Key Takeaways

  • Real estate agreements must include offer, acceptance, consideration, legal capacity, and legal purpose to be enforceable.
  • Common agreements include purchase, lease, assignment, and power of attorney contracts.
  • New additions include contingency clauses, inspection rights, financing terms, and earnest money deposits as critical contract components.
  • Specialized agreements like option contracts and seller financing contracts provide flexibility for different buyer and seller needs.
  • Misunderstandings often arise from contingencies, unclear timelines, or missing disclosures, so legal guidance is recommended.

There are several types of real estate contracts, and it is important to know that contracts are necessary for real estate deals. A contract is a legally enforceable document between two or more people. The contract consists of an offer, acceptance, consideration, legal capacity, and legality of purpose.

Take an example of John selling his property to Mary. Mary makes an offer to John, thereby meeting the first requirement of an offer. John then accepts the offer and therefore, we now have a formal acceptance in place. However, the contract is not yet enforceable.

We will now need consideration, also referred to some sort of value being exchanged between John and Mary. In this case, John is receiving a promise from Mary that she will purchase the property at the purchase price she offered, and John is making a promise to sell the property and transfer the deed over to Mary.

After consideration has taken place, the parties will need to be deemed legally capable in order to enter into the contract. So long as both John and Mary are at least 18 years of age and have the mental ability to enter into a contract, then this requirement is met.

Finally, the contract must have a legal purpose. In this case, John wants to sell his home to Mary, and therefore, it has a legal purpose.

Purchase Agreement

A purchase agreement is the most common type of real estate agreement. This contract specifies the details regarding the sale of property. It will include the address of the property, the price, names of both parties, signatures of both parties, and the closing date.

There are several kinds of purchase agreements as follows:

  • State/Association Purchase Agreement, which is the standard agreement between a purchaser and seller when a real estate agent is involved
  • General Purchase Agreement, which is a simply a shortened version of the above-mentioned contract, and is used usually when no real estate agent is involved in the transaction
  • Property-Specific Purchase Agreement, which could be used for vacant land or a mobile home

Essential Elements of a Real Estate Purchase Agreement

A thorough purchase agreement should outline not only the basic terms—price, parties, and property description—but also several critical provisions that protect both the buyer and the seller. These include:

  • Contingency Clauses: Common contingencies include financing, appraisal, inspection, and sale of another property. These allow the buyer to cancel the agreement under certain conditions without penalties.
  • Earnest Money Deposit: This is a good faith deposit showing the buyer's serious intent. It should specify who holds the funds and under what conditions they are refundable.
  • Closing Costs: The agreement should clarify which party is responsible for covering each of the closing costs, including escrow fees, title insurance, and transfer taxes.
  • Disclosures: Sellers are often required by law to disclose material facts affecting the property's condition, such as water damage or pest infestation.
  • Inspection Rights: Buyers should be granted access to perform professional inspections and request repairs or credits before finalizing the sale.

Real Estate Assignment Contract

A Real Estate Assignment Contract is used in a wholesale investment purchase. This could include distressed properties that are secured and then assigned to another buyer. There are certain terms added to this type of contract, as the term “assigns” is the common word used to differentiate it as an assignment contract.

Option to Purchase Agreements

An option to purchase agreement gives a potential buyer the exclusive right—but not the obligation—to purchase a property at a specified price within a certain timeframe. It is often used in lease-to-own scenarios or when a buyer wants to secure a property while finalizing financing. These agreements typically include:

  • Option fee (non-refundable) as consideration
  • Purchase price or pricing formula
  • Option period expiration date
  • Terms for extending or terminating the option

This type of real estate agreement benefits sellers by receiving upfront compensation and offers buyers time and flexibility.

Lease Agreement

This is a contract that binds an owner and a renter to the property. Therefore, the proper owner (referred to as a landlord) enters into an agreement with a tenant (the lessee) to reside in the home at a specified monthly rate. Additional items to be included in this agreement include payment of utilities and the security deposit. It’s important to ensure important items are mentioned in the lease agreement to prevent future legal disputes.

Seller Financing Agreements

Seller financing agreements allow the property seller to act as the lender, providing financing directly to the buyer. This can be useful when traditional financing is not available to the buyer. Key terms in seller-financed real estate agreements include:

  • Down payment amount
  • Interest rate and loan term
  • Repayment schedule
  • Consequences of default
  • Title retention until full payment is made

These agreements can speed up the closing process and are especially common in private or rural real estate transactions.

Power of Attorney

While a Power of Attorney is generally not used in a real estate contract, such documents could be used in situations if a party is unable to sign the contract, i.e. party is not physically in the country to sign, or has a mental disability. In this case, the party can hire another party to act as the power of attorney to sign on his or her behalf.

This type of contract can also be beneficial if you are the property owner of several investment (rental) properties or if you are carrying for an older parent or family member who might not have the ability to sign the contract.

Common Pitfalls in Real Estate Contracts

Even well-structured real estate agreements can lead to disputes if not properly executed. Some common pitfalls include:

  • Ambiguity in Terms: Unclear timelines, payment schedules, or responsibilities can lead to legal conflict.
  • Missing Signatures or Attachments: A contract is unenforceable if it's not signed by all required parties or lacks necessary exhibits like property disclosures or inspection reports.
  • Ignoring Local Laws: Real estate laws vary by state and locality. Standardized forms may not account for unique legal requirements.
  • Failure to Include Contingency Deadlines: Without defined dates, buyers or sellers may delay indefinitely, causing frustration or financial harm.

Frequently Asked Questions

1. What makes a real estate agreement legally binding? A real estate contract becomes legally binding when it includes an offer, acceptance, consideration, legal capacity of the parties, and a lawful purpose.

2. What is the difference between a lease agreement and a purchase agreement? A lease agreement allows a tenant to use a property for a set time, while a purchase agreement transfers ownership from seller to buyer.

3. What are contingencies in real estate agreements? Contingencies are conditions that must be met for the contract to proceed—such as securing financing, a satisfactory inspection, or the sale of another property.

4. Can real estate contracts be canceled? Yes, contracts can be canceled under certain conditions, especially if contingencies are not met. Cancellation terms should be clearly outlined in the agreement.

5. What is seller financing and when is it used? Seller financing is when the seller provides a loan to the buyer instead of the buyer securing one from a bank. It’s often used when buyers have trouble qualifying for traditional loans.

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