When a real estate transaction is carried out, it is common to find two types of contracts: the purchase contract and the earnest money contract. At first glance, they may appear similar, but in reality there are significant differences between them.
Before signing any agreement related to the acquisition of a property, it is essential to understand the key differences between these contracts. Both the earnest money contract and the purchase and sale contract have legal and financial implications of great relevance for the parties involved in the transaction.
What is an earnest money contract?
The earnest money contract is a pre-purchase agreement that establishes the terms and conditions between buyer and seller. In this contract, the buyer agrees to acquire the property within a determined period of time, following the stipulated conditions. On the other hand, the seller agrees to sell the property within the agreed time and under the agreed conditions.
One of the key features of the earnest money contract is the delivery of a down payment or deposit by the buyer, which confirms his commitment to purchase the property. However, it is important to note that waiving the transaction is subject to exceptions and must be specified in the earnest money contract, along with a penalty for the party waiving the purchase obligation.
In this contract, the sale price of the property, the maximum term to formalize the transaction before a notary and the amount of the earnest money, which is usually between 5% and 15% of the value of the property, are established. These deposits are deducted from the final purchase price.
There are different types of arras that can be applied. Each type has its own legal implications and consequences in case of breach by one of the parties.
Types of arras
- Penalties: withdrawal clauses are legal provisions that allow the cancellation of a sales contract without justification. In this case, these are the only clauses that allow withdrawal without a specific cause. If the buyer fails to comply with his contractual obligations, he will lose the amount of money previously paid as an advance payment. On the other hand, if it is the seller who decides to break the contract, he will be obliged to return double the advance payment to the buyer.
- Confirmatory: the delivery of a deposit, but this does not necessarily function as compensation if the contract is broken. It does not clearly establish penalties. In case of breach, the affected party may demand the sale or damages.
- Penalties: also contemplate the withdrawal and serve as a guarantee measure. It does not cancel the contract and the parties lose the amount of the advance payment or must return double the amount. The parties may enforce the contract.
Contract of sale
The purchase contract is the legal document that establishes the transfer of ownership. In this type of contract, both parties agree on the terms and conditions of the transaction, including the sales price, payment terms, delivery terms and legal responsibilities. It is a binding and definitive contract, which means that once signed, both parties are legally bound to comply with the agreed terms.
The purchase contract is signed when both parties are completely sure that they wish to carry out the transaction.
Terms and conditions
In the purchase contract, the terms and conditions are definitively established. Both parties agree on a delivery date and specific clauses on payment terms and legal responsibilities are established.
Consequences of noncompliance
Failure to comply by either party may have significant legal consequences. If the buyer does not comply with the terms of payment or refuses to accept the property, the seller may take legal action to enforce the contract or seek compensation for damages.
Similarly, if the seller does not comply with the terms of delivery or delivers a property in conditions different from those agreed upon, the buyer may seek legal remedy to protect his rights.
The role of the notary
Your presence at the signing of the contract ensures that all parties fully understand and agree to the terms and conditions.
It is important to note that the notary’s fees are paid by the buyer, since it is the buyer who requests his services to ensure that the transaction is legal and to protect his interests.
As we have seen in this article, both the sales contract and the earnest money contract play important roles in the process of a real estate transaction. While the purchase contract establishes a definitive transaction with fixed terms and conditions, the earnest money contract is a prior agreement that allows establishing commitments and guarantees before the final signing.
At Destiny Home we are experts in everything related to real estate transactions in Fuerteventura. If you want us to help you with the sale and purchase of your property, contact us, we will be happy to help you.
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