Real estate contract
Encyclopedia
A real estate contract is a contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

 for the purchase/sale, exchange, or other conveyance of real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...

 between parties. Real estate called leasehold estate
Leasehold estate
A leasehold estate is an ownership of a temporary right to land or property in which a lessee or a tenant holds rights of real property by some form of title from a lessor or landlord....

 is actually a rental of real property such as an apartment, and leases (rental contracts) cover such rentals since they typically do not result in recordable deed
Deed
A deed is any legal instrument in writing which passes, or affirms or confirms something which passes, an interest, right, or property and that is signed, attested, delivered, and in some jurisdictions sealed...

s. Freehold ("More permanent") conveyances of real estate are covered by real estate contracts, including conveying fee simple
Fee simple
In English law, a fee simple is an estate in land, a form of freehold ownership. It is the most common way that real estate is owned in common law countries, and is ordinarily the most complete ownership interest that can be had in real property short of allodial title, which is often reserved...

 title
Title (property)
Title is a legal term for a bundle of rights in a piece of property in which a party may own either a legal interest or an equitable interest. The rights in the bundle may be separated and held by different parties. It may also refer to a formal document that serves as evidence of ownership...

, life estate
Life estate
A life estate is a concept used in common law and statutory law to designate the ownership of land for the duration of a person's life. In legal terms it is an estate in real property that ends at death when there is a "reversion" to the original owner...

s, remainder estates, and freehold easement
Easement
An easement is a certain right to use the real property of another without possessing it.Easements are helpful for providing pathways across two or more pieces of property or allowing an individual to fish in a privately owned pond...

s. Real estate contracts are typically bilateral contracts (i. e., agreed to by two parties) and should have the legal requirements specified by contract law in general and should also be in writing to be enforceable.

In writing

In many countries, real estate contracts must be in writing to be enforceable. In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 the Statute of Frauds
Statute of frauds
The statute of frauds refers to the requirement that certain kinds of contracts be memorialized in a signed writing with sufficient content to evidence the contract....

 require real estate contracts to be in writing to be enforceable. In South Africa
South Africa
The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...

, the Alienation of Land Act specifies that any agreement of sale of immovable property must be in writing.

Additionally, a real estate contract must:
  • Identify the parties: The full name of the parties must be on the contract. In a sales contract, the parties are the seller(s) and buyer(s) of the real estate, who are often called the principals to distinguish them from real estate agents, who are effectively their intermediaries and representatives in negotiation
    Negotiation
    Negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual or collective advantage, to craft outcomes to satisfy...

     of the price. If there are any real estate agents brokering the sale, they are typically listed also as the real estate brokers/agents who would earn the commission from the sale.
  • Identify the real estate (property): At least the address
    Address (geography)
    An address is a collection of information, presented in a mostly fixed format, used for describing the location of a building, apartment, or other structure or a plot of land, generally using political boundaries and street names as references, along with other identifiers such as house or...

    , but preferably the legal description must be on the contract.
  • Identify the purchase price: The amount of the sales price or a reasonably ascertainable figure (an appraisal to be completed at a future date) must be on the contract.
  • Include signatures: A real estate contract must be entered into voluntarily (not by force), and must be signed by the parties, to be enforceable.
  • Have a legal purpose: The contract is void if it calls for illegal action.
  • Involve Competent
    Competence (law)
    In American law, competence concerns the mental capacity of an individual to participate in legal proceedings. Defendants that do not possess sufficient "competence" are usually excluded from criminal prosecution, while witnesses found not to possess requisite competence cannot testify...

     parties:
    Mentally impaired, drugged persons, etc. cannot enter into a contract. Contracts in which at least one of the parties is a minor are voidable by the minor.
  • Reflect a meeting of the minds: Each side must be clear and agree as to the essential details, rights, and obligations of the contract.
  • Include Consideration
    Consideration
    Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from...

    :
    Consideration is something of value bargained for in exchange of the real estate. Money is the most common form of consideration, but other consideration of value, such as other property in exchange, or a promise to perform (i.e. a promise to pay) is also satisfactory.


Notarization by a notary public
Notary public
A notary public in the common law world is a public officer constituted by law to serve the public in non-contentious matters usually concerned with estates, deeds, powers-of-attorney, and foreign and international business...

 is normally not required for a real estate contract, but many recording offices require that a seller's or conveyor's signature on a deed
Deed
A deed is any legal instrument in writing which passes, or affirms or confirms something which passes, an interest, right, or property and that is signed, attested, delivered, and in some jurisdictions sealed...

 be notarized to record the deed. The real estate contract is typically not recorded with the government, although statements or declarations of the price paid are commonly required to be submitted to the recorder's office.

