Why this matters: Learn when a binding agreement to buy and sell real estate is formed and how to assist clients by preparing and submitting or responding to an offer to buy real estate.
Time and nature of a response to an offer
A buyer intending to enter into a binding agreement to acquire a parcel of real estate prepares a signed written offer to purchase which:
is submitted by delivery of the offer to the seller of the property, called the offeree;indicates the buyer’s (offeror’s) intention to enter into an agreement on the terms stated in the offer; andthe seller accepts by delivery of their signed acceptance of the offer to the buyer who made the offer.
An acceptance is the response to an offer which agrees, without qualification or condition, to the offer’s terms.
Acceptance of a purchase offer forms a binding agreement which creates rights and imposes obligations on the buyer and seller. A “meeting of the minds” has occurred based on the terms offered and unconditionally accepted, resulting in the agreement.
When an offer — or counteroffer — is received by a person as the intended offeree, called communicated or submitted, the person may either:
accept the offer prior to its termination; orreject the offer.
No alternative responses to an offer exist. Thus, any response to an offer needs to fall into one of these two categories.
Related article:
An agreement starts as an offer
Acceptance or rejection
The process for an acceptance of an offer depends on:
whether the act constituting acceptance called for in the offer is:a promise to perform an act, called a bilateral agreement; orthe actual performance of the act, called a unilateral agreement;who may accept the offer;what documentation is required to achieve an acceptance;what method or medium is used to deliver the acceptance to the offeror, called communication;what inquiries an offeree may make for clarification and inclusion by the offeror as terms of the offer before acceptance; andwhether to accept the offer and do so prior to its termination.
The other response to an offer is a rejection. When the actions of the offeree constitute a rejection of the offer submitted, the offer terminates. Thus, when a seller communicates a rejection to the buyer who submitted an offer, the offer no longer remains available for the seller to later accept.
Activities or events affecting an offer which terminate the offer by rejection include:
a counteroffer to the offer [See RPI Form 180];formal disapproval or unacceptability of the terms offered [See RPI Form 184];restrictions or limitations imposed on the offer by a “qualified or conditional acceptance;” andallowing the offer to expire unaccepted.
Activities or events affecting an offer which do not terminate the offer by rejection include:
inquiries regarding clarification and the inclusion of terms not rising to a rejection.
Further, an offeree may not accept an offer after its rejection or after its expiration. A new offer needs to be submitted for the offeree to accept.
Related article:
Form-of-the-Week: Counteroffer and Rejection of Offer — Forms 180 and 184
To give a promise or complete an activity
All offers to enter into real estate related agreements — contracts — fall into one of two categories based on the manner of acceptance called for in the offer, such as:
the giving of a promise agreeing to perform on the terms stated in the offer, called a bilateral contract, as exists in exclusive representation agreements as the broker agrees to act diligently, and purchase agreements as the seller agrees to convey property; orthe completed performance of the act called for in the offer, called a unilateral contract, as exists in an open representation agreement when the broker is the procuring cause and an option to buy when the buyer exercises the right to buy.
A buyer and a seller form a bilateral contract when:
the buyer signs a real estate purchase agreement offer, prepared by their agent and submitted to the seller of the described property; andthe seller signs and delivers their acceptance of the offer to the buyer agent.
A buyer’s purchase agreement offer — a promise to buy — calls for the seller of the real estate to accept by merely promising to transfer the property to the buyer at a later time on terms set out in the offer. Since the seller’s acceptance forms a bilateral contract, the seller’s performance of the actual activities of conveying title and delivering possession occurs later at the close of escrow.
Conversely, an option to buy real estate granted by a seller is a unilateral contract. An option agreement gives a buyer the power to accept the seller’s irrevocable offer to sell the described property on the price and terms stated in the option.
To accept an irrevocable offer to sell granted by an option agreement, the buyer performs an act called exercise of the option. The action called for to exercise the option usually is the opening of an escrow and the deposit of funds toward payment of the purchase price.
Until the buyer exercises the option, they have not promised to buy the property. When the buyer exercises the option, the only act remaining for the seller to perform is their conveyance of title and delivery of possession.
The buyer, or assignee of the option rights, may not accept the irrevocable offer contained in the option by merely promising to open escrow and deliver funds, when required to form a bilateral contract. To accept, the buyer needs to perform all acts called for to exercise the option agreement.
Related article:
The seller breaches the purchase agreement
Submit the offer and relay the acceptance
Real estate purchase agreements identify the offeror, typically a buyer making the offer, but rarely name the offeree, the person the buyer intends to accept the offer. However, the offer describes the property the buyer will purchase.
