"What Is A Real Estate Contract?"
What is a Real Estate Contract?
A real estate purchase contract—also known as a contract to purchase real estate or a residential purchase agreement—is a binding, bilateral agreement between two or more parties. They must each have legal capacity to make the purchase, exchange, or other conveyance of the real property in question.The contract is based on a legal "consideration." Consideration is whatever is being exchanged for the real estate and most commonly it is money. Consideration could also be other property or a promise to perform, such as a promise to pay.
In addition to the agreed-upon consideration, a real estate purchase contract should also include:
- Identification of the parties
- A description of the property
- The essential details, rights, and obligations of the contract
- Any contingencies or conditions that must be met before the sale can go through
- The condition of property
- What fixtures and appliances are included and what is not included
- The amount of the deposit- Itemized closing costs and who is responsible for paying for each of them
- The prospective date of closing
- The signatures of each party
- Terms of possession
4 Types Of Real Estate Contracts
If you’re new to the real estate investing trade, you may be wondering what the different types of real estate contracts are? What role do these real estate legal contracts play? And, perhaps even more importantly, what benefits do they provide investors?
There are essentially four types of real estate contracts: purchase agreement contract, contract for deed, lease agreements and a power of attorney contract. They each have their different uses and stipulations.
1. Purchase Agreement
This is the most common type of real estate contract. As the name suggests, this is a contract that lays out an agreement between the buyer and seller of a specific property. This type of real estate contract includes all the typical elements of a contract: purchase price, signatures, party identification, etc. In addition, it also specifies the closing date for the transaction. Now, as one might expect, there are different types of purchase agreements that you can utilize as a real estate investor. Which type you end up using, however, will depend on a variety of factors. Here’s a quick look at the different types of purchase agreements at your disposal:
State/Association Purchase Agreement: Many states, and the realtor associations that serve local markets, have standardized purchase agreements they use to guide their transactions.
General Purchase Agreement: This is a stripped-down, usually much shorter, version of the state/association purchase agreement. A great option when working directly with sellers, and not buying a property through a real estate agent. If you do prefer to use a general purchase agreement with an attorney or real estate agent, be sure to point why you want to use the agreement, and emphasize how it can save time for all parties.
Property-Specific Purchase Agreement: If you’re buying a property outside the traditional single-family paradigm, such as a mobile home or piece of vacant land, you may need to use property-specific purchase agreements (this will depend on the market). Though there is quite a bit of similarity with these types of purchase agreements, these types of contracts do have certain clauses which pertain to the type of property being transacted.
2. Real Estate Assignment Contract
A real estate assignment contract is used, primarily, in a wholesaling investment strategy, in which you find a distressed property, secure it under contract and “assign” that contract over to second buyer (usually at a small profit to you).
The “meat” of real estate assignment contracts is very similar to a regular purchase agreement. Often times, an assignment contract simply has the addition of a few, extra words. As an example, you might add the following phrase to a purchase agreement: “John Smith, and/or assigns.” (When people refer to “wholesale real estate contracts,” this is the document they mean.)
The “assigns” part gives you the opportunity to lock up a property with a purchase contract and pass along that property to someone else if you so desire. Though the extra words may not take up much ink, they do provide a tremendous amount of flexibility to you as an investor.
3. Lease Agreements
Even if you’ve never purchased property before, chances are you’re familiar with lease agreements, or have signed one in the past. As one might surmise, these real estate contracts outline an agreement between the lessor (the property owner or landlord) and a lessee (the tenant).
Agreements of this kind specify important considerations such as the rent amount, security deposit, how utilities are handled. It should go without saying that lease agreements that are intended to avoid future issues between lessor and lessee, and protect both parties in the event that something unforeseen happens.
4. Power of Attorney
Though not used exclusively in a real estate setting, power of attorney documents are a form of real estate contract, and can be exceedingly useful in certain situations.This is because if you’re not able to sign a real estate contract, whether because you’re out of the country or because of some mental incapacity, this document gives another party the power to sign on your behalf.
This type of real estate contract can be quite helpful if you’re the owner of rental properties or you are caring for an elderly parent, or relative, who may encounter a situation when they can’t sign their own real estate contract.
Bottom Line
Prior to signing a contract, always consider:
- Whether you have the money and mortgage to complete the transaction.
- How long of a contingency period you’ll need. “Will you have enough time to inspect the property?” “Will you have enough time to get it appraised and receive a preliminary loan approval?”
- Your commitment to buying the property. It can be stressful to meet relevant deadlines. “Can you get loan financing and manage the process as a whole?”
- Your requirement to act in good faith. “Changing your mind after signing the contract could result in the loss of your earnest money,”