What is a Real Estate Contract?

Before indicating the use and importance of real estate contracts, we need to define what real estate is. Real estate is any piece of land and its additional fixtures, such as buildings, fences, and any property that adds to the land’s market value. The natural resources, such as the mineral components, flora, and fauna species, within the land is also considered as real estate. By this definition, a real estate contract outlines the agreement between a buyer and a seller with real estate as their main product of exchange. The contract protects the interests of both parties and minimizes the probability of risk, at the same time. The real estate contract defines the details of the agreement. Starting from the parties involved down to the payment terms and transfer of ownership and titles. All the decisions regarding the arrangement must be present in the contract to make it legally enforceable under the state laws it follows, which should also be in the contract. In total, a real estate contract is a legally binding document among parties that calls for an exchange of goods, which are the property and money.

The Building Blocks of a Real Estate Contract

Real estate contracts can be easily assumed as another because it does not only deal with the purchase; it also concerns development, marketing, and appraisal. In order to make sure that the contract that you are getting in to is a legitimate real estate contract, there are several vital elements that you may need to check.

Legitimate and Lawful Purpose: A contract’s validity banks on its main purpose and intention. It should have a legitimate and lawful purpose in order to be enforceable under the state laws both parties chose to follow. Statute of Fraud requires this kind of arrangement to be documented in writing. Along with other situations such as a sale of more than $500 and contract arrangements that go for more than a year. In this essence, the entire agreement, especially the legal purpose, must be reflected in writing. But, even if all the details are properly documented, if you are not the rightful owner of the property, the agreement will not be legal and enforceable.Payment Terms and Agreements: Another crucial element in a real estate contract is the stipulations regarding the payment terms between the parties. The payment terms pertain to the wholesale or retail price of the property and the length of the payment period. Standard payment terms often include a downpayment or deposit and monthly installment rates, especially among residential areas. Others include a new mortgage plan, while other buyers go through the process with the help of realtors. This agreement is essential because the cost and terms are often the make or break factor of the business relationship.Agreement Inclusions and Exclusions: In order to tailor-fit the contract to the agreement of both parties, provisions containing the inclusions and exclusions are also a crucial element in the contract. This section is most often decided by the seller. One example of statements regarding inclusions is when the party decides to provide a financing clause as an addendum to the payment terms and agreement. The financing clause also termed as a financial contingency, is beneficial for both parties because it provides a leeway for a party to back out in case finances do not follow through. It is often used in scenarios wherein the buyer is yet to apply for a mortgage and the seller provides a particular period for the buyer’s application to follow through. If not, the seller has the power to cancel the reservation and choose another competent buyer. This circumstance is one of many. Other contracts provide stipulations regarding the warranty, inspection details, and closing costs.Mutual Consent: A contract is never legal without consent from both parties. It is the foundation of any agreement and all the succeeding decisions is based on consent and respect for the needs and demands of the other party. The signatures from representatives of involved parties indicate their consent to all the arrangements indicated in the contract. Moreover, the consent from either party must not be coerced or forced by the other party. Using power or dominance over another party places undue pressure that affects decision making.

Varieties of Real Estate Contracts

The variety of these contracts accommodate the type of transaction and property. Real estate is classified into four types: residential, commercial, industrial, and vacant land. Different kinds of contracts are needed for these properties because of how money is generated among these properties. An example is the main purpose of building commercial estates is to generate income. And because of these differences among the estates sales, development, and assessment, real estate contracts must be flexible, to a certain extent.

Purchase Agreement: The purchase agreement is the type of contract that most people perceive what a real estate contract is. It is also called as a sales contract because it documents the transfer of the property’s ownership from the seller to the buyer. The agreement contains the details about the involved parties, specifications of the property, payment terms, and additional necessary contingencies. It is also important to note that this agreement has two subtypes. One subtype caters to arrangements that were accomplished with the help of a realtor or real estate agent, and the other type is used when the arrangement is made solely by the buyer and the seller. This type of real estate contract are not only for residential spaces, it is commonly used among the different types of real estates. Having a purchase agreement ensures the interests of both parties by making the agreement legal.Real Estate Assignment Contract: The second type of real estate contract deals with selling the right to buy a house or commercial property. This real estate contract focuses on wholesale selling of properties. The real estate assignment contract facilitates the sale of a property from the original owner to an end buyer, thus assigning an equitable power to the owner. In essence, there is a third party organization or person that matches sellers and buyers. The contract also emphasizes a provision of equitable interest, that pertains to the percentage that the third party receives.Lease Agreement: The last kind of real estate contract deals with renting and leasing constructed property. This contract details the relationship between the landlord and the tenant and the lease specifics. The lease specifics pertain to the length of the tenant’s stay and the type of the lease. A property lease agreement also dives into the details about the payment terms, on how much is due and when it is due for a particular period. Apart from the list of the tenant’s responsibilities and obligations, the lease agreement should also contain comprehensive information that the landlord can only provide such as the specifications of the place and other decisions that only the owner can decide on such as the final deposit fee amount and allowing the tenant to put up business in the property.

