3.4 Purchase Contracts & Contingencies
Key Takeaways
- New York is an 'attorney state' — lawyers, not licensees, draft the binding contract of sale.
- A binder or offer is a preliminary, usually non-binding step subject to attorney review and the formal contract.
- Common contingencies: financing (mortgage), inspection, appraisal, and the NY attorney-review/approval period.
- Earnest money (typically 5-10% of price in NY) is held in escrow by the seller's attorney or the broker until closing or termination.
- A 'time is of the essence' clause makes deadlines strictly enforceable; missing one is a breach.
New York Is an 'Attorney State'
Unlike many states where agents fill in standardized purchase forms, New York attorneys draft and negotiate the binding contract of sale. A real estate licensee who drafts contract terms risks the unauthorized practice of law. This downstate-rooted custom (especially New York City and surrounding counties) is a defining exam theme.
This section covers New York-specific practice. For general contract law, see our national exam prep.
Typical Transaction Sequence
| Step | What happens |
|---|---|
| 1. Offer | Buyer submits an offer, often on a one-page form |
| 2. Binder / acceptance | Optional preliminary memo of agreed terms |
| 3. Attorney review | Both parties' attorneys review and revise |
| 4. Contract signing | Attorneys finalize; parties sign the binding contract |
| 5. Due diligence | Inspections, mortgage application, title search |
| 6. Closing | Deed delivered; funds disbursed; title transfers |
The Binder (Offer to Purchase)
A binder is a short, preliminary memorandum of price, property, and parties.
| Feature | Detail |
|---|---|
| Binding? | Usually drafted to be non-binding until the formal contract |
| Purpose | Signals a serious buyer and frames the deal |
| Deposit | A small good-faith deposit may accompany it |
| Next step | Attorneys produce the full contract of sale |
Essential Contract Terms
The attorney-drafted contract must capture:
| Element | Description |
|---|---|
| Parties | Full legal names of buyer and seller |
| Property | Legal description / address |
| Purchase price | Total and how it is paid |
| Financing terms | Mortgage amount and type |
| Closing date | Target date for transfer of title |
| Contingencies | Conditions that must be satisfied |
| Signatures | All parties, properly executed |
Trap: 'The salesperson drafts the binding contract' is a wrong answer in New York. The salesperson may help complete a preliminary binder, but the binding contract is the attorney's work.
Common Contingencies
A contingency is a condition that must be met or the deal can be canceled, usually with the deposit returned. Memorize the typical New York time frames.
| Contingency | Purpose | Typical window |
|---|---|---|
| Attorney review/approval | Either party's attorney can disapprove | Often 3-5 business days |
| Mortgage (financing) | Buyer must secure a loan commitment | ~30-45 days |
| Inspection | Professional home/pest/radon inspection | ~10-14 days |
| Appraisal | Home must appraise at/above the price for the lender | Tied to loan timeline |
| Sale of buyer's home | Buyer must sell an existing home first | Negotiated |
Worked example: A contract carries a 45-day mortgage contingency. The buyer is denied financing on day 40 and notifies the seller in writing. Because the contingency was active and the buyer acted in good faith, the contract is canceled and the earnest money is returned.
Earnest Money & Escrow
| Aspect | New York practice |
|---|---|
| Purpose | Good-faith deposit showing the buyer is serious |
| Amount | Commonly 5-10% of the purchase price (often 10% downstate) |
| Held by | Usually the seller's attorney, sometimes the listing broker, in an escrow/trust account |
| Commingling | A broker must NEVER mix escrow funds with personal/operating funds |
| Disposition | Credited to the buyer at closing, or returned/forfeited per the contract |
Trap: A broker holding a deposit must place it in a separate escrow account and may not use it for business expenses. Commingling is grounds for license discipline.
'Time Is of the Essence'
| Feature | Meaning |
|---|---|
| Effect | Deadlines are strictly enforceable — to the day |
| Without the clause | Courts allow a reasonable extension |
| With the clause | Missing a date is a breach/default |
| How it arises | Stated in the contract, or set later by a clear written notice naming a firm closing date |
Scenario: A contract sets a closing for June 30 'time being of the essence.' The buyer's lender funds a day late. Because the clause makes the date strict, the seller may treat the late closing as a default and pursue remedies — including potentially retaining the deposit.
Default, Liquidated Damages, and Remedies
The contract spells out what happens if a party defaults. Earnest money usually doubles as liquidated damages.
| Defaulting party | Common remedy for the other side |
|---|---|
| Buyer defaults | Seller often retains the deposit as liquidated damages |
| Seller defaults | Buyer may sue for specific performance (force the sale) or recover the deposit plus damages |
| Either | The contract's remedies clause controls |
Real property is considered unique, so a buyer can seek specific performance — a court order compelling the seller to convey — a remedy not generally available for ordinary goods.
New York Closing Costs the Contract Anticipates
The contract allocates transfer-related costs. Two New York-specific items appear on the exam:
| Cost | Who typically pays | Note |
|---|---|---|
| NYS real estate transfer tax | Seller | $2 per $500 of price ($4 per $1,000) |
| 'Mansion tax' | Buyer | 1% on residential sales of $1,000,000 or more (higher tiers in NYC) |
| Mortgage recording tax | Buyer | Applies when a new mortgage is recorded |
| Title insurance | Buyer | Protects against title defects |
Worked math: A $600,000 sale. The NYS transfer tax is $600,000 ÷ 500 × $2 = $2,400, paid by the seller. Because the price is under $1,000,000, no mansion tax applies.
Tying the Process Together
From offer to closing, the New York deal is attorney-steered: agents negotiate and shepherd, attorneys draft, contingencies protect the buyer, escrowed earnest money signals commitment, and 'time is of the essence' converts soft deadlines into hard ones. Mastering who does what — and who pays the transfer and mansion taxes — covers the contract questions you will see on test day.
In a typical New York residential transaction, who drafts the binding contract of sale?
A broker is holding a buyer's earnest-money deposit. What must the broker do with it?
A New York contract states closing will occur June 30, 'time being of the essence,' and the buyer's funds arrive a day late. What is the likely consequence?