A real estate contract is a legally binding document between the buyer and seller or landlord and tenant of a property that details terms of the relationship. Real estate contracts are appropriate when a property is being sold, rented, assigned, or otherwise transferred. Common contract sections include property information, purchase price, contingencies, and earnest money.
Types of Real Estate Contracts
Purchase agreements are the most common type of real estate contract you’re likely to encounter, but there are several other types of real estate contracts. However, the type of contract you should use depends on the property and type of transaction. Contracts generally include purchase agreements, lease agreements, real estate assignment contracts, and powers of attorney.
Common types of real estate contracts include:
A purchase agreement, or real estate sales contract, is the most common type of real estate contract and is used when a property is sold. This document dictates the terms of a real estate transaction and includes important details like the address of the property, the price, the names of both parties, signatures of both parties, and the closing date. There are three major types of purchase agreements: state, general, and property-specific purchase agreements.
The three types of purchase agreements are:
- State or association purchase agreement: This type of purchase agreement is the standard buyer/seller agreement that is used when a real estate agent is involved.
- General purchase agreement: If a real estate agent is not involved in the transaction, buyers and sellers typically use a shorter, general purchase agreement.
- Property-specific purchase agreement: A property-specific purchase agreement is one that is drafted to address the uniqueness of the property being sold, like an unusual parcel of land or a structure that is currently being leased. This type of purchase agreement is most commonly used for vacant land and mobile homes.
Lease agreements dictate the contractual relationship between a property owner and renter. This type of real estate agreement states that the owner or landlord is leasing the property to the tenant or lessee for a specific period of time. Generally, these documents also include terms like the amount of the security deposit, who will pay utilities, and how disputes will be resolved. If you own a rental property and need a rental contract, check out our lease agreement templates.
Real Estate Assignment Contract
Real estate assignment contracts are used where a real estate wholesaler enters into a contract to purchase a home, then assigns that contract to another buyer. This contract looks like a standard sale contract but includes additional terms that enable the wholesaler to exit the deal if another buyer isn’t identified. Assignment contracts must also specify that the buyer intends to wholesale the property and the seller does not have to approve the assignment.
Wholesale contracts generally add these elements to a standard purchase agreement:
- Exit clause: This additional clause gives the wholesaler an out if they are unable to find a buyer to assign the property to. More specifically, the contract will state that the wholesaler has a certain amount of time to find a buyer and if one is not identified during that period, the buyer is not obligated to purchase the property.
- Assignment clause: Wholesalers also include an assignment clause that states they can wholesale the property to anyone or any business and that the seller does not have to be aware of—or approve—the assignment. Under this structure, the wholesaler can sell the contract to another investor, which enables them to turn a profit without having to actually buy the house and flip or resell it.
Power of Attorney
Power of attorney is not technically a type of real estate contract, but it enables a designated party to act on behalf of someone selling, acquiring, or otherwise managing property. This is especially common where the party is not mentally fit to handle a real estate deal or is not physically present at the time of the transaction. To name a representative, or attorney-in-fact, you must execute a real estate power of attorney that lists their abilities under the document.
In general, a real estate power of attorney may include the ability to:
- Acquire real estate: “Accept as a gift or as security for a loan, reject, demand, buy, lease, receive, or otherwise acquire ownership or possession of any estate or interest in real property.”
- Sell or otherwise transfer real estate: “Sell, exchange, convey with or without covenants, quitclaim, release, surrender, mortgage, encumber, partition or consent to the partitioning of, grant options concerning, lease, sublet, or otherwise dispose of any interest in the real property described in the power of attorney document.”
- Maintain real estate: “Maintain, repair, improve, insure, rent, lease, and pay or contest taxes or assessments on any estate or interest in the real property described in the power of attorney document.”
- Engage in legal action regarding real estate: “Prosecute, defend, intervene in, submit to arbitration, settle, and propose or accept a compromise with respect to any claim in favor of or against [the owner] based on or involving the real property described in the power of attorney document.”
When a Real Estate Contract Is Necessary
A real estate contract protects all of the parties involved in a real estate transaction by ensuring each person or company understands its rights and responsibilities. For that reason, a real estate contract is an important element of most, if not all, real estate transactions. This includes buying and selling a home, renting property, prehabbing, or fixing and flipping an investment property, wholesaling properties, and serving as a lender in a real estate transaction.
Types of transactions where you need a real estate contract include:
- Buying and selling property: When an estate in land, or ownership interest, in real estate is transferred, the parties should draft and sign a purchase agreement that lays out the details of the transaction, including price, contingencies, and the closing date.
