Offer to Purchase Contracts

When a seller and buyer agree to sell and buy a piece of real estate, they will typically enter into what is called an offer to purchase contract, where we commonly call these sales contracts. These contracts are bilateral because it is a two-way promise. Many times the buyer will include what is called a mortgage or financing contingency clause that says the buyer will only close on the property if the buyer is able to obtain financing. This is the way that a buyer can sign a contract and yet have the ability to back out if the buyer does not qualify for the loan. If the buyer does not qualify for the loan and the deal falls apart, the buyer also should receive any earnest money back that was part of this real estate deal because of the financing contingency clause. 

Another typical clause that gives the buyer the ability to back out of a contract before closing is an inspection clause also referred to as a due diligence clause. This clause gives buyers the right to do inspections. If something is found to be wrong with the property, such as roof leaks, basement leaks, environmental hazards, or other issues, then a buyer may try to go ahead and back out of the contract and be released. That is the purpose of the inspection or due diligence clause. Typically, with a sales contract, the buyer will put up some earnest money with the initial offer to show sincerity. On a residential transaction, it might be a few thousand dollars on a house purchase. This earnest money needs to be kept somewhere between the signing of the contract and the closing. The earnest money is kept in what is called an escrow or a trust account. The brokerage companies can hold these, and many times title companies can hold the earnest money in their own escrow account as well. If a brokerage company has their own escrow account for holding earnest money, the broker cannot commingle funds, which means to mix with your personal or business funds. Also, a brokerage company cannot just steal the money out of the escrow account, which would be called conversion. Conversion is converting someone else's money to your money.