When purchasing a home in Connecticut, one of the first critical steps is making a formal offer. Due to the nature of the market, the offer process has changed considerably since 2020. Pre-2020, most offers were made using a “binder” form. Now, it is becoming increasingly common for purchasers to make an offer using a full-blown contract. Both potential buyers and sellers must understand the different implications between signing a binder and signing a contract and the implications of each.
What is a Binder?
A binder is a preliminary agreement between a buyer and a seller when making an offer on a property. It’s often viewed as an intention of “good faith,” demonstrating the buyer’s intent to purchase the home. The purpose of a binder is to outline the essential terms of the transaction and establish a commitment from both parties to move forward with negotiating a contract based on those terms.
Key terms typically included in a binder are:
- Purchase price
- Closing date
- Contingencies
- Timeframe for inspections
In short, a binder has traditionally served as a “memorandum of terms” or a “letter of intent”—a moral, but not legal, commitment to finalize a deal based on the agreed-upon basic terms. After the binder is executed, the parties would then prepare and negotiate the formal contract. Once the contract is signed, both parties are legally bound to the transaction.
What is a Contract?
On the other hand, a contract is a formal, legally binding document that outlines all the terms of the sale, including any contingencies, deadlines, and any seller representations. Once both parties sign a contract, they are legally obligated to proceed with the transaction according to the terms specified in the agreement. Failing to comply with these terms can result in significant legal consequences, including a default under the contract.
Conclusion:
Whether you are a buyer or a seller, it’s important to understand the implications of using a binder versus a contract when making or accepting an offer. A contract offers more certainty compared to a binder but also imposes stricter obligations. If a party is not prepared to be “in contract” during the initial stages of inspections and negotiations, it can be quite a shock to realize that there may be no easy way out of the transaction.
If you’re unsure about what you’re signing or which option is best for your situation, we’re here to help you make the right decision.
Please contact us for assistance.