When purchasing commercial real estate (CRE) or a triple net (NNN) lease property, a purchase and sale agreement (PSA) is the most important document in the process, so understanding the PSA and how to use it will enable you to successfully close the deal.
What is a PSA in Real Estate?
A PSA in real estate is a document prepared by the buyer’s agent or attorney, which is then presented to both parties – the seller and buyer – after mutual acceptance of a written offer. PSAs vary by state, but they typically include details such as:
- Final sale price
- Earnest money details
- Timelines for due diligence
- Contingencies (inspection, title, financing appraisal)
- Any addendums/riders
- Title information
- Closing date
- Any other legal information
The PSA is a map of the entire buying and selling process that creates timelines and responsibilities and offers buyer and seller protection. Once prepared, the buyer, seller, and each person’s agent sign the PSA.
A detailed, accurate PSA creates a contract that lays out the foundation for the entire commercial real estate transaction.
The Commercial Real Estate PSA in Greater Detail
The commercial real estate PSA specifies the rights and obligations of both parties and details the legally binding and required steps for closing the transaction. In the PSA there must be:
- Wording that specifically makes an offer on the property and includes the price, the amount of time allowed for the deal to be completed, plus any conditions added by the buyer or seller.
- Proof that the seller has the legal right to sell the property. In the case of a power of attorney (POA), it is essential to ensure the original POA contract is written correctly, otherwise, the entire purchase agreement will be invalid. Also, any changes made to the PSA after it’s presented invalidate the contract; a new one must be written with the changes incorporated.
- Consideration exchanged between both parties. Consideration is something of value; it need not be money.
- A written contract of every detail. Oral agreements are invalid.
- Proof that the property is a legal structure. An illegal structure or the transfer of illegal property invalidates the PSA.
- All parties involved in the contract must be legally permitted to enter into a contract. This includes corporations, which must be licensed to do business in that state, or the contract is invalid.
- The PSA must include a detailed description of the property being sold, the more details the better.
- The specification of the type of deed that will be used to affect the property transfer.
- A mortgage contingency defining how much time you have to obtain financing. If you are unable to get financing in the specified time period, the seller can either give you additional time or you can cancel the contract without any repercussions.
- The date, time, and place of the closing. Adding the phrase “time is of the essence” allows you to cancel the contract if the closing doesn’t occur at the exact date in the contract.
- A third party named to do the title search and order a survey of the property, i.e., your attorney or possibly a company that specializes in this field.
- A list of expenses that will need to be paid at closing, whether or not they will be adjusted on a closing day, and who will pay them.
- And lastly, all parties necessary for the contract to be valid must sign the contract.
The commercial real estate buying process can be quite complicated. The rules change often, as well as by state, so both parties need to follow the signed PSA and exercise due diligence to ensure that the deal is structured in the best way possible for each party.
Why the PSA is Critical to a Successful Closing
When you purchase CRE, as the buyer, you want documentation that allows you to back out of the deal if something is amiss or isn’t legally sound. You also want a guarantee that what you are buying is exactly what is represented. Moreover, there are market pressures and timelines, like those of the 1031 exchange, that force due diligence to be carried out as quickly as possible so the deal can be closed. Written timelines, with the buyer and seller in agreement, keep the deal moving forward.
The purchase and sale agreement is critical to closing the deal as it addresses all possible questions and issues that might come up and ensures the legalities of the deal are checked and correct. It is THE document that makes a purchase and sale possible.
The Difference Between a PSA & Purchase Agreement
It is easy to confuse the “purchase and sale agreement” with a “purchase agreement.” However, the difference is that the purchase agreement is the final sale document that both parties sign at the closing table. Once both parties sign the purchase agreement, the property is legally sold to the buyer and the deal is done.
The Difference Between a PSA & Letter of Intent (LOI)
A letter of intent to purchase real estate is not a legal purchase contract. It is a document, presented by the buyer to the seller, that outlines the essential information and proposed terms of the sale without having to determine the specific legal terms before it is necessary to do so. It is more of a good faith document to show the seller that the buyer is serious about purchasing his or her property.
An LOI precedes the PSA, and typically includes the buyer’s information, price, earnest money, financing terms, closing date, any special circumstances like a 1031 exchange, and if the buyer is allowed preliminary due diligence.
Once the general guidelines of the intent to purchase are spelled out in the LOI, presented, and signed by both parties, it is then used as the basis for crafting the legally binding purchase and sale agreement.
What Happens if There’s a Change to the PSA?
It may take several weeks for the finalization of the purchase and sale agreement. You may start with one version of a PSA, but after due diligence, when the buyer and third-party companies begin inspections, surveys, environmental studies, title searches, loan agreements, and anything else outlined in the agreement, a problem might arise that changes the terms. Throughout the transaction, the PSA may be altered to reflect the change(s), both parties then agree by signing or initialing the change, and it is all finalized at closing.
PSAs for NNN Property Investments
Even though most NNN leases are designed by the high-credit companies that tenant them, such as Dollar General, 7-Eleven, and Walgreens, PSAs are still required in the buying and selling process. Every property, whether new or existing, requires a PSA with language that protects the buyer and seller and documents specifics of the transaction such as financing terms, timelines, inspections, surveys, and environmental studies.
To Wrap it Up – The PSA is Your Map to a Successful Real Estate Closing
The commercial real estate PSA is the main legal document in the sale process. It is impossible to proceed with any CRE investment – triple net lease investments included – without a purchase and sale agreement. It legally defines the finest details of the deal, includes buyer and seller protections, and provides the legal framework to complete the sale. It is your map to a successful real estate closing.
If you’re searching for just the right recession-proof CRE investment, no matter where you reside, an expert Westwood Net Lease Advisor is here to help. We work with you from before the property search through closing and represent your best interests throughout the purchase process. Contact us today – our buyer representation is free. 314-997-5227
