New York Home Buyers: What Does It Mean to Be "In Contract" and What Happens to Your Downpayment

Unusual offer and contracting procedures in the state of New York.

The procedure for contracting to buy a home in New York State differs from that in many other states. If you’re planning to buy a home in New York, you’ll need to become familiar with the basic steps and terminology – particularly if you’ve bought a home somewhere else before.

For starters, unlike in many other states, when you make an offer to purchase a home in New York and the seller accepts your offer, nothing legally prevents either side from walking away, almost regardless of the reason. You and the seller will not actually be legally bound to close the home purchase until the two of you have signed a formal contract, or are “in contract,” which typically occurs at least one week after the seller accepts your offer.

Another important difference from many other states’ procedures is that, upon signing the contract, you, the buyer, will need to make what’s called a “downpayment,” typically 10% of the purchase price. Don’t confuse this with the downpayment that’s likely required by your mortgage lender at the closing, which is typically an additional 10% of the purchase price.

This article discusses the process of getting “in contract” in New York and what happens to your downpayment once you make it.

From Making an Offer to Being “in Contract” to Buy a Home in New York

When someone makes an offer to purchase a home in New York, it’s typically done by filling out a one-page offer form provided by the listing broker. Unlike in other states, you are not expected to sign a form contract when you make your offer or to make what’s called an “earnest money deposit.” (The purpose of this deposit in other states is typically to show the buyers’ good faith and solid intentions to close on the deal.)

If the New York seller accepts your offer, it’s definitely good news, indicating that the seller is seriously interested in proceeding with the deal. The seller’s acceptance will likely be communicated orally to you or your broker, if you have one, by the seller’s broker. Despite this, neither of you is yet legally bound to go through with the home sale.

Accordingly, once your offer is accepted, it is essential that you and your attorney work as quickly as possible to finalize and sign a contract of sale with the sellers. This contract will lay out all the terms of the deal, such as price, contingencies, and closing date.

Before signing such a contract in New York, you should have an inspection of the property conducted, and if you are purchasing a coop or condo, your attorney should review the building’s books and records, including financial statements. Your attorney and the sellers’ attorney will also be the ones to prepare and negotiate the contract of sale. After these steps are completed, the contract will be ready for you to sign.

Delivering the Downpayment Upon Signing the New York Home Purchase Contract

When you sign the home purchase contract, you will also be expected to produce a personal check for 10% of the purchase price for your new New York home. The check should be made out to the sellers’ attorney or firm. Your own attorney will provide you with specific instructions. The amount of the downpayment will be deducted from the purchase price and the balance will be due at closing.

Be careful that you have sufficient funds in your checking account to cover the downpayment. Many contracts will allow the sellers to cancel the contract if a downpayment check is dishonored.

Your check will be delivered to the sellers’ attorney along with the signature pages of your contract. The sellers will sign and deliver their signature pages to your attorney. At this point, you and the sellers are “in contract,” and neither of you can walk away without being in breach of the contract and subject to legal liability for this breach.

Your home sellers are not allowed to go out and spend the downpayment money at this point. The sellers’ attorney will deposit your downpayment in an attorney escrow account. Typically, the account used will be non-interest bearing.

Use of Downpayment at Closing

During the escrow period, you should line up any necessary mortgage financing, and your attorney will conduct a title search to ensure that no liens are outstanding against the property. If all goes well, a closing will take place, at which title to the home is transferred to you and money is exchanged.

At the closing, you will be expected to produce the balance of the purchase price, using a certified or bank check. Most likely, you will pay an additional 10% of the purchase price at this time, in addition to the 10% you paid when you signed the contract. The bank giving you a mortgage will pay the rest.

The sellers’ attorney will likely use the downpayment to pay sellers’ closing costs. These may include real property transfer taxes, brokers’ fees, and legal fees for the sellers’ attorney. If any of the downpayment remains after those checks are written, then the sellers’ attorney will write a check for the balance to the seller.

Use of Downpayment as Liquidated Damages If Deal Doesn’t Close

If, after signing a contract, you decide (without a reason justified by the contract) that you no longer want to purchase the home, you and your attorney should attempt to get the sellers to agree to cancel the contract and return your downpayment. If they do not agree to this, and you walk away from the deal, the sellers may be able to keep your downpayment.

Most residential real estate contracts in New York contain a provision entitling sellers to keep the downpayment as “liquidated damages” if the purchaser defaults. A default happens if you refuse to close for a reason not contemplated in the contract.

Rest assured, however, that if your contract contains contingencies, or conditions based upon which the deal will be canceled without either party being in default, and you are canceling based upon one of those contingencies, your downpayment will not be at risk. For example, if you included a mortgage commitment contingency, and you were ultimately unable to get a mortgage, you will not be in default and should be able to end the contract without legal consequence.

If, however, you actually default -- for example, your life plans change and you decide to stay in your old house, or move to another city -- the sellers will notify you of their demand for the downpayment. If you object within ten days, the sellers’ attorney cannot release the downpayment to his or her clients. Instead, you will likely find yourself a party to litigation to determine who gets to keep the downpayment.

The outcome of such litigation cannot be predicted, but New York courts have, in some cases, allowed home sellers to keep the downpayment when the purchasers defaulted. (See Amato v. Hird, N.Y.L.J., Sept. 11, 2002 (Sup. Ct. N.Y. Co.).) Accordingly, you should discuss any decision to walk away from a real estate contract with an experienced New York real estate attorney.

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