Thus, the only person who may accept the offer, though unnamed within the buyer’s offer, is the person who is able to deliver title and possession of the property. Usually, this person is the vested owner of the property. However, it may be someone who holds an option to buy or otherwise has the right to buy the property, such as a speculator flipping the property while still in escrow to acquire title. [See RPI Form 161]
Real estate agreements are nearly always reduced to a writing signed by all participants, a mandate of the Statute of Frauds for their enforcement. Thus, a buyer seeking to enter into a binding agreement submits their signed written purchase agreement offer to the seller.
Accordingly, the documentation required of an owner of real estate to accept an offer submitted by a buyer includes entering their signature as the seller in the space beneath the acceptance clause on the purchase agreement form used to submit the offer, devoid of added or deleted words in the purchase agreement offer.
After the seller signs the acceptance clause, the acceptance is submitted to the buyer, called communication. When submitted, the seller’s acceptance is complete and a binding contract has been formed.
Again, real estate related agreements are all in writing and nearly all are on pre-printed forms so there is certainty in real estate transactions as well as enforceability. The provision in the form authorizing an acceptance of the offer includes instructions on how to accept.
Besides signing the acceptance statement at the end of the agreement, the acceptance clause requires the offeree to deliver a copy of the document bearing the acceptance signatures to:
the person making the offer; orthe offeror’s real estate agent. [See RPI Form 150 §11.1]
Related article:
The votes are in: Sellers often accept the first offer they receive
Accepting a counteroffer
Consider a seller — offeree — who receives an unacceptable purchase offer. The seller agent prepares a counteroffer form the seller signs. The seller agent submits the counteroffer to the buyer agent who reviews it with their buyer. The buyer decides to accept the terms of the counteroffer. The buyer begins the process of accepting the seller’s offer by signing the acceptance clause in the counteroffer form.
The buyer hands the signed counteroffer to their agent. At this point, the process of acceptance is incomplete — the acceptance has not been communicated to the seller as instructed in the acceptance clause of the counteroffer.
To form a binding contract, a copy of the counteroffer signed as accepted by the buyer needs to be delivered to:
the seller agent; orthe seller themselves, when they do not have a seller agent.
When the buyer agent is also the seller agent, the counteroffer has been accepted on the buyer’s handing their signed acceptance to the agent, unless the acceptance clause requires other steps before acceptance is complete.
When the seller has their own agent, delivery to the seller agent of a copy of the buyer’s signed acceptance of the counteroffer offer completes the acceptance process. A binding contract is formed at the moment of delivery to the seller agent, even when the seller agent fails to further hand it to the seller.
When the seller is not represented by an agent, delivery by handing or electronically sending the seller a copy of the buyer’s signed counteroffer forms a binding contract.
Related video:
Read more about the seller broker’s interference with the buyer broker fee.
Queries to clarify or refine the offer
Consider an offeree (seller) who reviews a purchase offer submitted on property marketed as available for sale. The seller advises their agent the offer as worded needs clarification or possible changes to contain all the terms the seller desires. The seller does not want to make a counteroffer but wants the buyer to resubmit the offer with acceptable terms. Such items may address:
the escrow period;the note or trust deed provisions in a carryback;a condition or contingency in the offer; orthe inclusion of seller and agent disclosures which the participants need to acknowledge in the offer to mitigate the seller’s exposure to liability.
Thus, the seller seeks to have the offer “cleaned up” or “redrafted” before they will accept it.
Here, the seller considering a buyer’s offer which expires in three days may discuss with their seller agent whether to:
contact the buyer agent (or the buyer acting without an agent) and ask for clarification of terms in the buyer’s offer or possibly alter the terms to include the seller’s suggestions; orprepare a counteroffer containing the suggested alterations or clarifications which the seller signs and is submitted to the buyer.
Without preparing and submitting a counteroffer, a seller may inquire into the buyer’s willingness to include the suggestions. The inquiry for clarifications or changes by the buyer is not a counteroffer or any other type of rejection of the buyer’s offer. Thus, the inquiry does not terminate the offer or bar the seller from a timely acceptance.
Here, the seller is attempting to get the offer cleaned up, by inducing change or clarification. The seller and their agent doing so may not make any statements of disapproval or counteroffer. When the buyer refuses to clarify or alter their offer, the seller needs to then decide whether to accept or reject the offer outright or by submitting a counteroffer.
Conversely, the seller might:
enter changes on the buyer’s written offer to alter the terms of the offer in some way, called an interlineation; andsign the acceptance clause and submit the document to the buyer agent.
However, the change of the terms in the offer on the attempt to accept the offer is a counteroffer to perform on different terms. This interlineation adding wording is a rejection which terminates the buyer’s offer on its submission.
Further, once a rejection (by either a counteroffer or a change of terms by interlineating) has been communicated by delivery to the buyer, the seller may not then regress and accept the original unaltered purchase agreement offer. The offer no longer exists, even when the time period for acceptance of the offer has not yet expired.
