Key Takeaways

  • Real estate contracts are legally binding agreements that govern property transactions.
  • Various types exist, including purchase agreements, lease agreements, and contracts for deed.
  • Essential elements include financing terms, home inspections, closing dates, and seller assist.
  • Additional components like earnest money deposits, contract contingencies, and disclosures are key for buyer and seller protection.
  • Assignment and flipping of real estate contracts are legal strategies used by investors.
  • Local and federal regulations, such as lead-based paint disclosures, must be observed.
  • Working with a real estate attorney helps ensure compliance and clarity in complex transactions.

Real estate contracts are essential for legally binding real estate transactions. There are different types of real estate contracts, and each has its own use and stipulations.

Forms and Contracts

All real estate transactions require properly executed contracts and forms. Basically, there are four types of contracts in real estate:

  • Purchase agreement contract
  • Lease agreement
  • Contract for deed
  • Power of attorney

Real estate contracts must be in writing to be enforceable, and both the buyer and seller must sign them. While DIY templates are available, it's often worth enlisting the services of an experienced real estate agent or real estate attorney.

Additional Types of Real Estate Contracts

In addition to the core four types of real estate contracts, several other agreements play vital roles in real estate transactions:

  • Option to Purchase Agreement: Gives the buyer the exclusive right to purchase a property within a specific time frame, typically for a fee.
  • Assignment Contract: Common in wholesaling, this allows a buyer to transfer their purchasing rights to another party, often for a profit.
  • Real Estate Investment Contracts: Used by investors to secure favorable terms for property acquisitions or joint ventures.
  • New Construction Contracts: Used when purchasing directly from a builder, covering completion timelines, customization options, and warranties.

These additional contracts highlight the diversity and complexity of real estate agreements, especially in investment-driven transactions​.

Real Estate Contract Conditions

The following are typical conditions a real estate contract covers.

Earnest Money and Escrow

An earnest money deposit is a key part of a real estate contract, serving as a good faith gesture by the buyer. This deposit is typically held in an escrow account and applied toward the buyer’s closing costs or down payment.

  • If the deal falls through due to a failed contingency (e.g., financing or inspection), the earnest money is typically returned to the buyer.
  • However, if the buyer backs out without a valid reason, the seller may keep the deposit as compensation for time lost.

Contracts should clearly define how much earnest money is required, when it must be submitted, and under what conditions it is refundable​.

Finance Terms 

Most people get a mortgage to buy a home, so a purchase offer should specify that an offer is contingent upon getting adequate financing. It's beneficial to research interest rates and to get mortgage pre-approval if possible. Buyers should specify in the contract if they need to get a specific type of loan to seal the deal, such as a VA or FHA loan.

If a buyer can pay cash for the property, he or she should state that up front because it makes an attractive offer to sellers. If someone doesn't have to obtain a mortgage, it's more likely that the deal with go through and that closing will happen on time, so sellers may be more eager to do business with someone who pays in cash.

Seller Assist

Buyers must ask in their offer if they want the seller to pay any or all of the closing costs. This can be stated as a dollar amount or a percentage of the purchase price.

Contracts should outline who pays specific closing costs. The agreement should spell out if the buyer or seller is responsible for common fees associated with the purchase, such as the following: 

  • Escrow fees
  • Title insurance
  • Title search fees
  • Notary fees
  • Transfer tax
  • Recording fees 

A real estate agent can tell you who typically pays each of these fees in your locale.

Home Inspection

It's a good idea to have a home inspection contingency in your offer. If an inspection shows serious and/or costly-to-repair flaws in the property, a home inspection clause allows the buyer to walk away from the deal. In some parts of the U.S., home inspections are done before finalizing a purchase contract. In these areas, inspections aren't a contract contingency.

Fixtures and Appliances

It's not enough (or legally binding) to have a verbal agreement if a seller wants any appliances or fixtures as part of the purchase. This may include dishwashers, refrigerators, and washers and dryers. The contract should specify which fixtures and appliances come with the property purchase.

Closing Date

Common time frames to complete the purchase range from 30 to 60 days. Some issues can affect the time to close, including remaining lease terms or the seller's need to find a new residence. 

On occasion, a short closing time may be desired, such as two weeks. However, it's often hard to deal with all contingencies and obtain all the required paperwork and funds in such a short amount of time.

Sale of Existing Home

Existing homeowners who need the money from the sale of that home to buy property they're making an offer on should include this contingency. This basically states they'll make the purchase once their current residence sells. There should also be a reasonable time frame included for selling the home because a seller won't want to take a home off the market indefinitely while the buyer tries to sell his or her property.

While there are many other factors included in a real estate contract, most people don't have to worry about all the minor details when they deal with a real estate agent. Agents typically use standardized, fill-in-the-blank forms.

If you're well-versed in real estate terminology and regulations, you might understand real estate contracts enough to make deals on your own. However, there are many skilled real estate professionals who can help the average person wanting to buy or sell property. They're able to explain contract terms in easy-to-understand language so that laypeople are able to comprehend the deal they're entering into.

Flipping and Assigning Real Estate Contracts

Contract assignment allows a buyer (often an investor or wholesaler) to transfer their right to purchase a property to another party, usually for a fee. This strategy is legal in many states and can be profitable, especially in hot markets.

  • The original buyer does not need to close on the property.
  • The assignment fee is paid at closing by the new buyer.
  • Sellers must agree to the assignment (check for "assignable" clauses in contracts).

Flipping contracts involves securing a property under contract and quickly assigning it or reselling it before closing. While legal, this practice is regulated in some states and may require specific disclosures or licensing​.

Disclosures and Legal Requirements

Real estate contracts must comply with federal and state disclosure laws. Sellers are typically required to provide:

  • Lead-based paint disclosures (for homes built before 1978)
  • Property condition reports
  • Known defects or hazards
  • Zoning or usage restrictions

Failing to provide proper disclosures can invalidate a contract or lead to legal penalties. Buyers should review disclosures carefully before signing, and sellers should document all known issues truthfully to avoid future liability​.

Contingency Clauses and Protections

Contingency clauses protect both buyers and sellers from unforeseen circumstances that could derail a sale. Common contingencies include:

  • Appraisal contingency: Allows the buyer to back out if the property appraises for less than the offer.
  • Financing contingency: Protects the buyer if they are unable to secure a loan.
  • Home sale contingency: Lets buyers make the purchase contingent on selling their current home.
  • Title contingency: Gives the buyer a way out if the title search uncovers legal claims against the property.

Each contingency should have a specific deadline, and the contract should outline what happens if the conditions aren't met​​.

Frequently Asked Questions

  1. What is the most common type of real estate contract?
    The purchase agreement is the most common, outlining the terms for transferring property ownership between a buyer and seller.
  2. Can a real estate contract be canceled after signing?
    Yes, but only under specific conditions such as unmet contingencies or mutual agreement. Canceling without cause may lead to financial penalties.
  3. What happens if a seller backs out of a contract?
    The buyer may sue for specific performance (forcing the sale) or recover damages, depending on the contract terms and state law.
  4. Is earnest money always refundable?
    Earnest money is refundable only if the buyer backs out for reasons covered by the contract's contingencies. Otherwise, the seller may keep it.
  5. Can you assign a real estate contract to another person?
    Yes, through contract assignment—if the contract permits it and the seller agrees. This is common in wholesaling.

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