1 Chapter 8
CHAPTER 8: Real Estate Sales Contracts
I. Discuss the Purpose of Sales Contracts
II. Discuss the typical Purchase Contract
provisions
A. Need for Earnest Money Deposit?
B. Deed and Condition of Title as a
contingency
C. Closing Agent, why have one?
D. Prorating
E. Termite Inspection as a contingency
F. Possession-when to give it
G. Loan Conditions as contingencies
H. Additional Conditions
I. Property Damage
J. Discuss Buyer Default how well defined?
Should be specific
K. Time Limits
L. Discuss the importance of “Time is of the
Essence”
M. Signatures
N. Acceptance
O. Notification
P. Federal Clauses
Q. Preprinted Clauses
R. Riders
S. Negotiation
III. Define Binder, and explain what Binder Does
Not Say
IV. Define Letter of Intent
V. Warn against Practicing Law
VI. Discuss Installment Contracts
A. Define Vendor, Vendee
B. Explain Public Criticism
C. Discuss the Protections available
VII. Explain Equitable Title
VIII. Lease with Option to Buy, and give examples
A. Popularity
B. Examples
C. Option Fee
D. Caveats
IX. Define Right of First Refusal, and give
examples
X. Exchange Agreements
A. Trading Up
B. Delayed Exchanges
C. Typical Trade Contract
how important
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119 120 Opening Remarks Start this chapter by distinguishing the difference between a
listing or contract of employment and sales contract.
()* ()) Earnest Money Stress: Earnest money is not required; the buyer is saying, “I am so
Deposit sincere about this offer, I am willing to put money where my mouth
is.” The amount of earnest money is negotiable. However, few sellers
are willing to take their house off the market for “just a promise.”
()+(), Prorating Local Distinction: This is a good place to introduce closing state-
ment prorations (as arithmetic).
()+()- Termite Inspection Expanding the Text: Even when a property is offered “as is,” agency
law requires known defects to be disclosed. See Chapter )(.
()/()0 1Conditions Stress: At the time of signing, this clause made the contract
“voidable.” If the buyer cannot obtain the contracted financing,
then the contract is void.
(),()2 Property Damage Local Distinction: Discuss your local custom regarding the
subsequent discovery of undisclosed pre-existing damage.
125 128 Buyer Default Stress: This is an example of the use of earnest money as liquidated
damages. For further discussion, see Chapter 7, Liquidated Damages.
(()-()3 Time Limits Stress: A buyer may withdraw his offer any time up to notification
of acceptance by the seller. Discuss the importance of notification.
()-()3 Signatures Local Distinction: Local custom varies. Discuss who presents the
offer.
()0(+* Notification Stress: Discuss and emphasize point 28 (receipt of acceptance). At
the same time, emphasize that the offer is rejected, it is useful to
have the sellers write the word “rejected” on the offer along with
their signatures.
129 132 The Binder Local Distinction: Compare a binder and a sales contract and
discuss the procedure used in your state.
130 133 Practicing Law Stress: Real estate agents can fill in blanks of preprinted contracts and
are not permitted to practice law. Writing clauses is not a good idea!
131 134 Installment Summary: List the advantages and disadvantages to each party:
Contracts Serer Advantage: Retains title, easy to regain possession.
Serer Disadvantage: Does not receive the entire sales price at
once.
Buyer Advantage: Small down payment, fewer credit
qualifications.
Buyer Disadvantage: Entire balance may be called in event of default,
Title may not be marketable; Title usually cannot be used as
collateral for another loan, e.g., home equity loan.
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131 134 Vendor, Vendee Memory Hook:
Vendor = Seller (some students find it helpful to recall that “0”
in vendor denotes the owner of the property)
Vendee = Purchaser
133 137 Lease with Option Summary: List the potential financial advantages of leasing with
to Buy an option to buy.
List the disadvantages.
135 139 Caveats Memory Hook:
Optionor = “0” for Owner/seller (prospective)
Optionee = Tenant/purchaser (prospective)
136 — Exchange Agreements Local Distinction: Have a local Commercial Broker who is
conversant regarding exchanges discuss this topic for approximately
30 minutes.
Stress: Two transactions, two fees, two sets of problems
138 140 Wrap-Up 1. There are at least twelve major sales contract provisions listed
in this chapter. Name as many as possible. (Earnest Money,
Deed & Condition of Title, Prorating, Termite Inspection,
Possession, Loan Conditions, Property Damage, Buyer Default,
Time Limits, “Time is of the Essence,” Signatures, Acceptance)
2. How is a Binder used in this state? (answer as per your state)
3. Define the difference between a Deed and an Installment
Contract. (Seller retains title.)
4. What is equitable title? (Title held by a buyer after signing a
sales contract but prior to closing.)
Class Activity Distribute copies of the most common sales agreement used in
your area. Let students work in pairs.
1. Working together, find each of the 12 major sales contract
provisions.
2. Let one student be the licensee, the other a prospective
purchaser. Have the “licensee” explain earnest money and
buyer default to the “buyer.”
3. Reverse roles, only this time, instead of a buyer, now a seller.
The “licensee” should explain termite inspection and property
damage to the “seller.”
4. Ask students to “point” to a student who did a particularly
good job at explaining the concept. Share with the rest of the class.
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