- Renting property: When a tenant rents property from a landlord, the parties should sign a lease agreement that defines the length of the lease, who is responsible for utilities and maintenance, and whether a security deposit is required.
- Fixing and flipping property: Investing in property to fix and flip involves purchasing a home or commercial building that is in need of renovation and then making improvements that make it more appealing to traditional buyers. In this case, a buyer and seller usually enter into a standard purchase agreement.
- Wholesaling property: Wholesaling property occurs when a real estate wholesaler puts a distressed home under contract with the seller with the intent to assign that contract to another buyer before closing. This type of transaction is best suited to a real estate assignment contract, which addresses the investor’s right to assign the contract to a third party.
- Serving as a lender: A real estate contract is also important if you are acting as a hard money lender in a real estate transaction. In this case, you can protect yourself with an agreement that sets forth the loan amount, term, interest rate, and other details relevant to the transaction.
Basic Elements of a Real Estate Contract
The content of real estate contracts varies widely depending on the property and nature of the transaction. However, there are some contract provisions that are included in most real estate sale contracts. For example, a real estate purchase agreement is likely to include the purchase price, methods of offer and acceptance, contingencies, and the amount of earnest money that must be deposited in an escrow account by the buyer.
Sections commonly included in a real estate contract are:
Basic Transaction Information
In general, the beginning of a real estate contract names the buyer(s) and seller(s) and identifies the property. The extent to which the parties and property must be identified varies by state, but it is best to include as much identifying information as necessary to eliminate the risk of confusion. More than likely, the contract will include the name and address of the buyer and seller as well as the legal description of the property.
For example, the introductory section may read:
“John Smith (the “Seller”), of 123 Main Street, Miami, Florida, does hereby sell, assign, and transfer to Jane Doe (the “Buyer”), of 456 Main Street, Miami, Florida, the following property:
(legal description of the property).”
Alternatively, this section may be structured as follows:
“The undersigned (herein ‘Purchaser’) hereby offers to purchase from the owner (herein ‘Seller’) the real estate located at _____________________________in the city of ________________, County of_________________, State of ____________, the legal description of which is: _____________________________.”
The agreed upon purchase price is also identified in the real estate contract. Depending on the complexity of the contract, the purchase price may be described as a simple dollar amount or more extensively discuss price and acceptable forms of payment. For example, a purchase agreement may limit payment to cash or extend financing options to a new mortgage, seller financing, or other types of loans.
In a more complex contract, this section may read:
“The purchase price shall be _______________________ dollars ($___________) to be paid in accordance with subparagraph _________, below:
A. Cash. The purchase price shall be paid in its entirety in cash at the time of closing the sale.
B. Cash Subject to New Mortgage. The purchase price shall be paid in cash at the time of closing the sale subject, however, to Purchaser’s ability to obtain a first mortgage loan within __________days after the acceptance of this offer by Seller in the amount of $______________, payable in not less than ______________monthly installments, including interest at a rate not to exceed _____________% financing. If such financing cannot be obtained within the time specified above, then either Purchaser or Seller may terminate this agreement and any earnest money deposited by Purchaser will be promptly refunded.”
Earnest Money Deposit
Earnest money is the deposit a buyer puts down to demonstrate their intent to purchase a property. This amount varies by state but is typically between 1% and 2% of the purchase price. In addition to specifying the amount of earnest money, the purchase agreement may name the escrow company with which the earnest money will be held and conditions under which the deposit may be returned to the buyer, or, alternatively, released to the seller.
For example, this section may read as follows:
“As earnest money, Purchaser deposits $__________________with the broker, which shall be applied to the purchase price at the time of closing the sale. In the event that this offer is not accepted by Seller, this earnest money deposit shall be promptly refunded to Purchaser by the broker. In the event that this offer is accepted by Seller and Purchaser shall fail to perform the terms of this agreement, the earnest money deposit shall be forfeited as liquidated damages suffered by Seller. Seller is not, however, precluded from asserting any other legal or equitable remedy, which may be available to enforce this agreement.”
Contract contingencies let buyers and sellers back out of a contract under certain negotiated circumstances. Frequently, contracts include contingencies for complications that arise associated with appraisal, inspection, and financing. A real estate contract may also include a home sale contingency that requires the buyer to sell their home for the purchase contract to be binding.
Common contingencies include:
- Appraisal contingency: An appraisal contingency protects a buyer by confirming the minimum value of the property. The appraisal is typically ordered by the financing institution and ensures the bank’s loan collateral—the property—is equal to or greater than the loan.
- Inspection contingency: Inspection contingencies give the buyer an opportunity to back out of a contract if inspections reveal problems with the house that will reduce its value or make it otherwise unappealing to the buyer. Typically, inspections are conducted for termites, the general condition of the property, and other conditions that may affect property value.
