Wed September 28, 2011, 7:48pm
Essential Elements of a Real Estate ContractFor beginners, it might be necessary to state what a real estate contract actually is. This is an agreement which is legally binding between the two parties to a property sale, herein the seller and the buyer, and relating to the title or ownership of the property at hand. The importance of contracts in the real estate market cannot be overemphasized. As such, players in the sector have to have a clear knowledge and understanding of the contract law fundamentals. Before looking at the essentials of the real estate contracts, it is important to first understand what types of contracts are there.
According to the US laws, there are four different types of these contracts. The first one is the unilateral contract. In this type, only one of the parties involved in the agreement, that is either the buyer or the seller, commits themselves to a promise. Most of the real estate options are unilateral contracts. For example, seller A can opt to give buyer B a choice to buy their property. Seller A only comes under an obligation to sell if and only if buyer B decides to exercise his right and buy the property. But at the same time, buyer B is under no jurisdiction to purchase the property.
The other type of contract is the bilateral contract. In this type of contract, both the two (or sometimes more) parties that are involved have to promise each other and stick to the same. A typical real estate purchase agreement is considered as a bilateral contract. In the above example, the agreement becomes a bilateral contract if seller A promises to hand over her property once buyer B pays him the promised amount of the contract. In other words, it is a give-and-take kind of agreement from both ends.
The third type of contract is the Expressed contract. In this kind of contract, all the involved parties to it normally state the conditions and terms of the contract in a very informal way, either in writing or verbally. However, the law requires that many of the real estate contracts be in writing. The only exceptions to this are short-term leases, and even though, the exception only applies to some states in the US and not all. Still going by our above example, Buyer B can ‘express’ his agreement with Seller A’s proposal by taking it to the next level and having it put down in pen and paper. Perhaps this is the most common type of property sale agreements in the US and even other places in the world.
Last but not least is the implied contract. This type of contract is brought about by the intentions, relationships and the actions of all the parties that are involved in the agreement. In most cases, these types of contracts are rare in the real estate market due to the fact that many of the contracts are meant to be in writing (that is expressed contracts).
All the above contracts have some common essentials which whenever they are missing, the contract does not become binding. As such, one has to be very observant before getting into any binding deal, or else, they might just realize that they weren’t buying property after all, but expensive illusions.
The first essential element is that a real estate contract has to be written. The writing must include all the other essential elements for it to be valid. However, as with every rule, there are exceptions, and short-term leases form an exception to this element in real estate. But as mentioned earlier, the exception only depends with the State. There are some states where that doesn’t apply at all and anybody wanting to do business there must play by the rules.
The other essential element to any contract is to do with the competence of the parties. Generally, a competent party is one with a legal age as well as a sound mind. There are many situations as to why one can be considered to be incompetent to a contract. It include those who are insane, the minors, those under temporary mental incompetence like alcohol influence and drugs and so on. However, should a minor enter into an agreement of a contract, they have the choice of either withdrawing or sticking to the contract till its end.
The other very important element to a contract is the fact that all the parties should have a convergence point of the minds, in other words, there should be mutual assent on all the terms and conditions. In any case, lack of this element simply means that there is actually no contract in place, because there must be the give and take situation.
Legal consideration is also very essential to any contract, and all the parties involved in it must provide some consideration. Consideration has to be a valuable thing, and it can be the real estate, money, personal property, services and so on. Closely related to legal consideration of the contract is the fact that the contract should also have a lawful object which creates a legal purpose for enforcing it.
The property that is being sold, under which the contract is made should be identified in the contract. As far as the law is concerned, a street address should be enough. But if one is into business, then they should consider legal descriptions in order to offer more clarity to the property and attract many potential buyers.
Price of the property has to be clearly indicated on the contract. For the real estate purchases agreements, the purchase price should be clearly stated, while for the real estate contracts, it is the sales price that should feature. If need be, all the parties to the contract can also find it useful to include a figure that is ascertainable. An appraised value could serve very well for a particular date.
Last but not least, a contract cannot be binding without signatures from the involved parties. If it is a corporation or a partnership, then there is always an authorized person to deal with that.
Stay on the safe side of contracts.