Explaining Purchase and Sale Agreements

April 9, 20236 min read
Explaining Purchase and Sale Agreements
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Key Takeaways

  • Typically used in real estate, a purchase and sale (PAS) agreement is a legally binding pact between a buyer and seller that obligates a transaction between them.
  • A party may take legal action if the other party breaches agreement terms, which means the offender may be sued and forced to comply.
  • A PSA is sometimes confused with a purchase agreement, which completes the sale.

Anyone who has ever bought a house likely signed at some point what is called a purchase and sale agreement (PSA). A PSA is an essential document, particularly in private real estate transactions. And such large purchases call for a thorough understanding of purchase and sale agreements, which are explained below.

What is a Purchase and Sales Agreement?

Typically used in real estate, a purchase and sale (PAS) agreement is a legally binding contract between a buyer and seller that obligates a transaction between them. It serves as a framework for negotiations between the parties about the item’s sale price and other conditions.

Depending on the state, the agreement will be prepared by either a real estate attorney or real estate agent and can be a single page or span hundreds of pages.

Why is a PSA Needed?

A PSA serves as a guide during real estate sales, which can be relatively complicated and have a lot of moving parts. It also lends legal structure to the purchase process.

What are the Contents of a Purchase Sales Agreement?

Each purchase and sale agreement contains transaction information such as:

  • Earnest money. This is a small deposit put down by the buyer “in good faith,” to indicate their seriousness about the PSA, which is specific about several earnest money details, including:
    • The amount of earnest money to be deposited.
    • The deposit deadline
    • Any mitigating circumstances that could cause the buyer to receive the funds back.
    • The amount of time the buyer has to do due diligence such as a home inspection.
    • Who will manage the earnest money (usually a title agent or escrow agent).
  • Asset identification. This specifies the asset that is being sold. If it is real property, that will include a physical address, parcel number, etc.
  • Closing date. With the stated planned closing date, the sale process is set in motion. Following the PSA will be an inspection, title search, appraisal, loan agreement, and money transfer, all of which must occur before closing. The agreement also establishes where the closing will occur.
  • Purchase conditions. This includes the purchase price, the establishment of which is a major PSA purpose. Note, though, that it is possible for the price to change or be renegotiated post signing. For example, there could be a home inspection issue.
  • Due diligence. There is often a PSA section that requires the buyer to acknowledge that due diligence must be conducted during the process and specifies during what periods. The section can also require acknowledgement of the asset’s condition.

Who Signs the PSA?

Both the buyer and seller sign the purchase and sale agreement. Who signs first depends on who sends the agreed-upon offer. The buyer typically begins by sending a signed agreement to the seller.

When is the PSA Signed?

The agreement is signed after the parties settle on transaction price and terms. In real estate, it advances the transaction toward closing.

What are the Legalities Behind a PSA?

As legally binding contracts, legal action may be taken by a party if the other party breaches contract terms. In other words, the offending party may be sued to get them to uphold what they agreed to.

What are the Different Types of PSA?

There are two major types:

  • House. This type of PSA outlines the specific conditions, provisions, and needs concerning the transaction. It will contain terminology that is exclusive to real estate.
  • Car. When purchasing or selling a vehicle, a PSA will contain all matters having to do with ownership transfer. Some components, such as inspection and transferability, will be shared with “house” PSAs. Still, these agreements tend to be shorter and have fewer conditions and terms.

Does a Purchase and Sale Agreement Ensure a Sale?

A PSA is sometimes confused with a purchase agreement, which completes the sale. Signing a PSA does not ensure a sale. A purchase and sell agreement is just that – an agreement, not a sale.

Do all Real Estate Transactions Require a PSA?

Private as well as commercial real estate transactions call for purchase and sale agreements. The PSA’s length and terms will hinge on the type, size, and nature of the commercial property being sold.

What are Opportunities to Invest in Commercial Real Estate?

Those who invest in commercial real estate generally lease the property to businesses that occupy their properties, which can include retail buildings, office buildings, warehouses, industrial buildings, apartment buildings, and mixed-use buildings.

Generally, commercial properties yield more financial reward than residential properties such as single-family homes.

How to Get Started Investing in Real Estate

Entering the real estate investment space is less complex when there is an online alternative investment platform such as Yieldstreet, which offers highly vetted and curated private and commercial opportunities.

Yieldstreet’s commercial real estate debt program has closed more than $900 million in transactions, including some $330 million in 2021 alone. Yieldstreet also offers a growth and income real estate investment trust.

Overall, investments in real estate are tax efficient and have lower correlation to public markets. They also can provide steady passive income while protecting against inflation and diversifying holdings, which is key to successful investing.

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Alternative Investments and Portfolio Diversification

Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments. This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

Because buying a home is one of the biggest investments one makes in life, it is important to become familiar with purchase and sale agreements and how they work. In so doing, buyers can ensure that all details are satisfactorily covered before they sign the agreement, and that everything goes as expected.

While no investment is risk free, investing in real estate, particularly commercial properties, can be a viable way to build wealth while diversifying one’s portfolio.

All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.Diversification does not ensure a profit or protect against a loss in a declining market.

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