How to Compose a Real Estate Contract

Real estate is one of the leading industries that drives the US market on an upward projection. More and more businesses are venturing out to this industry. And, the real estate market never loses its demand because the demand from the population also increases through time. So, as a way to keep up with the industry’s growth, it is essential that most of us are familiar with the process of how to make a real estate contract. These pieces of information are especially helpful when you are already a part of the industry or you are still planning to break into the scene.

Step 1: Be Straightforward with Payment Terms

The starting details of the real estate contract includes introducing and adequately labeling the involved parties. Mention the legal names of the parties, especially when it is a for-profit or non-profit organization. The name of the property and its address follow. After the necessary details, dive directly to the particulars of the payment terms. You can start by indicating the total selling price and then making mention of the need for earnest money and how much it is. Earnest money is used to signify that the buyer is willing to go through the sale, and it is often incorporated with the down payment. It is also necessary to mention the money’s use and where it is stored for the meantime. It is also crucial to include the due dates for the payments. It includes dates for the monthly fees and the end dates for earnest money and miscellaneous charges.

Step 2: Specify the Inclusions of the Property

After settling with the payment details, it is also a requirement to provide the inclusions of the property. For houses and residential spaces, you can include a list of the fixtures that are already in the property. In dealing with commercial properties, it can consist of the exact dimensions of the place and, maybe, even the floor plan of the area. As for apartment complexes and condominiums are residential, but commercial because its purpose in the first place is to generate money. So, the contract should take note of both the details, as mentioned earlier. Incorporating these details in the contract assures both parties that they are in agreement with what the property is and what it entails. Furthermore, the buyer can use the list on the deal as a checklist in inspecting the property, if everything listed is available and functional.

Step 3: Make Use of Advantageous Contingencies

Do not worry so much about what contingencies to use. These are also called as conditions that are useful in particular situations that may happen in the future. The typical real estate contract contingencies often allow parties to walk away from the agreement in case the condition is not followed. An example is a clause regarding inspection details. When the buyer inspects the property, and it does not have some of the listed inclusions written on the contract, the buyer can choose to walk away from the agreement without breach. Another standard contingency is the financing clause. This clause also allows parties to back out from the contract when the finances do not follow through. It can be a common occurrence in situations where the buyer is still applying for a mortgage. When the buyer’s application does not follow through before the closing date of the deal, the seller can choose to walk away and select a more competent buyer.

Another contingency that some sellers choose to include in the tenant lease agreement involves paying for a warranty. It clarifies who will pay for damages, especially in residential areas. Including this clause will specify and clear out the expectations of the lessee or the tenant. The clauses, as mentioned above, are some of the standard examples that are commonly used in real estate contracts. You can decide to come up with your terms and addendums to make the arrangement more tailor-fit to your agreement.

Step 4: Include Dispute Resolutions

It is essential to include stipulations regarding dispute resolutions in any contract. These details essentially outline what behaviors both parties expect from each other. Given that each side does avoid doing acts that will lead to premature termination of the agreement. Consequently, these set resolutions for possible conflicts also serve as safety nets to do away from possible costly legal proceedings and arrangements. More or less, it helps avoid court trials if a party fails or consciously avoids the fulfillment of their end of the agreement. The statements covering dispute resolutions can also be contract contingency that is followed when met with certain conditions. One of the situations that this contingency is especially helpful is when a party defaults or wishes to terminate the contract. The seller can indicate the fee, need for a termination letter, and impending consequences for the buyer. It can also include the method of calculation to ensure and practice transparency.

Step 5: Finalize the Agreement

A real estate contract may be lengthy because of all the necessary information required by both parties. And to finalize and wrap up the deal, do not forget to include provisions that cover the tax calculations. The percentage of the deduction for the real estate firm is also necessary if the sale was made through an agency. Apart from these, do not forget to include stipulations that indicate the state laws that make the agreement legal and enforceable. And if you wish to do so, your party can choose to add a deadline to accept the offer or to put up a counter offer. To make sure that everything in the contract are legal and necessary, you can ask for legal advice from a lawyer. Once the signatures are affixed on the pages of the document, the arrangement is final and suitable to go.

The workings within the real estate industry today is significantly different from the crude origins of landowning and development. All arrangements regarding ownership and use of these tangible properties are documented in writing. This process maintains order in a successful industry, as it continues to grow over the years. People can expect changes in the processes within the industry, but the importance and necessity of real estate contracts will remain the same.