Key Takeaways

  • A real estate contract must be in writing, include competent parties, legal consideration, and mutual assent, and must serve a lawful purpose.
  • There are various types of real estate contracts, including unilateral, bilateral, executory, executed, valid, void, voidable, enforceable, and unenforceable contracts.
  • Essential components include the legal description of the property, purchase price, required signatures, and terms of financing.
  • Contingencies such as financing, inspections, and appraisal clauses are critical in protecting buyers and sellers.
  • Default and breach provisions dictate legal consequences if one party fails to meet contractual obligations.
  • Real estate contract laws vary by state, requiring knowledge of local regulations to ensure enforceability.
  • Electronic signatures and remote notarization have become increasingly important in modern real estate transactions.

Law of contracts real estate is a legally binding agreement between a buyer and a seller in regard to the title of a property. For a real estate contract to be enforceable, it must be in writing and contain all the necessary and essential elements to be considered valid. Short-term leases are often exceptions to this requirement.

Elements of a Real Estate Contract

There are several elements that compose a real estate contract:

  • Competent parties are those who are of legal age when entering into the contract.
  • If a party is declared insane by the court, he or she is considered incompetent. Anyone entering into a contract while temporarily mentally incompetent due to alcohol or drugs is also considered incompetent.
  • Mutual assent is also known as a "meeting of the minds." To have a mutual assent, there must be an offer and an acceptance.
  • Legal consideration comes in many forms, such as real estate, money, services, or personal property. All parties to a contract must offer some type of consideration.
  • For a contract to be enforceable, it must have a legal purpose.
  • The purpose of the contract must be in compliance with the law. Illegal acts cannot be part of a contract. For example, if fraud is involved in a contract, it is not valid.
  • The legal description should be used when providing the property description on the contract.
  • The contract must include the purchase or sale price. The appraised value may also be used if it has a specified date.
  • All parties must sign the contract. Partnerships and corporations may designate an authorized person to sign on behalf of the business.
  • Electronic signatures are acceptable. 

Contingencies in Real Estate Contracts

In real estate contract law, contingencies serve as conditions that must be met for the contract to remain enforceable. These clauses protect both buyers and sellers from unforeseen issues that could affect the transaction. Common contingencies include:

  • Financing Contingency – Allows the buyer to withdraw if they cannot secure a mortgage.
  • Inspection Contingency – Grants the buyer the right to have the property professionally inspected before finalizing the contract.
  • Appraisal Contingency – Protects buyers using financing by ensuring the property's appraised value meets or exceeds the purchase price.
  • Title Contingency – Requires the seller to provide a clear title before closing to avoid disputes over ownership.
  • Home Sale Contingency – Allows a buyer to back out if they cannot sell their existing home before purchasing a new one.

Each contingency must be clearly defined in the contract to ensure enforceability in case of disputes.

Information About a Real Estate Contract

It is important for real estate investors to understand the fundamentals of contract law, since contracts are an integral part of the real estate marketplace.

A real estate contract is based on common law principles. Initially, the contract is formed as an offer, which the buyer signs. Until the seller accepts the offer, the contract is not considered binding. 

An acceptance means the seller has agreed to the exact terms stipulated in the offer. If the seller replies that she or he will accept the offer, but then adds an additional requirement, the contract is not binding. It will then be considered a counteroffer. There must be a mutual agreement for a contract to work.

If a time frame has been stipulated for an acceptance date by the buyer, and the offer has not been accepted by that time, there is no longer a contract. For example, the contract requires the seller to send a fax acknowledging acceptance. But instead, the seller calls or mails a letter. That is not acceptable per the terms of the agreed-upon contract.

Default and Breach of Contract

A breach of contract occurs when one party fails to fulfill their contractual obligations. In real estate contract law, breaches can lead to legal consequences such as:

  • Monetary Damages – The non-breaching party may seek compensation for financial losses.
  • Specific Performance – A court may order the breaching party to fulfill their contractual obligations, particularly in unique property sales.
  • Contract Rescission – The contract is canceled, and both parties are restored to their original positions.
  • Forfeiture of Earnest Money – The seller may retain the buyer’s earnest money deposit as compensation.

