An Overview of Real Estate Contracts

For most people, the purchase or sale of real property will be the largest financial event of their lifetime. The completion of a real estate transaction is a complex process, requiring a number of legal documents, including a real estate contract.

What Is a Real Estate Contract?

A real estate contract is a legally enforceable document that sets forth the rights and responsibilities of parties involved in any transaction related to the transfer or use of real property. Under the laws of every state, contracts involving an interest in land are governed by the Statute of Frauds and must be in writing to be enforceable in a court of law.

What Are Common Types of Real Estate Contracts?

Many different kinds of contracts are involved in real estate transactions, but these are four of the most common:

• Purchase, or “buy-sell” agreements—These contracts establish the terms for a transfer of real property. These agreements are discussed in more detail below in the section Real Estate Purchase Agreements..
• Listing agreement—A party wishing to sell a home will enter into a “listing agreement” with a real estate agent that establishes a wide range of terms—the commission rate to be paid, the length of time the house will be listed, where the property will be listed, and how the property will be shown. In most instances, the listing agreement is an exclusive one, preventing the seller from using multiple agents or brokers at the same time. Because of the exclusive nature of the relationship, a broker or agent may be entitled to a commission even when a buyer or seller completes a transaction without the broker or agent’s assistance.
• Lease agreements—A lease agreement forms a binding legal relationship in which the landlord (or “lessor”) agrees to allow a tenant (“lessee”) to occupy and use property, typically for a monthly rental payment.
• Easements—An easement agreement allows a non-owner access to property, either as a means of egress to other property or for some specific purpose (such as to run a fence line).
• Mineral rights and gas/oil use agreements—A mineral rights or gas/oil agreement, typically in the form of a lease, allows the lessee to come on the land and extract natural resources, as specified in the contract.

How Does a Real Estate Contract Work?

A real estate contract establishes the parties to any agreement related to the transfer or use of land and identifies their respective rights and responsibilities. When properly formed, a real estate contract is enforceable in a court of law. When one of the parties to a real estate contract fails to perform as required by the terms of the agreement, any party who has sustained or has the potential to sustain losses as a result of that failure (referred to legally as a “breach of contract”) has the right to file a civil action seeking certain remedies. A party may always seek damages (financial reimbursement) for any such losses. With real estate, though, because of the unique character of the subject matter of the contract, a court may order “specific performance,” requiring the parties to comply with the terms of the agreement. Accordingly, a seller of real estate may be compelled to transfer property to a buyer at the agreed-upon price.

How Is a Real Estate Contract Formed?

To be enforceable in a court of law, a real estate contract must be in writing and must be signed by all parties. The parties must also know that they are entering into a contract and intend to be bound by the terms of the agreement.

What Are the Key Terms in a Real Estate Contract?

Because the real estate contract will be the first source consulted when there are questions about the rights and responsibilities of the parties, it should include terms covering all matters relevant to the consummation of the agreement, including:

• The names of the parties
• An accurate legal description of the property in question
• The consideration given in exchange for the use or transfer of the property, i.e., any value given to the property owner, whether in cash or other forms
• Any contingencies related to the use or sale of the property, such as inspections, repairs, or financing
• The extent of the use or transfer of property, i.e., does it include fixtures and appliances
• The effective date of the closing and/or access to or possession of the property
• Any down payment or earnest money deposit to be made

When Is a Real Estate Contract Valid?

There are five requirements of a valid and enforceable real estate contract:

• There must be a valid offer and acceptance—An acceptance that changes the terms of the original offer will not be construed as an acceptance but as a counteroffer.
• There must be consideration—Each party to the agreement must either give something of value in exchange for what is received or must promise to do something not legally required or refrain from doing something he or she has a legal right to do.
• The agreement must be entered into voluntarily—There must be no reasonable evidence of coercion, undue influence, fraud, or misrepresentation.
• All parties to the agreement must possess contractual capacity—The parties must have the mental ability to understand that a contract is being formed and to understand the terms of that agreement. Contractual capacity may be compromised by age, mental infirmity, or intoxication/impairment.
• The subject matter of the agreement must be legal—The parties may not enter into a contract to use land or premises for any illegal purpose.

Real Estate Purchase Agreements

What Provisions Are Commonly Found in a Real Estate Purchase Agreement?

State laws typically specify what provisions must appear in a real estate contract. Though the parties may draft an agreement from scratch, form contracts are typically available through professional realtor organizations. The most important components of a real estate purchase agreement are:

• The legal description of the property
• The names of the seller and buyer
• The purchase price for the transaction
• The type of ownership being transferred—does it come with unlimited or limited rights?
• Conditions (also known as “contingencies”) that must be met before the contract is considered final and enforceable in a court of law. These typically include obtaining satisfactory inspections, a survey, an appraisal, a policy of title insurance, and approval of financing. A purchase may also be conditioned on the sale of other property.

How Is a Real Estate Purchase Agreement Formed?

As with any contract involving an interest in land, a real estate purchase agreement must be formed in writing. Typically, there are negotiations, both oral and written, which are memorialized in a written document. The written agreement must also be signed by all parties.

The purchase or sale of real property is governed by both common law (judge-made law) and state and federal statutes (enacted by state legislatures or Congress). As a result, the requirements for a valid and enforceable purchase agreement vary from state to state.