Executed Contracts in Real Estate

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There is a wide variety of real estate sales contracts, and it is essential to know what makes up each one. Executed contracts may seem challenging to understand in all the legal terms, but it’s pretty simple, and we’re here to help break that down for you. Throughout the article, you will understand what elements go into an executed contract and the difference between an executory contract. 

What is an Executed Contract?

When contracting parties have signed a contract and both parties have done all they promised to do, it is called an executed contract or executed agreement.

Before performing services or selling a product, most commercial transactions and business engagements will result in a formal agreement between the parties. As a result, they’ll work out contract terms that are acceptable to both parties. Parties sign the contract when they are ready to give legal effect to their agreement and begin effectively performing their legal duties. When all parties sign the contract, and complete the actions associated with it, it is executed.

Its worth noting, most real estate transactions require execution. A sales contract, for example, is executed when the seller has transferred title to the buyer and the buyer has paid the seller. Execution must occur to finalize the agreement; without execution, a transaction is incomplete and therefore doesn’t exist.

Executed contracts tie back into the concept of the validity of a contract. For a real estate transaction to be valid, all parties must sign a legally binding contract and exchange something of worth. A proper real estate contract has four basic components. You can read all about it further in our article The Basic Elements of a Valid Real Estate Contract

What is an Executed Contract Example?

Let’s look at this example. Say you are interested in buying your friend’s house. You both agree to sell it for a purchase price of $330,000. You create a legally binding contract that all the parties will sign to formalize the agreement. When the written agreement has been signed and solidified, and you get the keys, it becomes an executed contract.

Another example would be a lease agreement. Say you chose not to buy your friend’s house and decide to rent from them instead. You both agree on a lease term of one year and draw up a lease contract with your move-in date as the effective date. When the parties to the contract sign the lease agreement, you live their for one year, and the transaction is completely its executed.

What is an Execution Date?

The execution date or date executed is the day the contract is signed. The effective date is the day the contract goes into effect. Both dates can both be found in a contract. In many instances, the execution and effective dates are the same; however, that is not the case in some circumstances.

For example, you might sign a lease today to move into an apartment, but you won’t be able to move in until the following week. The execution date might be today, but the effective date will be when you move into your brand new home.

When you purchase a house, however, many times, the execution date and effective date are the same. “Passing the papers” or closing occurs when the transaction is completed. More often than not, if you purchase a house and execute the contract that day, you’ll receive the keys to the home, and the contract is effective in that instance.

What is an Executory Contract?

An executory contract is a contract in which the terms are set but will be fully completed later. Examples are real estate deeds, development contracts, car leases, rental leases, and other executory contracts. Both parties involved in an executory contract have responsibilities to fulfill until the contract is fully executed. An executory contract must be written and signed by all parties involved in the transaction.

A great example of an executory contract would be any normal apartment lease. If you enter into a lease, you are promising to pay rent for an amount of time. The contract is executory until the term expires.

What is the Difference Between Executed and Executory?

You may have noticed that the terms: executed contract and executory contract sound similar, but don’t get confused; they are two different things. You have an executed contract when you have a fully executed agreement. The term executed refers to the signing and completion of the contract. The term executory refers to the potential for completion of the contract or a contract in progress.

People often make the mistake of thinking ALL sales contracts are executed when everybody signs it and has come to an agreement, but that’s not always the case. Again, it comes down to when the contract’s effective date is, what type of contract it is, and more.

Contract Execution Best Practices

Here are some pointers and best practices to remember while signing or executing a contract:

  • Verify that the parties signing the agreement are authorized to do so.
  • Check to see if the contract’s effective date and execution date are the same.
  • Make sure you fully comprehend the contract’s scope and meaning by reading it from beginning to end.
  • Contact a law firm if you have any questions, or something does not seem right.
  • Make sure that the contract’s terms reflect your understanding of the agreement.
  • When both parties sign the contract, be sure you know what laws apply to it.

By ensuring that all of these align with the others, you will have a fully executed contract. Be mindful of the legal obligations involved and any legal forms you may need.

What to Know for the Exam

For your real estate exam, you will need to know about executed contracts, executory contracts, and their differences. Remember, when the contracting parties have fully signed the contract and completed the contractual obligation, it is referred to as an executed contract. An executory contract is one in which the terms are set to be fully completed later. Keep in mind these contract terms, ensure they are understood, and you should be set to come exam day!

Author:
Zackary Smigel is a real estate professional with a love for teaching, based out of Pittsburgh, PA. He's had the opportunity to work with some of the brightest minds in real estate and has spent years learning how to become a successful agent.

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