Purchase Agreements & Contingencies
~12 min read · Manage earnest money, contingencies, time-is-of-the-essence and counteroffers.
The purchase agreement is the transaction's constitution: earnest money that isn't legally required, contingencies that are exit doors with deadlines, and the doctrine of equitable conversion quietly moving ownership interests at signing. The exam tests the machinery clause by clause.
Formation and earnest money
A binding purchase agreement needs the contract elements plus real-estate specifics: identified parties, adequate property description, price and terms, signatures. Earnest money is a good-faith deposit — NOT legally required for validity (the promises are the consideration) — held in a neutral/broker trust or escrow account, credited to the buyer at closing, and typically the seller's liquidated damages if the buyer defaults without an excuse. Disputed deposits stay put until release agreement, interpleader, or court order.
- Earnest money: customary, not required; consideration is the promise
- Held in trust/escrow — never the broker's operating account
- Liquidated damages on buyer default in most forms
Contingencies: conditional exits
A contingency makes performance conditional; unmet, it lets the protected party exit WITH the deposit. The standard set: financing (loan approval by a date, at specified terms), inspection (buyer may disapprove condition; repair negotiations follow), appraisal (value at/above price), sale of buyer's home (often with a kick-out clause letting the seller keep marketing and demand removal on notice), and title/HOA review. Each carries a deadline and a notice mechanism — silence often waives; timely notice releases. 'Time is of the essence' makes every date enforceable, not aspirational.
- Financing, inspection, appraisal, home-sale, title — the big five
- Deadline + notice = exit with deposit; missed deadline = waiver
- Kick-out clauses police home-sale contingencies
- Time-is-of-the-essence makes dates hard
Between signing and closing
Equitable conversion: once the contract binds, the buyer holds equitable title (an ownership interest — insurable, protectable) while the seller keeps legal title as security until closing. Amendments change the contract by mutual signed agreement; assignment is generally allowed unless prohibited (and standard forms often prohibit); binder/option/right-of-first-refusal variants populate the edges. Destruction risk between signing and closing follows state law and the contract's risk-of-loss clause — the reason forms address insurance.
Worked example
A contract with time-of-the-essence has an inspection contingency expiring Day 10 and financing contingency Day 21. The inspection on Day 8 reveals a $9,000 roof problem; the buyer says nothing to the seller until Day 14, then demands repairs 'or I walk with my deposit.' The seller refuses and by Day 25 the buyer's loan is denied — the buyer never sent a financing notice either. Who gets the earnest money?
The inspection door closed on Day 10: with time-of-the-essence, failing to deliver disapproval/repair notice by the deadline waived the inspection contingency — the Day 14 demand has no contractual force; the seller may refuse freely. The financing contingency is the buyer's remaining hope: the loan WAS denied — but the contingency protects only through its own notice mechanism; if the form requires notice of denial by Day 21 and none was sent, that exit waived too, and the buyer's failure to close is default: seller keeps the earnest money as liquidated damages. If instead the form's financing clause self-executes on denial (some do), the buyer escapes. The exam's point: contingencies are procedural rights — deadlines and notices, not vibes.
Common exam pitfalls
Treating earnest money as required consideration.
The mutual promises are the consideration — a contract with zero deposit is fully valid.
Assuming an unmet contingency protects without notice.
Most contingencies demand timely written notice — silence past the deadline waives the exit.
Forgetting equitable conversion.
After signing, the buyer holds equitable title; the seller's legal title is security awaiting the closing.
Deposit in trust, exits on deadlines, notice or waive — and equity moves in before the moving truck.
Recap
- Purchase agreement: elements + description + terms + signatures
- Earnest money: customary trust-held deposit, liquidated damages on default
- Contingencies: financing, inspection, appraisal, home-sale, title
- Each exit needs timely notice; time-of-the-essence hardens dates
- Kick-out clauses let sellers pressure home-sale contingencies
- Equitable conversion: buyer's equitable title at signing
Prove it: 10 questions on this topic
Every lesson ends with a ten-question check in the free course — your progress syncs between the web and the EstatePass app.
Studying for the real estate licensing exam? Track every lesson free — progress syncs with the app.
Start freeMore in Contracts
Study smarter in the free dashboard
- Every lesson tracked, synced with the iOS app
- Ten-question checks after each lesson
- Lesson videos, flashcards and mock exams
No credit card required.