Real Estate Contracts: Types, Elements, and Legal Requirements

Express Contract

when the parties to the contract either write or say their intentions.

Implied Contract

when the actions of the parties serve to form the contract.

Bilateral Contract

a promise exchanged for a promise.

Unilateral Contract

a promise is exchanged for performance.

Forbearance

an agreement not to do something.

Valid Contract

a contract that meets all requirements of law and is binding on both parties and enforceable in court.

Voidable Contract

a contract that is binding on only one party.

Void Contract

not a contract at all and binding on neither party.

Unenforceable Contract

was once valid, but is now not enforceable in court for some reason.

Competent Parties

This is a requirement for any contract, must be of legal contracting age, cannot be intoxicated, and cannot have been ruled mentally incompetent by the courts.

Mutual Agreement ( meeting of minds)

Requirement for ANY contract where both parties agree to the terms.

Fraud

intentionally deceiving another party, or failing to disclose important information, in order to get them into an agreement.

Innocent Misrepresentation

accidentally deceiving another party.

Mistake

refers to ambiguity in negotiations or mistake of material fact.

Duress

threatening someone into signing a contract means that there could be no meeting of the minds.

Contractual Intent

jokes cannot be enforced as contracts because there was no intent for it to actually form a contract.

Lawful Objective

a contract must be for a legal purpose.

Consideration

Requirement for ANY contract, in buying a home, the buyer paying money and the seller providing title to real estate is the consideration.

Valuable Consideration

money or anything worth money (e.g. services).

Good Consideration

a gift based on love and affection felt for another.

In Writing

Requirement for a REAL ESTATE contract that all contracts dealing with the sale of land must be in writing.

Statute of Frauds

demands that all contracts dealing with the sale of land or an interest in land must be in writing.

Assignment

one party can assign his/her rights or obligations under the contract to another party.

Novation

Substitution of a new contract between the existing or new parties or the substitution of a new party into an existing contract.

Mutual Rescission

If both parties agree to cancel the contract before it is over.

Unlawful Objective

If the purpose of the contract becomes illegal.

Death

If the deceased party was the only one that could fulfill the contract obligations.

Accept Partial Performance

The wronged party does not believe it would be worth the hassle of pursuing the matter any further, so he/she accepts what has been done so far on the contract and moves on.

Unilateral Rescission

The wronged party stops fulfilling their end of the agreement since the other party isn't living up to the contract provisions.

Lawsuit for Money

The wronged party could sue for money damages if the result of the breach can be expressed in monetary terms.

Lawsuit for Specific Performance

The wronged party can sue to get the courts to force the other party to live up to the agreement.

Liquidated Damages

An amount agreed to from the beginning of the contract that will serve as the full amount of damages to be collected if either party breaches the contract.

Real Estate Sales Contracts

To bind each party to the sale while the buyer makes sure the seller is actually the owner and arranges financing.

Earnest Money

Signals intent of buyer and serves as liquidated damages should the buyer default.

Loan Conditions

Often the buyer will state a maximum interest rate that she will obligate herself to pay.

Termite Inspection

Who will pay for the inspection and repairs.

Property Damage

States that buyer can get out of the deal freely if material damage occurs before closing.

Personal Property

Any items of personal property intended to be included in the sale should be listed separately.

Amendatory Language Clause

Only necessary in FHA or VA deals; allows buyer to get out freely if the appraised value comes back significantly below the selling price.

Insulation Disclosure

Sellers of new homes must include information about the thickness and insulating properties of the insulation in the home.

Lead-Based Paint

Sellers/landlords must disclose any known lead-based paint hazard before the buyer/tenant is obligated to the contract.

Time Limit on offer

Specifies the duration for which the offer is valid.

Signature of Offeror

The signature of the person making the offer.

Acceptance of Offeree

The agreement of the person receiving the offer to the terms presented.

Notification of acceptance by offeree to offeror

Acceptance of Offeree

Binder

Some states use a binder to hold the deal together until the parties can meet with an attorney to draw up an official purchase contract.

Letter of Intent

Two or more parties express an intent to pursue a particular real estate project, including an outline of the proposed project and a statement that the parties will move toward its completion. This is not a legally binding contract.

Installment Contracts

Also Known As: Bond For Title, Contract for Deed, Land Contract.

History of Installment Contracts

Usually used when the buyer couldn't obtain financing elsewhere; originally, sellers retained title until the very last payment was made by the buyer.

Consequences of Missed Payment in Installment Contracts

If one payment was missed, the seller could evict (not foreclose on) the buyer and the buyer lost everything paid up to that point.

Change in Use of Installment Contracts

Before the 1970s, these were used mainly in complicated commercial deals; began to be used in residential deals during the high interest rate environment of the late 1970s.

Equitable Title vs. Naked Title

When a real estate sales contract or an installment contract is signed, the seller retains title but is obligated to sell to the buyer.