Sometimes real estate contracts will provide for a lawyer
Lawyer
A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...

 review period of several days after the signing by the parties to check the provisions of the contract and counterpropose any that are unsuitable.

If there are any real estate brokers/agents brokering the sale, the buyer's agent will often fill in the blanks on a standard contract form for the buyer(s) and seller(s) to sign. The broker commonly gets such contract forms from a real estate association he/she belongs to. When both buyer and seller have agreed to the contract by signing it, the broker provides copies of the signed contract to the buyer and seller.

Offer and acceptance

As may be the case with other contracts, real estate contracts may be formed by one party making an offer
Offer
Offer may refer to:* Settlement offer, an offer to end a civil lawsuit out of court* Offers, a 2005 Dutch television film* Office of Electricity Regulation , a forerunner of the current Office of Gas and Electricity Markets in Great Britain...

 and another party accept
Acceptance
Acceptance is a person's agreement to experience a situation, to follow a process or condition without attempting to change it, protest, or exit....

ing the offer. To be enforceable, the offers and acceptances must be in writing (Statute of Frauds
Statute of frauds
The statute of frauds refers to the requirement that certain kinds of contracts be memorialized in a signed writing with sufficient content to evidence the contract....

, Common Law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...

)and signed by the parties agreeing to the contract. Often, the party making the offer prepares a written real estate contract, signs it, and transmits it to the other party who would accept the offer by signing the contract. As with all other types of legal offers, the other party may accept the offer, reject it - in which case the offer is terminated, make a counteroffer - in which case the original offer is terminated, or not respond to the offer - in which case the offer terminates by the expiration date
Expiration (options)
For an option contract, expiration is the date on which the contract expires. The option holder must elect to exercise the option or allow it to expire worthless.Typically, option contracts expire according to a pre-determined calendar. For instance, for U.S...

 in it. Before the offer (or counteroffer) is accepted, the offering (or countering) party can withdraw it. A counteroffer may be countered with yet another offer, and a counteroffering process may go on indefinitely between the parties.

To be enforceable, a real estate contract must possess original signatures by the parties and any alterations to the contract must be initialed by all the parties involved. If the original offer is marked up and initialed by the party receiving it, then signed, this is not an offer and acceptance but a counter-offer.

Deed specified

A real estate contract typically does not convey
Conveyancing
In law, conveyancing is the transfer of legal title of property from one person to another, or the granting of an encumbrance such as a mortgage or a lien....

 or transfer ownership
Ownership
Ownership is the state or fact of exclusive rights and control over property, which may be an object, land/real estate or intellectual property. Ownership involves multiple rights, collectively referred to as title, which may be separated and held by different parties. The concept of ownership has...

 of real estate by itself. A different document called a deed
Deed
A deed is any legal instrument in writing which passes, or affirms or confirms something which passes, an interest, right, or property and that is signed, attested, delivered, and in some jurisdictions sealed...

 is used to convey real estate. In a real estate contract, the type of deed to be used to convey the real estate may be specified, such as a warranty deed
Warranty deed
A general warranty deed is a type of deed where the grantor guarantees that he or she holds clear title to a piece of real estate and has a right to sell it to the grantee . The guarantee is not limited to the time the grantor owned the property—it extends back to the property's origins. A General...

 or a quitclaim deed
Quitclaim deed
A quitclaim deed is a legal instrument by which the owner of a piece of real property, called the grantor, transfers his interest to a recipient, called the grantee. The owner/grantor terminates his right and claim to the property, thereby allowing claim to transfer to the...

. If a deed type is not specifically mentioned, "marketable title" may be specified, implying a warranty deed should be provided. Lenders will insist on a warranty deed. Any lien
Lien
In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...

s or other encumbrance
Encumbrance
Encumbrance is legal technical terminology for anything that affects or limits the title of a property, such as mortgages, leases, easements, liens, or restrictions. Also, those considered as potentially making the title defeasible are encumbrances...

s on the title
Title (property)
Title is a legal term for a bundle of rights in a piece of property in which a party may own either a legal interest or an equitable interest. The rights in the bundle may be separated and held by different parties. It may also refer to a formal document that serves as evidence of ownership...

 to the real estate should be mentioned up front in the real estate contract, so the presence of these deficiencies would not be a reason for voiding
Voidable
In law, a transaction or action which is voidable is valid, but may be annulled by one of the parties to the transaction. Voidable is usually used in distinction to void ab initio and unenforceable....

 the contract at or before the closing
Closing (real estate)
Closing is the final step in executing a real estate transaction.The closing date is set during the negotiation phase, and is usually several weeks after the offer is formally accepted. On the closing date, the parties consummate the purchase contract, and ownership of the property is transferred...

