Real Estate Contracts

Assignment

The transfer of a party's rights and obligations under a contract to another person. The original party may remain secondarily liable unless released.

A buyer assigns their purchase contract to another buyer who then closes on the property.

Bilateral Contract

A contract in which both parties make promises and are obligated to perform. Most real estate sales contracts are bilateral.

In a typical purchase agreement, the seller promises to deliver the deed and the buyer promises to pay the purchase price.

Breach of Contract

Failure to perform any term of a valid contract without a legal excuse. The non-breaching party may seek damages or other remedies.

If a seller refuses to close after accepting a valid offer, the seller has breached the contract.

Commingling

The illegal mixing of a client's or customer's funds with a broker's personal or business funds.

A broker who deposits earnest money into the company operating account instead of an escrow account is guilty of commingling.

Consideration

Something of legal value given in exchange for a promise. It can be money, property, services, or a promise to do or not do something.

The buyer's earnest money and promise to pay the full price, and the seller's promise to convey title, serve as consideration.

Contingency

A condition that must be met before a contract becomes fully binding. Common contingencies include financing, inspection, and appraisal.

The purchase contract is contingent on the buyer obtaining a mortgage loan within 30 days.

Contract

A voluntary, legally enforceable agreement between competent parties supported by consideration to do or not do a specific thing.

A signed real estate purchase agreement is a contract that binds both buyer and seller.

Conversion

The illegal use of a client's funds for the broker's own purposes. More serious than mere commingling.

A broker who uses earnest money to pay personal bills has committed conversion.

Counteroffer

A response to an offer that changes one or more of its terms. A counteroffer rejects the original offer and creates a new offer.

The seller accepts the price but changes the closing date; this is a counteroffer that the buyer may accept or reject.

Earnest Money

A deposit made by a buyer to show good faith when making an offer. It is usually held in escrow and applied to the purchase price at closing.

The buyer submits a $5,000 earnest money check with the offer to purchase.

Equitable Title

The interest a buyer holds in property under a land contract or after a purchase contract is signed but before closing. The buyer has rights but not legal title yet.

Once the purchase contract is signed, the buyer has equitable title and the seller holds legal title until closing.

Executed Contract

A contract in which all parties have fully performed their obligations. Nothing remains to be done.

After closing, when the deed has been delivered and the purchase price paid, the sales contract is executed.

Executory Contract

A contract in which one or both parties still have duties to perform. Most real estate contracts are executory until closing.

A signed purchase agreement is an executory contract until the closing takes place.

Express Contract

A contract in which the parties state the terms either orally or in writing. Most real estate contracts are express and written.

A written listing agreement is an express contract between the seller and the broker.

Implied Contract

A contract formed by the actions or conduct of the parties rather than by written or spoken words.

A passenger who boards a taxi implies a contract to pay the fare even though nothing is said.

Land Contract

An installment sales contract (contract for deed) in which the seller retains legal title while the buyer makes payments and receives equitable title and possession.

A buyer with limited credit purchases a home under a land contract and makes monthly payments directly to the seller.

Liquidated Damages

An amount of money agreed to in advance that the parties will accept as full compensation if one party breaches the contract.

The contract states that the seller may keep the earnest money as liquidated damages if the buyer defaults.

Novation

The substitution of a new contract or a new party for an existing one, releasing the original party from liability.

When a buyer assumes the seller's existing mortgage and the lender agrees to release the seller, a novation occurs.

Offer and Acceptance

The process by which one party makes an offer and the other party accepts it, forming a mutual agreement (meeting of the minds).

The buyer makes a written offer; the seller signs it without changes, creating a binding contract.

Option

A unilateral contract in which a property owner gives a prospective buyer the exclusive right to purchase the property at a fixed price within a stated period.

A developer pays $10,000 for a six-month option to buy a parcel of land at a set price.

Specific Performance

A legal remedy that forces a party to complete the contract as agreed rather than pay damages. Courts often grant this in real estate cases because each property is unique.

If a seller refuses to close, the buyer may sue for specific performance to force the transfer of the property.

Statute of Frauds

State law requiring that certain contracts, including most real estate contracts, be in writing to be enforceable.

An oral agreement to sell a house is generally unenforceable under the statute of frauds.

Time Is of the Essence

A contract clause that makes performance within the stated time limits a material term. Failure to perform on time is a breach.

Because the contract states 'time is of the essence,' missing the closing date by even one day can be grounds for termination.

Unenforceable Contract

A contract that appears valid but cannot be enforced in court, often because it violates the statute of frauds or the statute of limitations has expired.

An oral contract for the sale of real estate is usually unenforceable.

Unilateral Contract

A contract in which only one party makes a promise and is obligated to perform. The other party is not obligated until they perform.

An option contract is unilateral: the optionor is bound if the optionee decides to exercise the option.

Valid Contract

A contract that meets all legal requirements (competent parties, mutual consent, lawful object, consideration) and is fully enforceable.

A properly signed purchase agreement with all essential terms is a valid contract.

Void Contract

A contract that has no legal force or effect from the beginning because it lacks an essential element or is illegal.

A contract to sell property that the seller does not own is void.

Voidable Contract

A contract that is valid and enforceable on its face but may be rejected by one of the parties because of a legal disability, fraud, duress, or misrepresentation.

A contract signed by a minor is voidable at the minor's option.