Purchase Agreement vs. Offer: What Homebuyers Need to Know

 

Offer vs. Purchase Agreement: The Quick Difference

The offer is the start of negotiation, while the purchase agreement is the official deal that follows once both sides agree.

An offer is what a buyer submits to the seller showing interest in the property, outlining the desired purchase price, terms, and conditions. At this stage, the seller has the choice to accept, reject, or counter the buyer’s proposal.

A purchase agreement, on the other hand, only happens when the seller accepts the buyer’s offer and signs it. This is what the official agreement or contract will then be called.

The two are just stages of the home-buying process, and sometimes there is a misconception between the two that is common in first-time home buyers. However, it should be understood that only when the purchase agreement is signed will it be legally binding.

 

What Is an Offer in Real Estate?

An offer in real estate is a simple proposal to buy a home and is the first step in the homebuying process that initiates the entire transaction. It is required by law under the Statute of Frauds that real estate contracts must be written, and since an offer is one, it must be written. Most of the time, buyers hire a buyer’s agent to handle drafting an offer for them, although it is not legally required but also has other benefits such as negotiating on your behalf and pricing strategies.

A typical offer includes several key details:

• The purchase price the buyer is willing to pay
• The financing details, such as whether the buyer is using a mortgage or paying cash
• Any contingencies, like home inspection or financing approval
• The proposed closing date, or when the buyer hopes to complete the purchase

Once the offer is submitted, the seller has a few options. They can:

• Accept the offer as it is
• Reject it completely
• Or counteroffer, meaning they suggest changes to the terms

 

Is Making an Offer Required?

Yes, in US real estate, buyers are required to submit a formal offer, and it has always been a standard step because in dealing with properties as large as a house, parties cannot use verbal agreements. And to every property you are interested in, you will have to make an offer to each one. Without the offer, the home buying process will never officially start.

 

An important note to first-time homebuyers is that according to some accounts on Reddit, an offer is not accepted right away. There are people who discussed that their offer got accepted on the second try, some on the fifth, and some on the first. This does not automatically increase your agent’s fee. Instead, it depends on how much your agreed price is in your Buyer’s Representation Agreement. The usual commission for a buyer's agent is 2.5% to 3.0% of the home purchase price.

 

What Is a Purchase Agreement?

A purchase agreement is a signed contract between the buyer and the seller that confirms the terms of a home sale. This document is created when the seller accepts the buyer’s offer and would want to proceed with the sale. For this document to be binding, it must be written in form and must be signed by both parties. If there are two or more persons in either party, each one must sign.

At this stage, the negotiations are complete, and both parties must follow what is agreed upon in the purchase agreement; otherwise, there would be consequences such as losing the earnest money or litigation.

This agreement usually includes several important details:

• The final purchase price that both parties agreed on
• The agreed terms and timelines, including deadlines for inspections, financing, and closing
• Any contingencies, along with their specific deadlines (such as inspection or loan approval conditions)
• The responsibilities of both the buyer and seller, outlining what each party must complete before closing

Even after signing, it is common for buyers to experience “buyer’s remorse," and it will make buyers back out of the sale. This might be an honest feeling for the buyer, but this will not be a valid reason to cancel the purchase since it is already binding at this point. This stage is also called “under contract”.

 

Step by Step Process of How it Works

Step 1: Buyer submits an offer
Step 2: Seller reviews the offer
Step 3: Negotiation or counteroffer (if needed)
Step 4: Offer is accepted
Step 5: Purchase agreement is signed

 

Can Others Outbid a Buyer’s Offer After It’s Accepted?

No, once the offer is accepted, the agreement stands regardless if there are other higher offers. Seller have the option to still show their property on the market after they have already accepted an offer. sometimes if they feel good about the transaction, they will no longer show the property on the listing systems, otherwise called “contingent: no-show." This also means that the property is ongoing the completion of such conditions and doesn't want showings to other people. There is also an opposite to this called “contingent: continue to show” where the seller still accept other potential buyers for showings.

Kick-Out Clause

In relation to backup offers, some purchases have a kick-out clause that allows the sellers to “kick-out” the buyer if certain conditions aren’t met. It is usually tied to buyers having to sell their home first as a contingency according to Rocket Mortgage.

 

Backup Offers

A buyer’s offer is protected by law in the most fundamental way. Binding agreements should be followed through, which is why sellers can accept other offers, but they won’t be in effect unless the current agreement falls through. Sellers may receive a much higher offer but are not able to break contract, according to Realtor.

 

Can You Back Out of an Offer or Purchase Agreement?

Yes, at all times, but there is a big risk and will be difficult depending on what stage you are in because it is all about the timing.

If the buyer is still dealing with an offer, backing out is allowed as long as it has not yet been accepted by the seller. Since this is all about still trying to get into an agreement, there is no contract yet that binds parties to act. Walking away at this stage will not cause you any financial harm.

Once the purchase agreement is signed, it gets very difficult to walk away. Not only is the buyer not allowed to back out but also the seller, because both parties are expected to follow through with the contract. Unless both parties agree to walk away, which is called a mutual rescission or a mutual cancellation. The earnest money can also be negotiated. Some sellers agree to the cancellation but want the earnest money for the lost time and opportunity. Some agree for both parties to walk away without consequences, but sellers are not commonly found to be cooperative with mutual cancellation.

It is common for the buyer to get cold feet, especially when the contract was just signed; it is important to communicate this to the real estate agent and to the seller as well as an act of good faith but you should expect that the earnest money will be forfeited since the contract is already binding.

 

Bottom Line

Offers and purchase agreements are two different documents, but they represent a stage in the home buying process. The offer comes first before the purchase agreement is initiated.

Once the purchase agreement is signed, walking away is neither easy nor cheap; however, it helps to communicate having cold feet to your realtor and the seller at the earliest time possible, hoping that the seller might agree to the cancellation.

Always expect the worst when this situation arises and also expect that the earnest money will be forfeited. But as long as the agreement is not yet signed, you are free to walk away as you like.

 

 

 

 

 

 

 

 

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