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The Essential Guide to Real Estate Contracts and Agreements

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Created on Tuesday, November 28, 2017
Updated on Sunday, July 08, 2018
by Land Century

Real estate exchanges hands every day. Whether you're purchasing, selling, leasing or renting out real estate, it's important that you have contracts and agreements in place. Legally binding, contracts and agreements act as a safeguard to ensure that the buyer and seller agree on specifics in writing.

When entering into any real estate transaction, you must have a valid agreement in place.

But what is a real estate contract, and what does it include? These are questions that a lot of buyers and sellers need to be asking. The good news is that there are a lot of standard contracts and agreements available.

When in doubt, always consult with a lawyer or attorney to ensure that your contract or agreement is valid.

What is a Real Estate Contract?

Business transactions require a contract. When purchasing real estate, you're entering into a real estate contract. Real estate, however, can be:

- Purchased

- Sold

- Conveyed

- Exchanged

Entering into a contract is a smart choice because it makes the transaction legal. If you fail to have a contract, this can cause the transaction to be void.

Land sales are governed by:

- Jurisdiction

- Laws and practices

Sales must be within the laws and practices of the land's jurisdiction. Laws may vary, but for the most part, the contracts are the same. You'll find the majority of contracts will fall under bilateral contracts.

What this means is that the contract is agreed upon by two parties: buyer and seller.

What Are Real Estate Purchase Agreements?

Also known as real estate purchase contracts, these agreements allow for a legally binding contract between two or more parties. Again, these parties may be the seller and buyer, and multiple individuals may be part of the contract.

When an agreement or contract is formed, this provides a legal consideration.

Real estate is such that a legal consideration must be given when the real estate is exchanged. Consideration can be:

Money. The most common consideration. Money is exchanged for the use or purchase of the land.

Exchange. Another option. Real estate exchanges can occur, wherein one person exchanges real estate with another person in an even swap deal.

Promise. You can also use a promise, such as a promise to perform work in exchange for the land.

Agreements allow real estate to be exchanged while meeting the legal consideration requirement. You never want to exchange or purchase real estate without a contract or agreement in place.

The owner of the land can state that you're simply lying about the agreement.

And if you don't have a legally binding or valid contract, you will not be the owner of the land – it's that simple.

What Makes a Contract Legally Valid?

There was a time when contracts were legally valid when they were made orally. But, this isn't the case in real estate. Business contracts, in many cases, are valid when they're oral, but enforcing the contract is extremely difficult.

In the United States, the Statute of Frauds dictates that real estate:

- Contracts are only valid when they're written

- Contracts must be signed by the buyer and seller


Any exception to the above rule will make the contract invalid. Templates and forms are available that allow you to enter into a legally binding real estate contract. But, it's always best to work with a real estate lawyer that can provide you with a custom real estate contract.

Lawyers will ensure that the contract is up to government and local standards.

What Are Option Contracts?

Option contracts are available in real estate, too. These contracts provide a purchase option for real estate. The idea is such that the buyer will enter into an option to purchase a property. The seller, that agrees to the option, will not be able to sell the property to anyone else while the contract is valid.

So, if a buyer wants a property and needs four months to come up with the financing, the seller may enter into a five-month option contract.

During this period, the seller cannot sell the property to anyone else. This type of contract often includes:

- Term specifics that state how long the contract is valid before expiry

- Purchase price

This contract option is purchased. So, the idea is that the buyer doesn't need to buy the property, but the seller cannot sell the property while the contract is binding. The only catch is that if the buyer backs out of the contract, the money that they paid for the option is not returned.

Option contracts are very popular among third-party sellers that buy contracts and sell the property to someone else at a higher price.

What Must Be Included in Contracts?

There are certain real estate contract conditions that must also be met. When you have a real estate contract, you may need to include all or a combination of the following information:

- Party identification (buyer, seller and anyone else involved)

- Property (the actual property that is being exchanged)

- Purchase price or consideration

- Details (obligations and rights)

- Condition (details on what is included with the property upon sale) - Terms of the sale - Signatures of at least two parties - Closing cost details - Deposit amounts

And these are just the basics that need to be included in the contract. The easiest contract involves the exchange of money for real estate. If money is being exchanged, the above details are often all that you'll need for the contract to be valid.

The description of the property must also be in detail. It's not enough for the seller to state "my home." Instead, the seller would have to be descriptive and mention the home's address, location and even parcel number.

Real estate also has such a thing as contingencies.

What this means is that the purchase of the real estate is contingent on certain conditions. Every transaction is different, but the most common contingencies are:


Inspection of the property. If the inspection finds significant issues, it's possible that you can terminate the contract.


Financing conditions are also a part of contingencies. If you fail to obtain a mortgage or sell your home, the contract can be voided.

Appraisal of the property. If the property is overvalued, the mortgage company may not provide you with a mortgage because the appraisal shows the real estate is worth less than the purchase price.

Both parties can add their own contingencies to the list.

Keep in mind that contingencies do not allow the buyer to simply decide they no longer want the property. These clauses protect the buyer if something is wrong with the property or financing falls through, but the contingency doesn't allow the buyer to simply say "I've changed my mind."

Every contract must include three main points for the contract to be valid:

- Offer

- Counteroffer

- Acceptance


In essence, the contract must offer a property for exchange. In exchange for the property, the buyer accepts to pay a specific amount. The seller will provide the counteroffer of acceptance under certain contract terms.

Real estate contracts and agreements must be provided when any form of real estate is exchanged. This means that if you're selling raw land or a home, you still need to have a contract in place.


Otherwise, buyers may lose out on the money that they exchange.

Sellers are less impacted from sales without contracts because they still own the rights to the property.

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