Naked Title

The title that the seller has, as they no longer have all of their property rights.

Equitable Title

The buyer is said to have equitable title because they own the right to receive that property.

Option Contracts

An option to buy gives the owner of the option the right, but not the obligation, to buy the property.

Cost of Options

Options cost money; if the owner of the option decides not to exercise their right to buy, they give up the money paid for the option.

Lease with Option to Buy

A lease is signed on a property that also includes a completed purchase contract.

Right of First Refusal

Often included in rental agreements, this gives the lessee the right to match any valid offer to purchase received by the owner.

Exchanges

Also Known As: Tax-Deferred Exchanges, Section 1031 Exchanges, Tax-Free Exchanges (misnomer).

Basic Idea of Exchanges

I own a building and I want to own a different building; instead of selling my building and buying the one I want, I may be able to find someone to trade buildings with.

Tax Implications of Exchanges

As long as the myriad rules set forth by the IRS governing tax-deferred exchanges are followed, I may be able to defer those capital gains taxes.

Title Closing

The last step in the real estate transaction, taking place after all conditions in the sales contract have been met, often involving the buyer, seller, and their attorneys.

Escrow Closing

A type of closing where the seller conveys title to an escrow agent, who then conveys title to the buyer once the purchase price has been paid, allowing parties not to meet together.

Typical Buyer Responsibilities before Closing

Buyers must exercise due diligence, obtain property insurance, possibly have a survey, and conduct property inspections.

Obtain Property Insurance

Buyers must secure insurance to protect against loss of the property to fire or other hazards before the lender will advance funds.

Survey of the Property

Buyers may need a survey if there are questions about property lines or existing encroachments.

Commercial Properties

Buyers may be concerned about zoning changes or existing leases before closing.

Typical Seller Responsibilities before Closing

Sellers must prepare a new deed, remove encumbrances to title, and allow property inspections.

Encumbrances to Title

Liens or other claims against the property that must be cleared before closing, often including existing mortgage liens.

Usual Buyer-Paid Closing Costs

Costs typically borne by the buyer, which may include loan origination fees, appraisal fees, and attorney fees.

Usual Seller-Paid Closing Costs

Costs typically borne by the seller, which may include real estate brokerage commissions and deed preparation fees.

Settlement Statement (HUD-1)

A document that must be provided to the buyer and seller before closing, uniform throughout the U.S.

Lease

A contract transferring rights of use and possession in exchange for rental payments.

Loan Origination Fee

A fee charged by a lender for processing a new loan application.

Discount Points

Fees paid to lower the interest rate on a mortgage.

Appraisal Fee

A fee for the professional assessment of a property's value.

Credit Report Fee

A fee for obtaining a credit report to assess a borrower's creditworthiness.

Recording Fees

Fees charged for recording the property transaction with the local government.

Mortgage Insurance Premium

A fee paid by the borrower to insure the lender against default.

Attorney Fees

Fees paid for legal services in the real estate transaction.

Lender's Inspection Fee

A fee charged by the lender for inspecting the property.

Real Estate Brokerage Commission

A fee paid to a real estate broker for their services in facilitating a property sale.

Deed Preparation Fee

A fee for the preparation of the deed transferring property ownership.

Pro-rated Taxes

Taxes that are calculated and charged for the portion of the year that the seller owned the property.

Lessor

The landlord in a lease agreement.

Lessee

The tenant in a lease agreement.

Estate for Years

A lease with a specified starting and ending date for the tenancy, which can be shorter than a year.

Estate from Period-to-Period

A lease with a specified starting date but no specified ending date, often using automatic renewal clauses.

Automatic Renewal Clause

A clause requiring the tenant to state their intent not to renew the lease by a specified time prior to expiration.

Estate at Will

A type of tenancy where the tenant and landlord agree to terms allowing the tenant to stay without a written agreement, ending with sufficient notice.

Sufficient Notice

Typically defined as one rental period, allowing either party to end an estate at will tenancy.

Estate at Sufferance

A tenancy where the tenant does not have permission to possess the property and does not pay rent.

Gross Lease

A lease where the tenant pays monthly rent, and the landlord pays all expenses associated with the property.

Net Lease

A lease where the tenant pays monthly rent and also agrees to pay operating expenses associated with the property.

Net-Net Lease

A lease where the tenant pays monthly rent and also agrees to pay operating expenses and either property insurance or property taxes.

Net-Net-Net Lease

A lease where the tenant pays monthly rent and also pays operating expenses, property insurance premiums, and property taxes.

Fixed-Rent Lease

A lease where the amount of rent is fixed for the duration of the lease.

Step Up Lease

A lease where the amount of rent is fixed for the initial part of the term and then adjusts upward by a predetermined amount.

Reappraisal Lease

A lease where the increase in rental payments is based on the increase in value of the property, as determined by an appraisal.

Percentage Lease

A lease with a base rent amount plus a percentage of sales or income over a specified threshold.