What Is a Preliminary Real Estate Contract?

What Is a Preliminary Real Estate Contract?
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A preliminary real estate contract is the first legal step toward purchasing your home. Put simply, it is an agreement which sets out the terms on which the seller will sell and the buyer will buy the property. A preliminary contract does not transfer the property, but specifies a future date (the closing date) when the property will be transferred, and sets out the conditions (contingencies) which must be satisfied before closing occurs. A real estate contract is a legal agreement. Once it is validly signed, neither party may walk away from the deal, unless one or more of the contingencies is not met.


The purpose of a preliminary real estate contract is spell out the terms of sale agreed by the seller and buyer. It gives both parties the security of a legal agreement, whilst giving each of them time to clear the title of liens, carry out a home inspection and appraisal, and organize funds for the sale before the actual closing. Real estate sale contracts must be in writing and must be signed by all parties. The document itself does not have to be long or particularly formal. Many residential contracts are drafted in basic, common form, enumerating essential terms such as the name of the parties, the property and the price. Specific and unusual terms are typically transcribed in an addendum, which is signed at the same time as the principal contract and attached to it. An addendum forms part of the contract terms. Two copies of the purchase contract are usually signed; one for the seller, and one for the buyer.

Common Terms

As a minimum, a preliminary contract contains the full names and addresses of the parties; the address of the property and its legal description; the price to be paid and the method for payment; and the closing date. Additionally, it contains details of the buyer's down payment and any agreed extra costs above the purchase price. The contract will require the seller to deliver a transfer deed at closing. This is the legal document that transfers the property to the buyer or grantee. Usually this is a warranty deed, which contains certain representations by the seller about the validity and marketability of his title.


Contingencies are common in real estate contracts. Typically a homebuyer does not get final approval on a home loan until the purchase contract is in place, so a contingency is used to make the transaction conditional upon the buyer securing the loan. If he does not, he can forgo closing the deal without penalty. Other common contingencies relate to the property appraising at or above the purchase price, or passing a home inspection in a manner that is satisfactory to the buyer. Once the contingencies in a contract are satisfied, neither the seller or the buyer can walk away from the contract without legal penalty.


If either party fails to observe one or more of the contract's terms, the other party will have a range of legal remedies open to him. As a minimum, a defaulting buyer risks his deposit. A court may order specific performance to compel the parties to complete the transfer. Alternatively the parties may seek cancellation of the contract, together with money damages in restitution, to cover the costs they have incurred.