The Basic Elements of a Valid Real Estate Contract

Valid real estate contract image

Contracts are required in every real estate transaction, whether commercial or residential. Certain elements must make up each piece of a valid contract, and if they are not present, it could be voided by a court of law. There are four different requirements to a valid contract, each of which we will cover to help you understand what makes real estate contracts valid.

What Makes a Contract Valid in Real Estate?

To make a real estate transaction valid in real estate all parties must sign a legally binding contract, and something of value must be exchanged. There are four main elements of a valid real estate contract:

  1. The party must be the legal age of 18 or older and deemed legally competent.
  2. The contract must be legal or hold a legal purpose.
  3. A clear and specific consideration must be included in the agreement.
  4. The contract must hold mutual consent or be agreed upon by both parties.

Parties Involved

To enter into a contract, all of the parties must be legally competent. At the time of signing the contract, you must be of legal age and mentally capable. No party under 18 years old can be involved in a legal contract. Included in this rule are other parties deemed competent, including: a person who has the authority to sign contracts on behalf of a company, a person who has a justifiable power of attorney, or an emancipated minor.

Legal Purpose

Parties cannot carry out a contract to do an illegal act. For example, there can’t be a contract to kill, steal, or do anything illegal. The contract’s purpose must comply with the law. An agreement between two parties that involves one party defrauding the other would be void. As for real estate, contracts must be presented in written form and hold legal value.

Consideration

Anything of legal worth offered and exchanged in the agreement is referred to as consideration. Consideration is a term that is commonly linked to money, but it can refer to anything of value. The goal of requiring consideration is to establish that the contracting parties have reached an agreement. As long as it is present, it makes no difference what the size, number, nature, or amount of what is being exchanged. It’s important to note; consideration must be specified and written in the contract to add to its validity. A contract cannot be legally enforced if there is no consideration. All parties must offer some form of consideration for there to be legal acceptance.

Mutual Consent

Mutual consent requires that the contracting parties have willingly and knowingly consented to the contract’s conditions. Any party involved in the contract cannot be subject to fraud, misrepresentation, error, or undue duress. The character of the offer must be explicit, the property must be accurately defined to identify the subject matter, and the price must be exact. Ultimately, both parties must agree to all terms mutually  in an official offer and acceptance.

Additional Contract Terms and Elements

Remember, like almost all things in the United States, things differ from state to state. While most elements of a valid real estate contract are the same from state to state, there are some differences depending on the state and circumstance. Remember, a transaction in real estate is based on the principles of common law; meaning, ultimately it should apply to both federal and state mandated laws.

A basic real estate contract starts out as an offer, which the buyer accepts. The contract is not considered binding until the seller accepts the offer. An acceptance indicates that the seller has agreed to the offer’s specified terms. The contract is not binding if the seller responds that they will accept the offer but with conditions. After that, it will be considered a counteroffer. For that to work, obviously, both parties must agree.

In most cases, the purchase price of the subject property must be specified in the agreement. For a contract to be enforceable, it must include the agreed-upon sales price or another reasonably ascertainable figure, such as an appraisal that will be performed at a later date. The contract must also have mutual assent or “meeting of the minds,” as it is sometimes referred to. This occurs when all parties in the agreement comprehend and accept all of the contract’s fundamental details, obligations, and rights.

Finally, the subject property must be identified in the contract. The agreement must be in writing and include at least the property’s physical address to clearly identify the subject property. The legal description of the subject property is desired; however, it is not needed. It’s a good idea to print the date on which each participant signs the real estate contract, as well as an expiration date.

At What Point is a Real Estate Contract Valid?

This is a bit of a tough question to answer, and you’ll see soon why.

A real estate contract is valid when all requirements are met and the documents are signed. The timing or point of validity depends on the circumstance as well as the contract. There are various types of contracts in real estate, such as unilateral, bilateral, and implied. The different types of contracts usually determine at what point the real estate contract becomes valid. Generally speaking though, in most cases, a real estate contract becomes legally binding the moment it’s signed by the buyer and seller.

Contract Contingencies

Of course, we have to discuss the not the so simple cases, the instances that involve contingencies. “A contingent property means an offer for the property has been accepted but there is a condition or “contingency” that is written into the contract and it must be met before the sale can go through. In order for the contract to be legally binding, the contingency must be met.”

In these cases, the point the real estate contract is valid is different than a regular contract. All conditions must be met before the real estate contract is valid. So as you can see, the point a real estate contract is valid depends on the circumstance, and type of contract.

Valid Real Estate Contract Examples

Let’s look at a valid real estate contract example. Let’s say you are looking to buy a home, and someone you know is looking to sell their perfect property. After asking them a few questions, you have come to some agreement that aligns with your budget. You go to a law firm together, being that you are competent parties, and draw up a written agreement for the sale of the property. The contract outlines the purchase price of the property and features an expiration date. It holds all the valuable information for your new home. The seller accepts, each party signs the mutual agreement, and the contract is now considered valid.

Its as simple as that. One party must make an offer, and another party or parties must accept the offer. When this occurs the real estate contract becomes legally binding.

What to Know for the Exam

Come exam day; you need to be familiar with the four elements that make a valid contract in real estate. You also need to understand at which point a contract becomes valid, which may depend on the situation and circumstance. Make sure you are familiar with the many different types of real estate contracts, and don’t be afraid to reach out if you ever have any questions!

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.

Leave a Reply

Your email address will not be published. Required fields are marked *