Understanding potential legal remedies helps buyers and sellers prepare for contractual disputes.

Types of Real Estate Contracts

When drawing up a real estate contract, you may come across various forms such as:

  • Unilateral Real Estate Contracts. Only one party is involved in making a promise concerning the contract.
  • Bilateral Real Estate Contracts. Two or more parties are involved, allowing each to make promises to the other party.
  • Expressed Contracts. They allow parties to state the terms of their contract in writing or verbally.
  • Implied Contracts. They arise due to the intentions, relationship, or actions of the parties involved.
  • Executory Contracts. Those contracts have not yet been completed because of unfinished obligations. For example, if a real estate transaction is in escrow, it is considered executory.
  • Executed Contracts. They are complete; there is nothing more that needs fulfilling.
  • Valid Contracts. They are legally binding and enforceable contracts where all parties are in agreement, and all the standards of contract law have been met.
  • Void Contracts. Such contracts do not meet the criteria for contract law. This may be due to the contract containing illegal intent and therefore being unenforceable. Voided contracts are never valid, and neither party can enforce it.
  • Voidable Contracts. They may appear to be legal but are lacking in their ability to meet some of the legal requirements. One or more parties can rescind the agreement as long as it's done within a certain time frame.
  • Enforceable Contracts. They meet the necessary contract law requirements and offer legal repercussions if it is not fulfilled.
  • Unenforceable Contracts. They have the appearance of validity, but they offer no legal remedies if not fulfilled.

Electronic Signatures and Remote Notarization in Real Estate Contracts

With advancements in technology, electronic signatures and remote notarization have become legally recognized in many states. The Electronic Signatures in Global and National Commerce Act (E-SIGN Act) and the Uniform Electronic Transactions Act (UETA) ensure that electronic contracts and signatures hold the same validity as paper contracts.

Benefits of electronic signing in real estate contracts include:

  • Faster processing times, reducing delays in closing.
  • Increased security, as electronic documents are encrypted and stored securely.
  • Remote accessibility, allowing parties in different locations to complete transactions efficiently.

However, real estate laws vary by state, and some jurisdictions still require wet signatures or in-person notarization for specific documents, such as deeds and mortgages.

State-Specific Real Estate Contract Laws

Real estate contract laws differ by state, affecting required disclosures, contingency enforcement, and contract termination policies. Some state-specific factors include:

  • Disclosure Requirements – Certain states mandate sellers to disclose defects, while others follow a “buyer beware” approach.
  • Attorney Review Periods – Some states require a real estate attorney to review and approve contracts before they become binding.
  • Earnest Money Regulations – State laws determine how earnest money deposits must be held and under what circumstances they can be forfeited.

Before entering a contract, both buyers and sellers should consult an attorney familiar with local real estate contract laws to ensure compliance.

Frequently Asked Questions

1. What makes a real estate contract legally binding? A real estate contract is legally binding when it includes competent parties, a clear offer and acceptance, mutual consent, legal consideration, and a lawful purpose. It must also comply with state laws.

2. Can a seller back out of a real estate contract? Yes, a seller can back out under specific conditions, such as a contingency not being met, failure of the buyer to provide earnest money, or if the contract includes an escape clause. However, wrongful termination can lead to legal consequences.

3. What happens if a buyer breaches a real estate contract? If a buyer breaches a contract, the seller may have the right to keep the earnest money, sue for specific performance, or seek monetary damages depending on the terms of the agreement.

4. Are electronic signatures legally valid in real estate contracts? Yes, electronic signatures are legally valid under the E-SIGN Act and UETA, but state laws may require wet signatures or notarization for certain documents.

5. What is the role of a real estate attorney in contract law? A real estate attorney ensures that contracts comply with state laws, protects clients’ interests, negotiates terms, and resolves disputes that may arise during the transaction.

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