Session 3b: Real Estate Contracts

RAMAKRISHNA NALLATHIGA
ASSOCIATE PROFESSOR
NICMAR PUNE

Post Graduate Programme in Real Estate

and Urban Infrastructure Management

Structure
Introduction
Essentials of Purchase Contract
Ringer, Binder and LoI
Types of RE Contracts

Installment Contracts
Option Contracts

Introduction
Real Estate Contract arises so as to make the transaction

between buyer and seller secure and each of the parties

commits to its terms
Typically, they are bilateral contracts that offer protection to
both Property buyer and seller

Seller is bound to transfer title to contractee

Buyer is bound to make payment to contractor

Both buyer and seller make promises for delivery and this

exchange of promise forms the legal consideration of the

contract
Most of the real estate contracts are written and signed by
both the parties

Introduction
Purchase Contract, also known as deposit receipt, offer and

acceptance, purchase offer, or purchase and sales agreement,

has the following elements in it

Provision for buyers earnest money deposit

Buyers offer to purchase
Acceptance of the offer by the seller
Provisions for the payment of a brokerage commission

They are also termed as earnest money contracts, which

involve Earnest Money Deposit (EMD) is the money that

accompanies an offer to purchase as evidence of good faith
EMD is used as security and can be agreed upon as
liquidated damages in the event of buyers default i.e., failure
to perform legal duty such carrying out terms of contract

Essentials of Purchase Contract

A typical purchase contract will have:

Location and date of deposit

Buyer and seller
Property description
Consideration amount/ value
Warranty deed of conveyance
Prorating of ongoing expenses incl debt
Condition (as is) and possession giving
Agreement on sharing of transaction charges .e.g, duty, tax
Provision for rescind of contract
Conditions and time limits
Time is of essence phrase and signature

Rider, Binder and LoI

Typically, contracts may have riders, which are any additions

annexed to a document and be a part of document
Purchase Contracts are subject to a lot of negotiation on any
item concerning the property
Sometimes, Binder, a short purchase contract, is used to secure a
real estate transaction until a more formal contract can be signed
Letter of Intent (LoI) is also used at times to avoid any firm legal
obligation when two or more parties want to mutually express
their intention to buy, sell or lease
Equitable title is the exclusive right to demand that title be
conveyed upon payment of the purchase price; it is conferred to
buyer while seller holds bare or naked title

Installment Contract
Installment Contract is also a method of selling and financing

property whereby the seller retains title but buyer takes possession
while making the payments
Installment contract (or conditional sales contract/contract for
deed/agreement of sale) combines the features from sales
contract, deed and mortgage. It is a contract wherein the seller
delivers deed at a future agreed date
When the buyer does not have full purchase price in cash or not
able to borrow, the Seller may accepts a down payment and
monthly payments. The Seller can then choose to:

Either deliver a deed to the buyer at the closing and at the same time take back
from the buyer a promissory note and a mortgage secured by the property (a
mortgage carry back)
Or enters into an installment contract wherein the buyer makes required
payments to the seller before the seller delivers a deed to the buyer

Option Contracts
Option Contract, unlike earnest money contract, is unilateral,

executed contract
Once the contract is executed, the buyer has the right to purchase
the property with no obligation to do so
The seller on other hand has obligation to sell in the event of
contract execution
Most of the option contracts involve cash payment rather than any
deposit payment
Option contracts are suitable to buyers who hunt for multiple
properties use this as an instrument to zero in on a property
Option Contracts are made for a fixed option period (usually 60
days) and if the option is not exercised during it, the contract gets
terminated by its own terms

Option Contracts
Lease-Option to Buy

Also termed as lease-option, it allows the tenant to buy the property at a

preset price and terms during the option period
It gives flexibility and more time to tenant to make buying decision and
tenant has to notify landlord in writing
If tenant does not exercise the option within option period, the option
expires and purchase contract becomes null and void

Right of First Refusal

It refers to the right to match or better an offer before the property is

sold to someone else

Exchange agreements, such as tax0deferred exchange

involving exchange of real property for another real estate

parcel to effect non-taxable gain, prevail in the US

References
Charles Jacobus, 2010, Real Estate Principles,

Cengage Learning

Chapter 8 : Real Estate Contracts