Related video:
Read more about the proper use of the counteroffer form.
Acceptance period before the offer terminates
All offers to buy or sell real estate terminate at some point in time.
An offer is terminated:
by the lapse of time for acceptance stated in the offer’s acceptance clause; orwhen the offer’s acceptance clause states no time limit, by the lapse of a reasonable time without communication of an acceptance. [Calif. Civil Code §1587(b)]
After the time has run, the power to create a contract by accepting the offer no longer exists as it has expired. Thus, a seller needs to communicate an acceptance to the person who made the offer during the acceptance period to form a binding contract on the terms offered.
When the participants do not enter a period for acceptance in a purchase agreement or counteroffer, they may submit the acceptance any time during a reasonable time period after the offer was submitted. A reasonable time period is any time ranging from a few days to a week or more, depending entirely on the circumstances surrounding the negotiations.
Nearly all real estate purchase agreements or counteroffers state a date or the occurrence of an event as the expiration of the acceptance period. Thereafter, no offer remains for the seller to accept.
Related article:
The top bidding war strategies to get an offer accepted
Late acceptance
Often an offeror’s purchase agreement offer expires by its terms, such as the running of three days from the date a buyer submits an offer. Then, occasionally, the offeree (seller) signs the acceptance clause and delivers a signed copy to the buyer, which does not form a binding agreement.
However, the buyer may act on the seller’s “late-acceptance effort” and form a binding contract by taking steps to acknowledge the late acceptance. With the buyer’s acknowledgment of the seller’s untimely acceptance by, say, the opening of an escrow, the seller becomes bound to the agreement. Here, the buyer’s positive response to a late acceptance is considered a waiver of the expiration period for acceptance.
However, the buyer is under no obligation to respond to a tardy attempt to accept. No offer remains for the seller to accept. No obligation is imposed on the buyer by a seller’s late attempt to accept. The expiration of the acceptance period is solely for the benefit of the person (in this case, the buyer) making the offer.
Late acceptance is not a counteroffer
Consider a seller who contacts an agent to sell their property. The agent locates a buyer who makes an offer to purchase the property.
The offer contains a provision stating the offer is deemed revoked unless accepted in writing within five days after the date of the purchase agreement offer.
The buyer is unable to present the offer to the seller until after the fifth day following the date of the offer. The seller signs and immediately submits their acceptance of the offer to the buyer. The buyer does not respond by a writing “accepting the acceptance.”
However, on directions from the buyer, the buyer agent dictates escrow instructions which are prepared. The buyer signs and returns the instructions to escrow. However, the seller refuses to sign their copy of the escrow instructions or proceed with the transaction. The buyer demands the seller perform claiming they have a binding agreement.
The seller claims their signature accepting the offer does not constitute an acceptance as the buyer’s offer expired before the acceptance was submitted. Thus, the seller claims their late acceptance becomes a counteroffer which the buyer never accepted.
Did the seller’s untimely submission of their acceptance of the purchase agreement constitute a counteroffer?
No! A counteroffer is an offer which replaces or qualifies a term or condition in the original offer. A late acceptance is not a counteroffer since it does not substitute new or different terms for the buyer’s offer. It is just a late acceptance of all the terms and conditions of the offer.
Here, the buyer, by signing and returning escrow instructions, acted to waive the acceptance period time limit. Time for acceptance is a condition placed in the offer solely for the benefit of the buyer to eliminate their future exposure to contract liabilities.
However, a buyer forms a binding agreement between the buyer and seller when the buyer:
acts on a late acceptance by having escrow instructions prepared; andsigns and returns the instructions to escrow.
Thus, the seller needs to perform under the agreement and close escrow. [Sabo v. Fasano (1984) 154 CA3d 502]
Related article:
Form-of-the-Week: The Counteroffer, and Counteroffer Addendum — Forms 180 and 180-1
Events terminating the offer
Other events terminating an offer presented in a submitted purchase agreement or counteroffer include:
death of either person before acceptance;destruction of the real estate before acceptance;revocation of the offer by the person who made the offer by:sending a notice of withdrawal of the offer by mail, phone, fax, email or through their agent to the person who may accept; anddoing so before an acceptance is submitted;rejection of the offer by the person who may accept, such as occurs on submission of a formal counteroffer or a qualified or conditional acceptance by interlineation on the purchase agreement, since the communication of these actions terminates the offer; ora prior sale of the property to another buyer during the acceptance period for the seller’s counteroffer, notice of which is either placed in the mail to the buyer (whether or not received) or hand delivered to the buyer before a copy of the buyer’s signed acceptance of the seller’s counteroffer is submitted to the seller, the seller agent or other authorized agent for acceptance.
Related video:
Read more about accepting or rejecting a buyer’s offer.