- Financing contingency: Financial contingencies allow a buyer to obtain the financing necessary to purchase the property. If the buyer is unable to get the necessary financing during a period of time set forth in the real estate contract, they can back out of the purchase agreement without repercussions.
- Home sale contingency: This type of contingency gives a buyer a specified amount of time to sell their current home so they can finance the new one. If this contingency exists, the buyer can back out of the contract if their home does not sell and the seller can cancel the contract if the buyer doesn’t sell their home within a set period of time.
Condition of the Property
The condition of a property refers to whether there is any existing damage to either the structure (typically a house) or land at the time of contract. If the property is being sold as-is, this section of the purchase agreement will be brief. However, if the seller is required to make repairs, this section will be longer. Personal property that will be included with the real estate—like furniture or maintenance equipment—may also be described in a separate section.
“The above property is sold on an ‘AS IS’ basis. The Seller makes no warranties, express or implied (except as specifically stated in this document).”
This section may also be more detailed, as follows:
“This offer to purchase includes all improvements, buildings, and fixtures presently on the real estate including but not limited to electrical, gas, heating, air conditioning, plumbing equipment, built-in appliances, hot water heaters, screens, storm windows, doors, Venetian blinds, drapery hardware, awnings, attached carpeting, radio, television antennas, trees, shrubs, flowers, fences, and _____________________________.”
Possession & Date of Closing
A real estate sale contract also establishes when a buyer may take possession of the property and schedules a date by which closing must occur. The contract will provide the specific date on which the buyer can take possession and detail what will happen if the seller does not allow the new owner to take possession. Generally, the closing date is based on the date of the contract, the length of the due diligence period, and the date on which the title report is completed.
Possession language varies but may look similar to this example:
“Purchaser shall be given possession of the property on _______________, 20____. A failure on the part of Seller to transfer possession as specified will not make Seller a tenant of Purchaser, but in such event Seller shall pay to Purchaser $____ per day as damages for breach of contract and not as rent. All other remedies, which Purchaser may have under law, are reserved to Purchaser.”
Common closing language is as follows:
“This offer is void if not accepted by Seller in writing on or before ___________ a.m./p.m. of the ___________day of ___________, 20____. Closing of the sale shall take place ______ days after Purchaser’s receipt of an abstract showing marketable title in Seller or title insurance binder showing insurable title in Seller. This offer is made at ________________, State of ___________, this ________ day of _____________, 20_______.”
Frequently Asked Questions (FAQs)
Is a real estate contract legally binding?
Yes. Real estate contracts are legally binding if they are in writing and signed by all parties; something of value—for example, the earnest money—must also be exchanged. If a buyer backs out of a purchase agreement outside of the due diligence period or for a reason not stated in the contract, they are in breach of the contract and forfeit their earnest money.
Where can I get a real estate contract?
If you are working with a real estate agent, they can provide a state-specific purchase agreement form. Likewise, a real estate attorney or service like LegalZoom can help you draft a detailed agreement for more complex transactions. If you do not want to pay for an attorney or a template document, there are purchase agreement samples available online.
What happens if a buyer backs out of real estate contract?
The consequences of a buyer backing out of a real estate contract depend on the terms of that contract. If the due diligence period has not ended and a buyer backs out because one of the contract contingencies has not been met, the escrow agent will return their earnest money. If the buyer backs out and is in breach of the contract terms, the seller gets to keep the earnest money. In either case, the buyer will not be forced to purchase the property against their will.
Can a seller terminate a real estate contract?
A seller can terminate a real estate contract under certain limited circumstances that are explicitly stated in the purchase agreement. For example, if there is a home sale contingency and the buyer doesn’t sell their home within a certain period of time, the seller can back out of the contract. However, if the seller simply decides not to sell their house, the buyer may be able to legally enforce the contract and complete the transaction.
Bottom Line: Real Estate Sales Contract
A contract is a necessary element of any real estate transaction because it protects the interests of the buyer and seller, regardless of the type of transaction. However, it’s important to choose the right type of real estate contract based on the nature of the transaction, type of property, and relationship of the parties. For that reason, it’s important to familiarize yourself with real estate sale contracts and other real estate documents before completing a transaction.
Real estate contracts can be complex and extremely nuanced, so it’s best to work with a real estate agent or attorney when investing in real estate or selling your home. However, if you need to prepare a real estate contract without hiring an agent or attorney, check out LegalZoom. They offer a variety of state-specific templates and a network of legal professionals to meet your individual needs. Click here for more information.