Your home is likely to be one of the most significant investments you will ever make. As a family grows, they may purchase a larger home. You may be thinking about buying a more lavish property, or your parents may be downsizing to a more manageable single-story home. Whatever the reason for purchase or sale, there are distinct types of residential real estate contracts, each providing or addressing unique concerns and situations.
All valid real estate contracts are legally binding documents outlining the terms of two or more parties (buyer and seller) who negotiate the terms of a real estate transaction, including exchange, purchase, and more. The U.S. common law Statute of Frauds (SOF) states that real estate contracts need to be written and signed by both parties to be legally enforceable. The agreed-upon terms are to be effective upon signing. It is important to know about the various types of real estate contracts to identify which is best whether you are in a buyer or a seller situation.
The Four Real Estate Contract Types
Different real estate contracts include purchase agreement contracts, real estate assignment contracts, lease agreements, and power of attorney contracts. Each contract type has different stipulations and uses. In addition to a real estate agent, it is wise to have a real estate attorney oversee any contractual obligation before signing. Real estate law varies from state to state. You will find it easier to renegotiate terms and settle potential disputes before signing a contract than to pursue legal action to rectify oversights or conflicts about the property later.
All four types of real estate contracts must meet the following requirements to be enforceable:
- Offer – A written real estate contract with a signature to provide to the other party who then accepts, counteroffers, rejects, or fails to respond to the offer. An offer includes an expiration date to terminate without a response automatically.
- Acceptance – The other party accepts an offer by signing the contract. This contract requires original signatures by both parties.
- Consideration – A value is proposed between two parties in exchange for a property, typically in the form of money, but sometimes another property or promise to perform.
- Legal Capacity – Each party must be eligible (not mentally impaired, minors, etc.) to enter into a contract.
Purchase Agreement Contract
A purchase agreement is the most common real estate contract. Also known as a sales contract, this binding document is between two parties, the property buyer and property seller, to transfer a specific property under certain conditions. A purchase agreement’s main components include:
- The identity of the parties using their full legal name
- A description of the property
- The condition of the real estate property, often including a formal appraisal
- Purchase price
- The obligations, details, and rights of the real estate contract
- A contingency list
- Fixtures, window treatments, and appliances included in the sale and those excluded
- Earnest money deposit
- Deed type
- Closing costs and responsible parties for each associated cost
- Signatures of both parties
- Terms of possession
- Date of closing
Three subset types of purchase agreement contracts are based on clauses regarding the property type:
- State or Association Purchase Agreement – A standard agreement used by a real estate agent between the property buyer and seller. State real estate associations have amendable template agreements to guide these transactions.
- General Purchase Agreement – This agreement is a shorter version of the State or Association Purchase Agreement typically used for buying a property without a real estate agent.
- Property-Specific Purchase Agreement – This agreement is routinely used to purchase a property, unlike the traditional single-family model, such as a mobile home or vacant land.
Real Estate Assignment Contract
This contract type is best in a wholesale strategy for the sale of a property between the homeowner and an eventual end buyer. The contract facilitator is typically a real estate investor who receives the rights to purchase the property without actually buying it, so they can sell their right to buy the property to another buyer. The contract is particularly useful to institutional investors buying single-family homes in America. The investor receives a small paid assignment fee by the ultimate end buyer but never has title to the property, nor will they appear in the title chain.
This real estate contract is between a property owner (the landlord) to a renter (tenant) of the property. The lease agreement specifies a monthly rate the tenant pays the landlord to reside at the property. Besides establishing rent, provisions include security deposits, utility payments, and maintenance issues. Lease agreements work best when they cover all important items to prevent future legal disputes. Standard lease agreements are available online and are adjustable to fit your particular situation.
Power of Attorney
A comprehensive estate plan should include a power of attorney to use in situations where a principal may become physically or mentally unable to sign a real estate contract. A named power of attorney will act, signing the agreement on the principal’s behalf if they are mentally disabled, hospitalized, or have an illness restricting their ability to sign. A power of attorney may also sign for an individual who owns multiple investment properties or is not physically in the country. Additionally, they may sign for elderly individuals or relatives who may be unable to sign the contract.
Whether purchasing or selling your first or second home or an investment property, you will need to sign a real estate contract as a buyer or a seller. Each real estate contract type has different requirements and uses. A real estate attorney can provide the insight you need to identify the contract type best suited to your situation to achieve your goal. We hope you found this article helpful. Contact our Chicago area office at 630-568-6656 to discuss how we can help you with any legal questions you may have.