In real estate, contracts are a must. But what can sometimes be surprising is that despite the fact that it is a common requirement for deals and investments, only a little of it is understood. Nevertheless, it doesn’t matter if you’re beginner or an expert in real estate investing. You have to be equipped with contracts when working on your deals.
As real estate contracts are based on common law principles, it is naturally important that real estate investors understand the general flow of contract law: offer, counteroffer, and then acceptance. Although there are some differences in the contract law of each state, generally all contracts come down to a center point: mutual agreement between the parties.
Basically, the contract is initially drafted and serves as the “offer.” If the seller wants to add to the contract (another condition or a clause), then the seller is making his counteroffer. If the seller agrees to the terms of the contract, then there is “acceptance.” The result would be a mutual agreement between the two parties, making the contract binding.
Unilateral and Bilateral Contracts
A real estate contract can either be unilateral or bilateral depending on the kind of deal you’re making. If you are involved with a sales deal, for example, the contract would have to be bilateral. This means that it’s a two-way agreement wherein the seller agrees to sell and the buyer agrees to buy. The bilateral contract is most often used in real estate, since almost all the deals require the assent of both parties.
If you’re involved with options, however, a unilateral agreement is appropriate since in this kind of deal the seller is obligated to sell but the buyer is not obligated to buy.
Basic Requirements Of a Contract
Each state has its own standards and criteria for the real estate contracts. But all contracts more or less have most legal requirements in common.
Written and In Print: Verbal agreement is not enough when it comes to real estate deals. Real estate contracts have to be in writing for it to be enforceable.
Identification of Both Parties: The contract must clearly state the identification of both parties. It may not be really legally required, but full names and middle initials helps to avoid possible mistaken identities or misunderstandings.
The Property: The property to be sold and bought should of course be written down, along with a legal description and location.
Purchase Price: The purchase price of the property must also be written in the contract. If the purchase price has not yet been determined, you can state a reasonably ascertainable figure in the contract.
Mutual Assent: Mutual agreement is the most important criteria in a contract to be binding. This is especially important as almost all real estate contracts are bilateral and can only be enforced with both the parties’ agreement.
Signatures: For the contract to be enforceable, it has to be signed by both parties. The law requires both parties signing to be of legal sound and mind, of course. A facsimile signature is acceptable as long as it is stated in the contract that facsimile signatures are valid.
Consideration: Consideration is what induces a promise. It is something of value or interest bargained for in exchange of the property. It binds a contract and makes the contract enforceable. The amount won’t really matter, as long as there is a consideration. Money is the most common form of consideration, but another property, a promise to perform, or something else in value is acceptable.