. If the liens are not cleared before by the time of the closing, then the deed should specifically have an exception(s) listed for the lien(s) not cleared.

The buyer(s) signing the real estate contract are liable (legally responsible) for providing the promised consideration for the real estate, which is typically money in the amount of the purchase price. However, the details about the type of ownership may not be specified in the contract. Sometimes, signing buyer(s) may direct a lawyer preparing the deed separately what type of ownership to list on the deed and may decide to add a joint owner(s), such as a spouse, to the deed. For example, types of joint ownership
Concurrent estate
A concurrent estate or co-tenancy is a concept in property law which describes the various ways in which property is owned by more than one person at a time. If more than one person own the same property, they are referred to as co-owners, co-tenants or joint tenants...

 (title) may include tenancy in common, joint tenancy with right of survivorship, or joint tenancy by the entireties. Another possibility is ownership in trust instead of direct ownership.

Contingencies

Contingencies are conditions which must be met if a contract is to be performed.

Contingencies that suspend the contract until certain events occur are known as "suspensive conditions". Contingencies that cancel the contract if certain event occur are known as "resolutive conditions".

Most contracts of sale contain contingencies of some kind or another, because few people can afford to enter into a real estate purchase without them. But it is possible for a real estate contract not to have any contingencies.

Some types of contingencies which can appear in a real estate contract include:
  • Mortgage
    Mortgage loan
    A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...

     contingency - Performance of the contract (purchase of the real estate) is contingent upon or subject to the buyer getting a mortgage loan
    Loan
    A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

     for the purchase. Usually such a contingency calls for a buyer to apply for a loan within a certain period of time after the contract is signed. Since most people who buy a house require financing to complete their purchase, mortgage contingencies are one of the most common type of contingencies in real property
    Real property
    In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...

     contracts. If the financing is not secured, the buyer may unilaterally cancel the contract by stating that his or her condition has not or will not be satisfied or allow the contract to expire by declining to waive the condition within the specified time period.
  • Inspection contingency - Another buyer's condition. Purchase of the real estate is contingent upon a satisfactory inspection of the real property revealing no significant defects. Contingencies could also be made on the satisfactory repair of a certain item associated with the real estate.
  • another sale contingency - Purchase or sale of the real estate is contingent on a successful sale or purchase of another piece of real estate. The successful sale of another house may be needed to finance the purchase of a new one.
  • appraisal contingency - Purchase of the real estate is contingent upon the contract price being at or below a fair market value
    Fair market value
    Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or...

     determined by an appraisal
    Real estate appraisal
    Real estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property's Market Value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently...

    . Lenders will often not lend more than a certain percentage (fraction) of the appraised value, so such a contingency may be useful for a buyer.
  • 72-hour kick out contingency
    72-hour clause
    A 72-hour clause, typically inserted in real estate sale contracts, is also known as an escape clause, release clause, kick-out clause, hedge clause or right of first refusal clause....

     - Seller contingency, in which the seller accepts a contract from a buyer with a contingency (typically a home sale or rent contingency where the buyer conditions the sale on their ability to find a buyer or renter for their current property prior to settlement). The seller retains the right to sell the property to another party if he so chooses after giving the buyer 72 hours notice to remove their contingency. The buyer will then either remove their contingency and provide proof that they can consummate the sale or will release the seller from their contract and allow the seller to move forward with the new contract.

Date of closing and possession

A typical real estate contract specifies a date by which the closing must occur. The closing is the event in which the money (or other consideration) for the real estate is paid for and title
Title (property)
Title is a legal term for a bundle of rights in a piece of property in which a party may own either a legal interest or an equitable interest. The rights in the bundle may be separated and held by different parties. It may also refer to a formal document that serves as evidence of ownership...

 (ownership) of the real estate is conveyed from the seller(s) to the buyer(s). The conveyance is done by the seller(s) signing a deed for buyer(s) or their attorneys or other agents to record the transfer of ownership. Often other paperwork is necessary at the closing.

