Definition
A Purchase and Sale Agreement (PSA) is the primary contract that governs a real estate transaction. It sets the purchase price, key deadlines, due diligence rights, closing conditions, and the remedies if either party defaults. For investors, the PSA is where underwriting assumptions become binding business terms.
What a PSA Typically Includes
Economic terms
- Purchase price and how/when it is paid
- Earnest money deposit (EMD) amount, timing, and when it becomes non-refundable (“hardâ€)
- Prorations (rents, taxes, utilities) and closing credits
- Personal property included (appliances, furniture, equipment) and any allocation language
Due diligence & inspections
- Inspection period (diligence window) and access rights
- Document delivery requirements (rent roll, T-12, service contracts, leases, permits)
- Property condition inspections (physical, environmental, roof, plumbing, electrical)
- Title and survey review timelines
Closing mechanics
- Closing date, extension options, and associated fees
- Escrow instructions, wire deadlines, and closing statement process
- Closing deliverables (deed, bill of sale, assignment of leases, estoppels, etc.)
- Possession (at closing) and any post-closing occupancy or holdover terms
Representations, warranties, and disclosures
- Seller reps (authority, litigation, compliance, leases, contracts, environmental knowledge)
- Buyer reps (authority to close, entity standing)
- Survival period (how long reps survive after closing) and claim procedures
- Disclosure schedules and exceptions to the reps
Default and remedies
- Buyer default: often limited to forfeiting deposit (liquidated damages), but not always
- Seller default: deposit return plus costs, or specific performance (forcing closing)
- Notice and cure periods (how disputes are handled before remedies apply)
Why It Matters to Investors
A PSA doesn’t just “document the deal†— it defines your risk. The best underwriting in the world won’t save you if the contract leaves you exposed on access, timelines, title, or deposit hardening. Conversely, strong PSA terms can protect downside and preserve options if diligence reveals problems.
Key Clauses to Pay Attention To
- Deposit hard date: when the money becomes non-refundable (and what conditions can extend it).
- Due diligence scope: what inspections are allowed and whether invasive testing is permitted.
- Title/Survey objections: what defects the seller must cure and the buyer’s termination rights.
- Estoppels & SNDAs: tenant confirmations and lender requirements (critical for multi-tenant assets).
- Service contracts: which contracts must be assumed, and termination rights for the buyer.
- Casualty/condemnation: what happens if the property is damaged or partially taken before closing.
- Proration method: actual vs estimated, and post-closing true-up procedures.
- Assignment rights: ability to assign to an affiliate/entity without seller consent (common for syndications).
Example
A buyer signs a PSA with a 30-day diligence period and a $250,000 deposit. The deposit becomes non-refundable on Day 31 unless the buyer delivers a termination notice by the end of Day 30. During diligence, the buyer discovers a major roof issue and elects to terminate on Day 28.
Because the termination was delivered within the diligence window, the buyer typically receives the deposit back (subject to the PSA’s notice requirements and any agreed deductions). If the buyer misses the deadline, the deposit may become “hard†even if the issue is real.
Common Pitfalls
- Loose diligence language: unclear inspection rights can restrict access or invasive testing.
- Title timing traps: short objection windows can waive buyer rights unintentionally.
- Deposit goes hard too early: before critical diligence (environmental, leases, zoning) is complete.
- Weak remedies: limited recourse if seller fails to deliver key documents or close as agreed.
- Contract assumptions: inheriting bad vendor contracts without termination rights.
- Estoppel thresholds: unrealistic tenant estoppel requirements can delay or kill closing.