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Basics of the real estate contract

By William Bronchick | Published: Oct 14, 2009 | 11 Comments

The real estate contract is the most often used, yet least understood tool in the real estate business. Whether you are a rank beginner or seasoned expert, there is no excuse for not knowing and understanding the real estate contract.

Real estate contracts are based on common law contract principles, so it is important that you understand the nuts and bolts of contract law: Offer, Counteroffer and Acceptance. In most states there are standardized contracts used by real estate agents and attorneys. The contract is generally drafted in the form of an offer. The offer is usually signed by the buyer (the offeror). The contract is not binding until the seller accepts, creating a "meeting of the minds" (called "mutual assent").

An acceptance is made if the offeree (the seller, in this case) agrees to the exact terms of the offer. If the seller replies, "I'll accept your offer if you agree to close fifteen days sooner," there is no binding contract, but rather a counteroffer. The basic building block of a contract is that there is mutual agreement.

If the offer is not accepted in the time frame and manner set forth by the buyer (offeror), then there is no contract. For example, if the contract specifies that acceptance must be made by facsimile, an acceptance by telephone call or mail will not suffice.

Unilateral contract vs. Bilateral contract

A real estate sales contract is a "bilateral" (two-way) agreement. The seller agrees to sell, and the buyer agrees to buy. Compare this with an option; an option is a unilateral (one-way) agreement in that the seller is obligated to sell, but the buyer is not obligated to buy - it is his option to do so. A bilateral agreement with a "liquidated damages" provision yields the same result if the buyer fails to close escrow; the seller keeps the buyer's earnest money and the deal is over.

Basic legal requirements of a real estate contract

There are some basic requirements that must be present to make a real estate contract valid:

  1. Mutual assent

    As stated earlier, there must mutual agreement or "meeting of the minds."

  2. In writing

    With few exceptions, a contract for purchase and sale of real estate must be in writing to be enforceable. Thus, if a buyer makes an offer in writing and the seller accepts orally, then backs out, the buyer is out of luck.

  3. Identify the parties

    The contract must identify the parties. Although not legally required, a contract commonly sets forth full names and middle initials (it helps the title company in preparation of the title commitment). If one of the parties is a corporation, it should so state (e.g., "North American Land Acquisitions, Inc., a Nevada Corporation").

  4. Identify the property

    The contract must identify the property. Although not required, the legal description should be set forth. A vague description such as "my lakefront home" may not be specific enough to create a binding contract.

  5. Purchase price

    The contract must state the purchase price of the property or a reasonably ascertainable figure (e.g., "appraised value as determined by ABC Appraisal Group").

  6. Consideration

    A contract must have consideration to be enforceable. Consideration is the benefit, interest or value that induces a promise; it is the glue that binds a contract. The amount of the consideration is not important, but rather whether there is consideration at all. It is common for a contract to state that "ten dollars and other good and valuable consideration has been paid and received."

  7. Signatures

    A contract must signed to be enforceable. The party signing must be of legal age and sound mind. A notary's signature or witness is not required. A facsimile signature is usually acceptable, so long as the contract states that facsimile signatures are valid.

Comments

By Connie Wildasinn,  Sun Jan 31 2010, 22:43
If you don't understand something as your agent again and again until you do... this is a legal and binding contract you are getting ready to sign...
By Shawn Rosa,  Tue Dec 13 2011, 11:32
I defer to the lawyers on all detailed contract questions posed by buyers or sellers. never give legal advice as a realtor.
By Melissa,  Sun Jan 22 2012, 09:39
It's true, legal *advice* offered by a realtor could be construed as unauthorized practice of law. But there is no problem with a realtor simply explaining the law, just as a paralegal would. It's an important distinction that should be made clear to the client. That assumes that the realtor understands the law - which they should!
By Adrian Provost,  Mon Feb 27 2012, 17:16
Agents shouldn't offer legal advice, yet we should always be sure that our client is aware of the binding agreement that they're entering and that they understand it clearly*
By Stephanie Leon PA 786-574-3928,  Sat Apr 28 2012, 10:17
Well written.. Buyers should read this article. Thanks for sharing.
By Matie,  Fri Jun 15 2012, 02:42
use your skills after finding a home with http://www.indexpost.com/
By Carmen Brodeur- Top 1% Realtor,  Wed Oct 17 2012, 11:49
I agree with the comments about agents not giving legal advice but they should know the contract inside and out. Not enough agents take the time to read and understand the purchase contract.
By lorelei,  Wed Feb 5 2014, 12:56
In the "Offer To Purchase & Contract - Vacant Land" standard form, under Item 2, Buyer's Due Diligence Process, (d) Indemnity... could someone explain what the pre-existing conditions of land might be that could cause loss, damage, claim, suit or cost to the Buyer's agents and contractors. Also, what is meant by Seller's negligence or willful acts or omissions related to Buyer's Due Diligence process on vacant land? This is very confusing.
By Costa Blanca,  Fri May 23 2014, 12:05
very interesting article, thank you this precious input.
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By joel deitch,  Mon Sep 8 2014, 20:56
does anyone know what the term "on or about" means in reference to a closing date
By Mark Saunders,  Tue Feb 3 2015, 10:50
Joel most of the time it says or sooner so if the inspection process on loan process move without any delays maybe seller is ready to move on and buyer can move in sooner

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When you find a home you'd like to buy, you'll need to write an offer for it. Follow these steps to create a successful offer. Set a price To write an offer, you need to know how much to offer for the home. To decide on a price, you need to know about two ...

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