buyer pursuing specific performance (forcing the sale) if the seller defaults.
PSA vs. letter of intent
A letter of intent (LOI) outlines proposed deal terms and is generally non-binding. The PSA converts those terms into a binding agreement. In residential real estate, LOIs are uncommon -- parties typically move directly to the PSA. In commercial transactions, an LOI often precedes the PSA to establish framework terms before investing in legal drafting and due diligence.
Investor-specific considerations
For wholesalers, the PSA must include assignment language. For flippers, the inspection contingency is critical for discovering hidden repair costs. For buy-and-hold investors, the financing contingency protects against loan denial. In all cases, read the PSA carefully before signing, understand your contingency deadlines, and consult a real estate attorney if anything is unclear.
State-specific forms matter. Texas uses TREC-promulgated forms. Other states have their own standard contracts. Using the wrong form or a non-standard contract can create enforceability issues. Work with an agent or attorney familiar with your state's requirements.