About Real Estate Contracts

Whether you want to buy, sell or lease real estate, a contract will protect both you and the other party from unforeseen developments and allow you to back out of the agreement under specific circumstances. Real estate contracts cover the terms of a transaction whereby real property changes hands in return for a fee.

Function

Although you may offer or accept a verbal agreement, when it comes to the exchange of real estate, if there are any problems stemming from that agreement, you may not be protected in a court of law. For a real estate contract to be enforceable, it must be in writing. In addition, the contract must clearly identify both parties and the property in question. Include the sales price and the dollar amount of all financial obligations, along with which party is responsible for paying them, such as repairs and closing costs.

Considerations

Real estate contracts are not legal if one or more of the parties to the contract is not legally able to enter into negotiations. This means the person must be over the age of 18 and must be of sound mind. If the individual is mentally impaired, coerced or drugged, the contract is void. Additionally, all parts of the real estate contracts must be legal. For instance, you may not transfer the title of a house in exchange for illegal drugs. However, you must list some consideration in exchange for the property. In the case of a sale to a family member, the exchange is often listed as "one dollar."

Effects

Real estate contracts should protect both parties to a transaction but the legal wording is often so confusing as to require the assistance of a real estate agent or an attorney to understand. If you want to write up your own real estate contract and save a real estate agent's fee, contact your banker for a fill-in form or download one from the Internet. See the Resources section for a link.

Misconceptions

An offer to purchase real estate is not a contract--it is only an offer. Until both the buyer and the seller agree upon the terms of the transaction and sign the document, either party may withdraw an offer. This becomes an issue when a buyer makes a written offer and the seller verbally agrees to the terms but does not sign the offer. If another buyer comes along and makes a better offer, the seller can legally accept the new offer. Since the original acceptance was verbal it is not legally binding.

Warning

If you're not using the services of a real estate agent, ask an attorney to look over the offer before signing it. A title insurance company will research the deed to make sure that the title is clear and that the property can be legally sold. Any earnest money must deposited in an escrow account, either with an attorney, a title insurance agent or intermediary that will release the funds upon closing or disperse them according to the contract, should the transaction fall through.

Expert Insight

Make sure your bases are covered. The contract should provide the means for both parties to back out under unusual circumstances. Make sure you can get out of the contract if the buyer cannot obtain financing within a short time or if an inspector determines the house has major structural damage or requires extensive repairs that offset the listed value.

Resources

• State-specific real estate contracts