Chapter 10 - Contract Preparation

I. Regional Contract Differences

In New York, the method and form of contract preparation vary significantly based on geography. Understanding these "customs and practices" is essential for the state exam.

• Downstate (NYC, Long Island, Westchester): Contracts are almost exclusively drafted by the Seller’s Attorney. Real estate agents usually provide a "Deal Sheet" or "Memo of Sale" to the attorneys but do not fill out the contract forms themselves.

• Upstate: Real estate licensees often use pre-printed Purchase Offer forms approved by local Bar Associations and REALTOR® boards. When signed by the buyer and accepted by the seller, these forms become the legally binding contract.

II. Data Required for Contract Drafting

To prepare an accurate contract, the following documents and information are gathered:

• Prior Deed: Used to verify the current owner and obtain the legal description.

• Title Insurance Policy: Helps identify existing liens or easements.

• Survey: A map showing the property boundaries and any encroachments.

• Certificate of Occupancy (C of O): Proof that the structures on the property are legal for their current use.

• Tax Bills: To calculate the exact Apportionments (prorations) at closing.

• Personal Data: Full names (as they appear on IDs), Social Security Numbers (for tax reporting), and marital status.

III. Verifying Property Descriptions

A street address is never sufficient for a legal contract. One of the following must be used:

1. Metes and Bounds: A detailed description using angles and distances.

2. Lot and Block: References a specific lot on a Filed Map in the County Clerk's office.

3. Section, Block, and Lot: The Tax Map Designation used by municipalities for taxing purposes.

IV. The Mortgage Contingency

Most contracts are "contingent" upon the buyer securing financing. If the buyer acts in good faith but is denied a loan, the contingency allows them to cancel the contract and receive their down payment back.

• Traditional Financing: Conventional loans from private lenders.

• FHA/VA: Government-backed loans; these often require specific "Amendatory Clauses" in the contract.

• Purchase Money Mortgage (PMM): Seller financing where the seller acts as the bank and lends the buyer a portion of the purchase price.

• Assumable Mortgages: A rare arrangement where the buyer takes over the seller's existing loan and interest rate.

V. The Down Payment (Earnest Money)

In New York, the down payment is usually 10% of the purchase price, though this is negotiable.

• Who Holds the Funds? In Downstate transactions, the Seller’s Attorney typically holds the down payment in a dedicated Escrow Account. Upstate, the Listing Broker often holds the funds in a neutral escrow account.

• Lawyers’ Fund for Client Protection: A major advantage of an attorney holding the funds is this state-managed fund, which protects clients in the rare event of attorney dishonesty or "misappropriation" of escrow money.

VI. Signing Procedures and Riders

• Who Signs First? Traditionally, the Purchaser signs first and delivers the contract along with the down payment check to the seller's attorney. This constitutes an "offer." The contract is not "fully executed" until the seller signs and a copy is delivered back to the buyer.

• Lead-Based Paint Rider: For any residential property built prior to 1978, federal law requires a Lead Paint Disclosure and a "Protect Your Family" pamphlet be attached to the contract.

• Attorney Review Clause: A provision (common Upstate) that gives attorneys for both sides a specific window (usually 3–5 days) to approve or cancel the contract.

• Unauthorized Practice of Law: Exam Alert: Brokers and salespersons should never draft original legal language or complex riders. They should only "fill in the blanks" on approved forms.

⚠️ EXAM ALERT: QUICK FACTS

• Practice of Law: Real estate licensees are prohibited from giving legal advice. If a client asks about the legal consequences of a clause, the only correct answer is: "You must consult with your attorney."

• Section 443 Disclosure: The Agency Disclosure Form must be provided to the client before the contract is prepared—specifically at the first substantive contact.

• Down Payment vs. Down Payment: Don't confuse the "Contract Down Payment" (the 10% held in escrow) with the "Total Down Payment" (the difference between the purchase price and the mortgage amount).

• Binding Nature: A contract is not binding until it is signed by both parties and delivered. A signature without delivery does not create a contract.

KEY TERMS

Attorney Review Clause: A provision in a real estate contract that allows the buyer's and seller's attorneys a specific period (often three to five business days) to review and approve or disapprove the contract before it becomes legally binding.

Caveat Emptor: A Latin phrase meaning "let the buyer beware"; it is the legal principle that the buyer is responsible for assessing the condition and quality of the property before purchasing.

Delivery Customs: The traditional local practices governing how, when, and where a deed and other closing documents are delivered to finalize the transfer of title.

Down Payment: A portion of the total purchase price paid in cash at the beginning of the transaction (usually at contract signing) to secure the property; it is generally held in escrow until closing.

Earnest Money Deposit: A sum of money provided by the buyer at the time of the offer to demonstrate good faith and serious intent to complete the purchase.

Lawyers’ Fund for Client Protection: A fund managed by the New York state court system to reimburse law clients who have lost money because of dishonest conduct by a member of the New York Bar.

Liquidated Damages: An amount of money predetermined in the contract that the parties agree will serve as the total compensation if one party breaches the agreement.

Mortgage Contingency Clause: A provision that makes the contract dependent on the buyer's ability to obtain a commitment for a mortgage loan at specified terms within a certain timeframe.

Riders: Supplemental documents or amendments attached to a standard real estate contract that add specific conditions, disclosures, or provisions requested by the parties.

Specific Performance: A legal remedy in which a court orders the breaching party to fulfill their specific contractual obligations (such as selling the house) rather than just paying monetary damages.

"Time is of the Essence": A legal phrase used in a contract to indicate that the specified dates and times are vital, and any delay in performance constitutes a material breach.