Home Buyers Guide: What Is A Binder Agreement?

Basic binder agreements and the differences between binder agreements and contracts for purchase.

A binder agreement is a real estate term that is more often referred to as an offer to purchase. The agreement is not necessarily a contract for the sale of property, but is rather an offer to purchase the property that is presented to the seller for review. The binder agreement may be accepted or denied by the seller of the property. If the agreement is accepted then the buyer is said to have the right to purchase the property during the period of time listed in the agreement.

Binder agreements are typically valid for the specific period of time that is listed in the agreement. Binder agreements will expire if the property is not actually purchased by the required date. The binder agreement also typically contains other conditions under which the potential buyer would be willing to purchase the property. These conditions may include specific price, property conditions, or financing arrangements. The conditions are typically called contingencies, and they allow the purchaser to walk away from the agreement if all agreed upon conditions are not met by the purchase date.

Binder agreements are also typically accompanied by earnest money. The earnest money is used to hold the property for the buyer, and to show the seller that the buyer is truly interested in purchasing the property. The amount of earnest money presented with the binder agreement varies with jurisdiction but is normally between $500 and 1% of the total price. This money is placed into an escrow account (an account maintained by a third party) pending the occurrence of an event. If the property is sold to the purchaser, the earnest money is applied to the purchase price of the property. If the seller does not accept the binder agreement, the earnest money is refunded to the purchaser. If the purchaser and seller both enter into the binder agreement, and one of the parties decides not to honor the agreement, the earnest money is typically transferred to the other party.

Binder agreements are not as formal as official purchase contracts, but the agreements often act as formal contracts for sale. The binder agreement may be enforceable in court if the agreement contains the signature of both parties, a sufficient description of the property to be sold, a definite price or definite method for determining the price, and the date at which possession will transfer. All of these terms are typically included in a binder agreement or offer to purchase, and such documents are usually considered purchase contracts. There are some small differences that distinguish purchase contracts from binder agreements. For example, purchase contracts are more formal and require a legal description of the property, while a binder agreement may simply list the address of the property and contain a provision that a legal description will be provided later.

Binder agreements are sometimes used in areas other than the purchase of real estate. Any time that two parties agree to certain terms for certain consideration, a binder agreement is created. One such example is an insurance policy. The policyholder enters into an agreement to pay a certain price for a specific amount of insurance if his property is damaged because of a stated condition. The insurance company receives the premium payment and agrees to pay for damage caused to the property of the policyholder as a result of conditions listed in the agreement. This form of binder agreement binds the policyholder to pay the premium for the insurance and binds the company to provide coverage in the event of property destruction.

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