Types of Real Estate Contracts [Know the Differences]

Published on September 1, 2023

Types of Real Estate Contracts

Types of Real Estate Contracts

Real estate contracts are foundational to any property transaction, and understanding their various types can mean the difference between a smooth deal and a complicated one. From purchasing to leasing, these agreements shape the real estate landscape. 

Dive into this comprehensive blog as we discuss the different types of real estate contracts and highlight their differences. Understanding these contracts is the key to making smarter property decisions in the future.

What is a Real Estate Contract?

What is a Real Estate Contract

Real estate contracts are legally binding agreements that outline the terms, conditions, rights, and obligations associated with a real estate transaction. These contracts serve as the foundation for any real estate deal, so there would be a structured and organized process. 

Designed to ensure clarity and security for all parties involved, real estate contracts lay down the specifics of a transaction, ranging from financial terms to the responsibilities each party must uphold. They provide a framework that reduces confusion and potential misunderstandings, thus facilitating a smoother transfer or use of real property. 

Given the significant financial and legal implications associated with real estate, these sales contract play a crucial role in safeguarding the interests of buyers, sellers, landlords, tenants, and other stakeholders. 

It's essential for anyone engaging in a real estate transaction to fully understand the terms of their binding contract, as it dictates the nature of their commitment and the recourse available in case of disputes or discrepancies.

Are Real Estate Contracts Legally Binding?

A real estate contract is a legally binding agreement between two parties or more. Once both parties—typically the buyer and the seller—have agreed upon the terms and signed the contract, they are obligated to adhere to the stipulated conditions and provisions outlined within the document. 

These real estate contracts include a formal acknowledgment of a mutual agreement and detail the expectations, rights, and responsibilities of each party involved.

However, it's essential to note that for a real estate contract to be legally binding, it must fulfill certain criteria. The contract used by real estate investors and agents should be made with the free consent of the parties, involve a lawful consideration, and have a legal purpose. Both parties should be able to sign a real estate contract personally.

Any omission, misrepresentation, or fraudulent details can make a contract void or voidable as per many real estate associations. Additionally, most jurisdictions require real estate contracts to be in writing to be enforceable, given the significant financial implications and the long-term nature of such agreements.

In case either party fails to do their end of the agreement, the party at a disadvantage has the right to seek legal remedies, which might include enforcing the contract, seeking damages, or pursuing other specified remedies outlined in the contract itself. 

Given the binding nature of real estate contracts, it's always advisable for individuals to thoroughly review and, if necessary, consult with legal professionals before signing.

Real Estate Transactions That Require Real Estate Contracts

Real Estate Transactions That Require Real Estate Contracts

Each real estate transaction carries its own distinct complexities and processes. Below, we'll delve deep into the details of each transaction and the nature of real estate contracts associated with them before we list down common real estate contracts.

Selling a Property

A number of considerations come into play in the sale of a property. The transaction requires a detailed description of the property, including any structures, the land, and any included fixtures or exclusions (like certain appliances). As such, a contract must be put in place.

Key terms, such as the sale price, payment method to the buyer and real estate agent, and the potential for any adjustments (taxes, utilities) need to be agreed upon.

Conditions or contingencies may be attached to the sale, allowing parties to withdraw from the transaction under specific circumstances. 

Examples include unsatisfactory property inspections or the buyer's inability to secure financing. Deadlines for these conditions, as well as the expected date for the transfer of ownership (closing date), are typically stipulated.

Furthermore, warranties or representations about the property's condition and legal status, such as whether there are any liens or encumbrances, are provided by the seller. Once the terms are agreed upon and documented in a property-specific purchase agreement, the parties are legally bound to adhere to them. Of course, these real estate contracts need to be signed by both parties involved including the property owner and buyer.

Buying a Property

A buyer's perspective on a real estate transaction revolves around ensuring they are obtaining a clear title to a property that meets their expectations. Here, detailed property inspections and assessments of potential future value or utility are crucial. 

The buyer needs assurance regarding the property's legal status, ensuring there are no undisclosed liens or legal disputes related to ownership.

Additionally, the buyer may have specific contingencies or conditions under which they would proceed with the purchase. These might relate to financing, the sale of a current home, or the results of a property appraisal. That said, the contract specifies the details regarding the sale and all the agreements to guide the whole selling process.

Buying and Then Renting a Property

This dual-action process starts with the buyer's acquisition of a property. Once the property is secured, the next phase involves preparing it for tenants. 

This requires understanding and adhering to local landlord-tenant laws, determining rent, and defining the terms of occupancy, maintenance responsibilities, lease duration, and the conditions under which the lease might be terminated or renewed.

Rental agreements or rental contracts also include clauses about property damage, security deposits, and the rights of both the landlord and the tenant. These arrangements legally define the relationship and obligations of two or more parties. This is signed by both parties involved.

Wholesaling a Property

Wholesaling in real estate involves an intermediary party (the wholesaler) entering into an agreement to purchase a property with the intent of transferring those rights to another buyer, often without taking possession themselves. 

The emphasis is on identifying potential real estate deals, securing them at a certain price and getting to sell the rights to purchase a property, and then finding a third-party buyer willing to purchase the property or the purchase rights at a higher price. It's a strategy that revolves around quick turnovers and relies heavily on networking and market knowledge.

