4 Types of Real Estate Contracts: A Beginner’s Guide

If you are new to real estate investing, you may not be familiar with what a real estate contract is or the different types of real estate contracts.

Real estate contracts play a significant role in real estate investing. As a property investor, you will be required to negotiate and sign contracts when you strike any real estate deal. Therefore, it is absolutely necessary for you to be well-informed about the various real estate contracts that you might use throughout your real estate career. This blog will give you foundational knowledge on what a real estate contract is and the different types of real estate contracts to enable you to make informed investing decisions.

What Is a Real Estate Contract?

A real estate contract is a legally binding agreement between two or more parties for exchange, purchase, or any other type of real estate transaction. This document outlines the terms agreed upon after negotiations have ensued. Real estate contracts are required by the Statute of Frauds (SOF) in U.S. common law to be in writing and signed by both parties to be enforceable.

As in any legal transaction, real estate contracts are essential in the execution of real estate transactions. They are designed to protect both parties. They form the basis of legal action that can be taken if any of the parties does not fulfill the terms of the contract. However, the laws regarding real estate contracts may vary from state to state. Therefore, it is prudent to hire an attorney before signing anything.

Requirements for a Real Estate Contract

As it is the case with other contracts, the following requirements must be met for a real estate contract to be enforceable:

• Offer: One party typically makes an offer by preparing a written real estate contract, signing it, and handing it to the other party. The other party either accepts the offer, makes a counteroffer, rejects it, or fails to respond.
• Acceptance: The other party can accept the offer by signing it. The contract must possess original signatures by both parties for it to be enforceable. Both parties should initiate any alterations to the contract. If a counteroffer is made, the original offer will be terminated and it won’t be legally binding since both parties didn’t agree to the terms. When the offer is rejected, it is terminated. If there is no response to the offer, it automatically terminates by the expiration date indicated on it.
• Consideration: This is something of value that is exchanged between the two parties in the real estate transaction. Consideration is mostly in the form of money. It could also be a promise to perform or another property.
• Legal Capacity: The parties involved should be eligible to enter into a contract. They should not be mentally impaired, minors, etc.
• Legality of Purpose: The contract should not call for illegal action.

Types of Real Estate Contracts

Here are 4 common real estate contracts that you need to familiarize yourself with, based on the different types of real estate transactions:

1. Purchase Agreement

Out of all the types of real estate contracts, this is the most common. A purchase agreement (also called a sales contract) is a binding contract between two parties (property buyer and property seller) to transfer a particular property. This contract specifies the details regarding the sale of a property.

The following are the main components of a purchase agreement:

• Identity of the parties
• Description of the property
• Condition of the real estate property
• Purchase price
• The important details, obligations, and rights of the real estate contract
• A list of contingencies
• Appliances and fixtures that are included in the sale and those excluded
• Earnest money deposit
• Type of deed
• Closing costs and the party responsible for paying each cost
• The signatures of both parties
• Terms of possession
• Date of closing

There are three different types of purchase agreements based on the clauses regarding the type of property being transacted:

• State/Association Purchase Agreement

This is a standard agreement between a property seller and buyer when a real estate agent is involved. Many states, as well as real estate associations, usually have such agreements to guide their real estate transactions.

This is a shorter version of the state/association purchase agreement and is typically used when you’re buying the property without a real estate agent.

• Property-Specific Purchase Agreement

This purchase agreement is normally used in the purchase of properties that are not in the traditional single-family paradigm. For instance, it could be used for mobile homes or vacant lands.

2. Real Estate Assignment Contract

This contract is usually used in wholesale real estate to facilitate the sale of a property between a homeowner and an end buyer. A real estate assignment contract is initiated when the property owner agrees to sell the rights to purchase the property to an investor and both parties sign a contract binding themselves to the imminent deal. The contract gives a real estate investor the rights to purchase a property (they don’t actually buy the property) and they can then sell their rights to buy the subject property to another buyer. The investor will be paid a small assignment fee by the end buyer, who will proceed to purchase the property from the owner. It is important to note that a real estate assignment contract does not give investors the title to the property. The assignment of the contract will also not appear in the title chain.

3. Lease Agreement

A lease agreement is a real estate contract that binds a property owner (landlord) and a renter (tenant) to the property. The landlord agrees to offer his/her property for the tenant to reside in at a specified monthly rate. Apart from the rent amount, the agreement also includes important provisions such as the security deposit and payment of utilities. All important items should be included in the lease agreement to prevent any legal disputes in the future. You can find standard lease agreements on the internet and adjust them for your use.

4. Power of Attorney

Of all the types of real estate contracts, this one is quite unique. A Power of Attorney is used in situations where the principal (a person who has given permission for someone to act in his/her place) is not physically able to sign a real estate contract. In this case, the principal will appoint another party to act as the power of attorney so that they can sign the contract on their behalf. This may happen when the principal is in the following situations:

• Mentally disabled
• Hospitalized or has any other illness that restrains his/her ability to sign the contract
• Not physically present in the country to be able to sign the contract
• Owns several investment properties
• Is an elderly parent or relative who may not be able to sign the contract

The Bottom Line

If you are looking to purchase your first investment property or to do any other real estate transactions, you are most probably going to sign a real estate contract. There are many types of contracts in real estate that are used by beginners and experienced investors alike. Each of them has different uses and requirements. Therefore, having sufficient knowledge of these types of real estate contracts will enable you to have smoother navigation in the world of real estate. However, you may need to hire a real estate attorney experienced in these types of transactions when it comes to the fine print.

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