Real Estate Contracts – What Are They?
Most people when they hear the term “real estate contract” probably think of a purchase and sale agreement, but there are actually important distinctions, no matter how similar the two terms may sound. In the real estate contract, a purchase and sale agreement is a contract under which, in exchange for a purchase price paid at closing, the seller transfers title to the buyer. On the closing date (typically weeks or sometimes months after the contract is entered into), the buyer becomes the owner of the property, and the deed from the seller to the buyer ordinarily gets recorded to tell the world that title has changed hands. A “real estate contract,” on the other hand, does not involve an immediate transfer of title. Rather, the seller retains title to the property during an agreed-upon period during which the buyer continues to make payments. Only once all payments are made is the seller obligated to then deliver a “fulfillment deed,” confirming that the buyer’s obligations under the contract have been satisfied, and title passes to the buyer at that point, often many years after the parties entered into the contract.
There are many reasons parties may decide to enter into this kind of arrangement, rather than the far more common and traditional purchase and sale agreement. A buyer may not have the credit or immediate financial resources to complete the purchase at the time of the contract. The seller may have less than perfect confidence that the buyer will perform its payment and/or other obligations.
The real estate contract is one of the rare instances in contract law where forfeitures are legal. Let me explain- ordinarily, in contract law, penalty provisions are unenforceable. For example, hypothetically, if a buyer and seller were to agree that buyer would pay fair market value of $100,000 for a boat, with 5 monthly installments of $20,000 each, but the buyer defaulted on the last payment, the seller would be allowed to seek compensatory damages for the breach. But suppose that same contract had a provision that in case of the buyer’s default, the seller would receive unencumbered title to the buyer’s $1,000,000 home, that provision would be an unenforceable penalty. Were the provision to be enforced, the seller would indisputably receive a windfall far in excess of the seller’s true damages. But in the real estate contract context, if the buyer defaults, the seller can initiate a procedure to forfeit the buyer’s right to complete their payment obligations and obtain title. This means that the seller can, under the right circumstances, keep all of what has been paid by the buyer and still retain title to the property. This prospect can be unfavorable for buyers, but some buyers are willing to accept that possibility in exchange for being allowed to purchase the property.
Whether you are a buyer or seller of real estate, having an experienced real estate lawyer on your side can make a world of difference in maximizing your benefit from the transaction, and reducing risk. The lawyers at Beresford Booth have extensive experience with real estate matters and would be happy to assist you.