3.1 Indiana Purchase Contracts and Agreements
Key Takeaways
- A valid Indiana real estate contract needs competent parties, mutual assent, consideration, legal purpose, and a writing under the Statute of Frauds (IC 32-21-1).
- Earnest money must be placed in the broker's escrow/trust account promptly per the Indiana Real Estate Commission rules; the exact deposit deadline is set by the purchase agreement.
- Standard contingencies (financing, inspection, appraisal, sale-of-buyer's-home) let a buyer terminate and recover earnest money if the stated condition is not met.
- A "time is of the essence" clause makes every dated deadline a strict, enforceable obligation; missing one can be a material breach.
- On the 50-question Indiana state portion, expect contract-formation, earnest-money, and contingency-mechanics items rather than national common-law theory.
How Indiana Tests Contracts
Indiana abolished the salesperson tier in 2014, so the entry license is the broker license. The licensing exam is delivered by Pearson VUE in two graded portions: an 80-question national portion (pass ≈ 60 correct, 150 minutes) and a 50-question Indiana state portion (pass = 38 correct, 90 minutes). Both portions sit inside a 145-question, 240-minute appointment that also includes 15 unscored pretest items (5 national and 10 state). Contracts and property law sit in the state portion, so expect Indiana-specific mechanics, not abstract theory.
Standard Contract Requirements
A valid Indiana real estate contract needs all of these. Consideration means something of value (usually the purchase price); legal description means the land must be identifiable (a street address is fine for a residential purchase agreement, but the deed needs a metes-and-bounds or platted-lot description).
| Element | What it means | Common exam trap |
|---|---|---|
| Competent parties | Age 18+, mental capacity | A minor's contract is voidable by the minor, not void |
| Offer and acceptance | Mutual assent ("meeting of the minds") | A counteroffer is a rejection plus a new offer |
| Consideration | Value exchanged both ways | Earnest money is evidence of intent, not the consideration |
| Legal purpose | Lawful transaction | An illegal purpose voids the whole contract |
| Written form | Statute of Frauds (IC 32-21-1) | An oral land sale is unenforceable, not automatically void |
| Legal description | Property identifiable | "My lake house" alone fails the description test |
Statute of Frauds (IC 32-21-1)
Indiana's Statute of Frauds requires any contract for the sale of land (or a lease over three years) to be (1) in writing, (2) signed by the party to be charged, and (3) state the essential terms (parties, property, price). An oral promise to sell is unenforceable — a court will not order performance — though partial performance plus reliance can create a narrow exception. On the exam, the safe answer is: real estate agreements must be written.
Offer, Counteroffer, Acceptance
A binding Indiana contract forms only when acceptance of the exact terms is communicated back to the offeror.
- Offer — buyer signs the purchase agreement and submits it.
- Counteroffer — any change (price, closing date, included fixtures) rejects the prior offer and creates a new one the original party may accept or reject.
- Acceptance — unconditional agreement to every term, signed and delivered.
- Binding contract — once delivery of the signed acceptance is complete; mere signature without delivery is not yet a contract.
Exam Tip: A seller who signs but adds "subject to my attorney's approval" has made a counteroffer, not an acceptance. Watch for language that changes any term.
Earnest Money Handling
The Indiana Real Estate Commission (IREC) rules require a managing broker to deposit trust funds, including earnest money, into a designated escrow/trust account and to keep those funds separate from the broker's own money (no commingling, no conversion). The purchase agreement states the exact deposit deadline; the broker must follow it.
| Issue | Indiana rule |
|---|---|
| Where it goes | Broker's escrow/trust account, never the broker's operating account |
| When deposited | Promptly, by the deadline stated in the purchase agreement |
| Who holds it | The listing broker, a title company, or an attorney per the contract |
| Disbursement | Only at closing, on written mutual agreement, or by court order |
| Disputed funds | Hold until the parties agree in writing or a court (interpleader) decides |
Trap: A broker who is unsure which party is entitled to disputed earnest money must NOT simply pick one side. Holding the money and filing an interpleader is the protective answer.
The Four Core Contingencies
A contingency is a condition that must be satisfied or the buyer may terminate and recover earnest money.
- Financing contingency — buyer must obtain a loan commitment by a stated date; protects a buyer whose application is denied or whose rate exceeds the cap.
- Inspection contingency — buyer hires a licensed home inspector, then may accept, request repairs/credits, or terminate for defects within the response window.
- Appraisal contingency — if the lender's appraisal comes in below the price, the buyer can renegotiate or walk; common when paired with a mortgage.
- Sale-of-buyer's-property contingency — buyer must close on their current home first; sellers often add a "kick-out" clause to keep marketing.
Time Is of the Essence and Amendments
When a contract states "time is of the essence," every dated deadline is strictly enforceable and missing one can be a material breach. Without that clause, courts allow a commercially reasonable cure period. Any change after the contract is binding must be a written amendment signed by all parties — a verbal extension is risky and may be unenforceable under the Statute of Frauds.
Worked example
A buyer's inspection deadline is Friday at 5:00 p.m. and the contract says time is of the essence. The buyer emails an objection at 5:40 p.m. Saturday. The seller may treat the inspection contingency as waived because the deadline passed — the buyer is now bound to the as-is condition. Had there been no time-is-of-the-essence clause, a court might allow the slightly late notice if no party was prejudiced.
Where must an Indiana broker place a buyer's earnest money after the purchase agreement is accepted?
A seller signs a buyer's offer but writes in a $5,000 higher price and returns it. What has the seller done?