Sales Contracts and Contingencies
The sales contract is the core document of a real estate transaction. It defines the price, timelines, and responsibilities of both parties.
Offer, Counteroffer, and Acceptance
An offer is a proposal with clear terms. Acceptance must mirror the offer without changes. If the seller changes any term, the result is a counteroffer and the original offer is terminated.
Key points:
- An offer can be withdrawn before acceptance unless it is part of an option contract.
- A counteroffer replaces the original offer.
- Acceptance must be communicated and delivered as specified in the contract.
Earnest Money and Liquidated Damages
Earnest money is a good faith deposit that shows the buyer is serious. It is held in escrow and applied to the purchase price at closing.
If the buyer defaults without a valid contingency, the contract may allow the seller to keep the earnest money as liquidated damages.
Equitable Title
Once a contract is signed, the buyer receives equitable title, which means the buyer has a beneficial interest in the property. Legal title transfers at closing when the deed is delivered.
Common Contingencies
Contingencies protect the buyer or seller by allowing termination if certain conditions are not met.
Table: Common Contract Contingencies
| Contingency | Purpose | Example |
|---|---|---|
| Financing | Protects buyer if loan is denied | Buyer can cancel if not approved |
| Appraisal | Protects buyer if value is too low | Buyer can renegotiate price |
| Inspection | Protects buyer if repairs are needed | Buyer can request repairs or cancel |
| Title | Protects buyer if title defects exist | Seller must clear title |
| Sale of buyer property | Protects buyer who must sell | Buyer cancels if home does not sell |
Disputes and Breach
Disputes often involve missed deadlines, repair negotiations, or financing failures. The contract controls what happens, so agents must read and follow the timeline carefully.
Option and Installment Contracts
Option contract - Gives a buyer the right to purchase within a set period in exchange for an option fee. The buyer is not obligated to buy.
Installment sales contract (contract for deed) - The buyer makes payments over time and receives title after full payment. The seller keeps legal title until the final payment.
Summary
Know the timeline and the role of contingencies. Most exam questions test the effect of counteroffers, earnest money, and the difference between equitable and legal title.
Step-by-Step: A Typical Purchase Contract Timeline
- Offer is written and delivered.
- Seller accepts or counters.
- Contract is formed and earnest money is deposited.
- Buyer completes inspections and applies for financing.
- Appraisal is ordered by the lender.
- Title search reveals defects, if any.
- Contingencies are removed or resolved.
- Closing occurs and deed transfers.
Practical Example: Counteroffer
Buyer offers $450,000 with a 30-day closing. Seller responds with $465,000 and a 21-day closing. This is a counteroffer. The buyer must accept or reject the new terms.
Earnest Money Dispute Example
Buyer fails to secure financing but the contract has no financing contingency. The seller may keep the earnest money as liquidated damages if the contract allows it. If the contingency exists and the buyer acts in good faith, the deposit is usually returned.
Equitable Title and Risk of Loss
In some states, the buyer bears the risk of loss after contract signing due to equitable title. In others, the seller retains risk until closing. This is state-specific and should be disclosed in practice, but for the national exam, understand the general concept of equitable title.
Exam Traps
- Assuming a counteroffer keeps the original offer alive.
- Forgetting that earnest money is applied to the purchase price.
- Confusing option contracts with standard purchase contracts.
Contingency Management and Addenda
Contingencies have deadlines. If the buyer does not act by the deadline, the contingency may be waived. Agents track dates and use addenda to extend deadlines when needed. A common addendum is a repair request after inspection.
Right of First Refusal vs. Option
Right of first refusal - Gives a party the right to match an offer if the seller decides to sell. It does not force the seller to sell.
Option contract - Gives the buyer the right to purchase at a set price within a set time, usually for an option fee. It creates a binding promise by the seller but no obligation for the buyer.
Installment Contract Risks
In an installment sales contract, the buyer builds equity over time but does not receive legal title until final payment. If the buyer defaults, the seller may keep prior payments depending on state law. Buyers should understand this risk; for the exam, know that legal title stays with the seller until full performance.
Exam Application Check
If a question asks which agreement gives a buyer a right without an obligation, the answer is an option contract. If it asks which agreement lets a party match a future offer, the answer is right of first refusal.
A seller changes the closing date on a buyer offer and signs it. This is:
Earnest money is best described as:
Equitable title means the buyer:
An option contract gives the buyer:
4.4 Agency Relationships and Duties
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