The date of the closing is normally also the date when possession of the real estate is transferred from the seller(s) to the buyer(s). However, the real estate contract can specify a different date when possession changes hands. Transfer of possession of a house, condominium, or building is usually accomplished by handing over the key(s) to it. The contract may have provisions in case the seller(s) hold over possession beyond the agreed date. [WHAT legal proviisions can be made for the protection of buyer in 'escrow?'--DB]

The contract can also specify which party pays for what closing cost(s). If the contract does not specify, then there are certain customary defaults depending on law, common law (judicial precedents), location, and other orders or agreements, regarding who pays for which closing costs.

Condition of property

A real estate contract may specify in what condition of the property should be when conveying the title or transferring possession. For example, the contract may say that the property is sold as is, especially if demolition is intended. Alternatively there may be a representation or a warranty (guarantee) regarding the condition of the house, building, or some part of it such as affixed appliances, HVAC
HVAC
HVAC refers to technology of indoor or automotive environmental comfort. HVAC system design is a major subdiscipline of mechanical engineering, based on the principles of thermodynamics, fluid mechanics, and heat transfer...

 system, etc. Sometimes a separate disclosure form specified by a government entity is also used. The contract could also specify any personal property
Personal property
Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. In the common law systems personal property may also be called chattels or personalty. In the civil law systems personal property is often called movable property or movables - any...

 (non-real property) items which are to be included with the deal, such as washer and dryer which are normally detachable from the house. Utility meters, electrical wiring
Electrical wiring
Electrical wiring in general refers to insulated conductors used to carry electricity, and associated devices. This article describes general aspects of electrical wiring as used to provide power in buildings and structures, commonly referred to as building wiring. This article is intended to...

 systems, fuse
Fuse (electrical)
In electronics and electrical engineering, a fuse is a type of low resistance resistor that acts as a sacrificial device to provide overcurrent protection, of either the load or source circuit...

 or circuit breaker
Circuit breaker
A circuit breaker is an automatically operated electrical switch designed to protect an electrical circuit from damage caused by overload or short circuit. Its basic function is to detect a fault condition and, by interrupting continuity, to immediately discontinue electrical flow...

 boxes, plumbing
Plumbing
Plumbing is the system of pipes and drains installed in a building for the distribution of potable drinking water and the removal of waterborne wastes, and the skilled trade of working with pipes, tubing and plumbing fixtures in such systems. A plumber is someone who installs or repairs piping...

, furnace
Furnace
A furnace is a device used for heating. The name derives from Latin fornax, oven.In American English and Canadian English, the term furnace on its own is generally used to describe household heating systems based on a central furnace , and sometimes as a synonym for kiln, a device used in the...

s, water heaters, sink
Sink
A sink is a bowl-shaped plumbing fixture used for washing hands, for dishwashing or other purposes. Sinks generally have taps that supply hot and cold water and may include a spray feature to be used for faster rinsing...

s, toilet
Toilet
A toilet is a sanitation fixture used primarily for the disposal of human excrement, often found in a small room referred to as a toilet/bathroom/lavatory...

s, bathtub
Bathtub
A bath , bathtub , or tub is a large container for holding water in which a person may bathe . Most modern bathtubs are made of acrylic or fiberglass, but alternatives are available in enamel over steel or cast iron, and occasionally waterproof finished wood...

s, and most central air conditioning systems are normally considered to be attached to a house or building and would normally be included with the real property by default.

Riders

Riders (or addenda) are special attachments (separate sheets) that become part of the contract in certain situations.

Earnest money deposit

Although, it is not absolutely required for a valid real estate offer or a contract, an earnest money deposit from the buyer(s) customarily accompanies an offer to buy real estate. The amount, a small fraction of the total price, is listed in the contract, with the remainder of the cost to be paid at the closing.

Financial qualifications of buyer(s)

The better the financial qualification of the buyer(s) is, the more likely the closing will be successfully completed, which is typically the goal of the seller. Any documentation demonstrating financial qualifications of the buyer(s), such as mortgage loan pre-approval or pre-qualification, may accompany a real estate offer to buy along with an earnest money check. When there are competing offers or when a lower offer is presented, the seller may be more likely to accept an offer from a buyer demonstrating evidence of being well qualified than from a buyer without such evidence.

See also

  • Real estate transaction
    Real estate transaction
    A real estate transaction is the process whereby rights in a unit of property is transferred between two or more parties, e.g. in case of conveyance one party being the seller and the other being the buyer...

  • Land contract
    Land contract
    A 'land contract' is a contract between a seller and buyer of real property in which the seller provides financing to buy the property for an agreed-upon purchase price and the buyer repays the loan in installments...

    - a special form of real estate contract where the seller provides financing for the buyer to repay in installments
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