How is a “Contract to Sell” different from a “Contract of Sale”? Such a small variation in the words, but such a huge difference in meaning and effect.
To the sharp observer, the difference is easy to see. But to the layman, it may not be easy to spot. It can be as confusing as the zonkey above (it’s both a zebra and a donkey). In fact, a lot of people really confuse these two. They even use it interchangeably, thinking they are the same. Let’s try to clarify that here.
Contract to Sell
A Contract to Sell is an agreement between a buyer and a seller whereby the seller promises to sell something to the buyer and the buyer promises to buy it. But generally, in this kind of contract, the ownership of the subject “thing” is not transferred to the buyer upon the signing of the contract. There are usually conditions to be complied with by one or both of the parties. And the transfer of ownership will only happen when those conditions are met.
In real estate transactions, it is quite common for developers or individual sellers to enter into a Contract to Sell with a buyer. In cases like this, the agreement contained in the contract basically goes like this:
- The seller/developer promises to build the house or condominium building.
- The seller/developer promises to sell the house or the subject condominium unit to the buyer.
- The buyer promises to buy the house or condominium unit. This can be in installments or in full cash, or in any other arrangement.
- The ownership of the subject property will only be transferred to the buyer when the house or condominium unit is completely built AND when the buyer has fully paid its price.
In the above scenario, the conditions are the completion of the building by the developer and the full payment by the buyer.
Contract of Sale
A Contract of Sale is an agreement between a buyer and a seller whereby the seller agrees to give or deliver something to the buyer for a certain price which the buyer agrees to pay. In contracts like this, when the buyer pays and the seller delivers, the transfer of ownership is also done at the same time.
This is usually not applicable to situations where the seller is not yet ready to deliver the thing being sold. Nor is it applicable where the buyer is not yet ready to pay the price in full.
However, even if the buyer cannot pay in full right away, both parties may still agree on the transfer of ownership to the buyer. This is, provided that the seller can readily deliver what he is selling. And subject to what we call a “resolutory condition” that when the buyer fails with his payment(s), the seller will take back the thing sold.
In real estate transactions, this type of contract is usually executed only when the property is ready to be turned over and if the buyer is ready to pay the price in full.
The Main Difference
The most significant thing to remember is the effect of each of these two contracts.
Generally, in a Contract to Sell, the ownership is not transferred to the buyer upon the execution of the contract. In a Contract of Sale, the ownership is transferred to the buyer right upon its execution.
Why is it important to know this?
Nobody likes reading very long fine prints. While it is still best to really read them before signing, you can just look at the heading or title of the document and immediately see what you’re getting into.
A lot of people (buyers) think that when they sign a contract in a real estate transaction, they already own the property even when they haven’t completed the full payment yet. That’s why some people even demand that the title of the property be transferred to them already.
Well, they practically own the property already. But don’t necessarily own it legally. Not always, since it depends on the actual agreement they signed.
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