Flipping a Property

Real estate flipping involves buying properties, often at a lower price point or in distressed conditions, with the intent to renovate or rehabilitate them and sell them at a profit. 

The flipper assesses the potential value of the property after repairs, the costs associated with those repairs, and the expected market price once the renovations are complete. 

The entire process, from acquisition to resale, requires detailed planning and often hinges on timely execution to ensure profitability, given the dynamic nature of real estate markets.

Being a Lender

Acting as a lender of residential real estate means providing funds to a borrower for the purchase of a property. The lender's primary concern is the borrower's ability to repay the loan and the value of the property acting as collateral for that loan. Interest rates, repayment schedules, and the consequences of default are agreed upon in a contract. 

Lenders secure their interest by having a claim against the property, ensuring they can recoup their funds if the borrower defaults. This claim gives the lender the right to initiate foreclosure proceedings, where the property can be sold to repay the loan amount.

What are the Types of Real Estate Contracts?

What are the Types of Real Estate Contracts

Before drafting a real estate contract or deciding to enter into a contract yourself, you must first understand the types of purchase agreements in real estate.

Purchase of Agreement Contract

The Purchase of Agreement Contract, often termed the Purchase Agreement in real estate, is a foundational document that details the terms and conditions under which a property will be bought or sold. This agreement is the most common among the several types of contract that binds sellers and buyers.

Serving as a legally binding commitment between the buyer and the seller and as a common type of real estate agreement used by a real estate agent and investor, the purchase agreement must include the essence of their arrangement, ensuring both parties are clear about their obligations and rights.

This real estate purchase agreement contract not only specifies the agreed-upon purchase price but also outlines various contingencies, from property inspections to financing, that must be satisfied before the transaction can finalize. 

In essence, the purchase contract offers protection, allowing either party to back out of the asset purchase or sale of property under predefined circumstances without incurring penalties. Additionally, the general Purchase Agreement provides assurance to the buyer regarding the transfer of a clear, undisputed title to the property, eliminating potential ownership hassles.

Lease Agreement Contract

The Lease Agreement Contract in real estate stands as a document outlining the terms under which an investment property is rented or leased to a tenant. 

Acting as a binding commitment between the landlord and the tenant, this written real estate contract details the specifics of their rental arrangement, ensuring clarity and mutual understanding between both parties.

The Lease Agreement specifies vital details such as the duration of the lease, specified monthly rate or rental rate security deposit requirements, and the responsibilities of each party concerning property maintenance, payment of utilities, and repairs. 

Moreover, it details policies on issues like pet ownership, late payment penalties, and grounds for eviction, offering clear instructions for dispute resolution.

By setting these contract terms, standard lease agreements serve to protect the rights and interests of both the landlord and the tenant following common law or real estate law. We can also expect the lease agreement to prevent issues in the long run.

Real Estate Assignment Contract

The Real Estate Assignment Contract is used for transferring property rights from one party to another without the direct sale of the property itself. 

This unique arrangement allows an individual with a purchase agreement (often referred to as the "assignor") to transfer their rights and obligations under that standard agreement to a third party, known as the "assignee" or wholesaler. It is rare that a real estate agent is involved in this license agreement.

This contract enables investors, particularly in real estate wholesaling, to secure a property under contract and then assign or sell that contract to another buyer of the property without a real estate agent. This process allows the initial buyer to benefit without ever actually purchasing or taking possession of the property.

Beyond its use for investors, the Real Estate Assignment Contract ensures clarity and formalizes the shift of obligations and rights. It details the specifics of the arrangement, such as assignment fees, deadlines, and any contingencies that the assignee should be aware of. The contract gives the investor the right to purchase the property.

By writing the terms of the contract, both the interests of all parties involved are safeguarded, ensuring a transparent transition of contractual responsibilities and rights without the intricacies of a traditional property sale.

Power of Attorney

The Power of Attorney is used in real estate as a legal instrument that grants one individual, known as the "agent" or "attorney-in-fact," the authority to act on behalf of another person, referred to as the "principal." 

This delegation of power can encompass a wide range of actions, but in real estate, it often pertains to buying, selling, managing, or making decisions related to a property.

The primary purpose of this type of contract is to facilitate real estate transactions or management tasks when the principal cannot be present or is unable to sign the contract themselves. It might be employed due to the principal's unavailability, health reasons, or geographical constraints. 

Given its importance, the POA contract is detailed and explicit, ensuring that the agent's powers are clearly defined, whether they're broad or limited to specific tasks. 

Furthermore, it mandates the agent, real estate attorney or real estate lawyer to act in the best interest of the principal, ensuring transparency and accountability following the real estate kaw.

Final Thoughts: Types of Real Estate Contracts

Contracts play a significant role in real estate, guiding transactions and safeguarding the interests of the entities involved. From purchase agreements to the power of attorney arrangements, each contract type addresses specific needs, offering tailored solutions to unique real estate challenges. 

Armed with knowledge about these contracts, both professionals and individuals can approach real estate transactions with confidence and clarity.

Now that you already know the different types of real estate contracts, it’s time to start finding real estate deals to put under contract. Check out Property Leads for the most motivated seller leads! All our leads are sold exclusively, so you would have less to no competition.

Fill out the form below to start getting leads from us!

Copyright © 2024 Property Leads
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram