Understanding Real Estate Contract For Sale
The real estate contract is a critically important document in the real estate business. Whether you are a first-time buyer or an experienced investor, it is very important you understand what the real estate contract is and what it contains.
What is a Contract of Sale?
“A real estate contract of sale is a contract between parties for the purchase and sale, exchange, or other conveyance of real estate”. They are typically bilateral contracts (i.e., agreed to by two parties) and should also be in writing to be enforceable. The basic building block of a contract is that there is mutual agreement.
Built on common law contract principles that are standard in most states. The contract is normally drafted as an offer. The offer is signed by the buyer (the offeror). The contract is not binding until the seller accepts the offer, resulting in a meeting of the minds called mutual assent.
An acceptance is made if the offeree (the seller) agrees to the exact terms of the offer. If the seller replies, “I’ll accept your offer if you agree to close in 7 days,” there is no binding contract, but rather a counteroffer.
If the offer is not accepted in the time frame and manner set forth by the buyer (offeror), then there is no contract. For example, if the contract specifies that acceptance must be made by email, an acceptance by telephone call or mail will not suffice.
Unilateral Contract vs. Bilateral Contract
A real estate sales contract is a “bilateral” (two-way) agreement. Where the two parties to the contract make a ‘promise’ to the other party. For example the buyer ‘promises’ to pay the seller $600,000 in exchange for the sellers promise to deliver title to the property.
In a unilateral contract, only one party to the contract makes a promise. For example a promise to pay a reward to X if X finds Y’s cat. X is not obliged to find Y’s cat, but Y is obliged to pay X if X finds the cat.
Who prepares a Contract of Sale?
The contract should always be prepared by a qualified solicitor or licensed conveyancer and then be reviewed by a solicitor or conveyancer representing the buyer/purchaser’s party. This ensures that both sides are protected in the transaction.
The property is sold when both the vendor and the buyer have signed the contract of sale and the agreed deposit has been paid. All parties who sign the contract must be given a copy of the signed contract.
What are the Basic Legal Requirements of a Real Estate Contract
There are some basic requirements that must be present to make a real estate contract valid:
- Mutual Assent or a meeting of the minds is an essential element of an offer and an acceptance.
- In Writing. For a real estate contract to be enforceable it must be in writing and must contain all the essential elements to be valid. For example, if a buyer makes an offer in writing and the seller accepts orally, then backs out, the buyer is out of luck.
- Identify the Parties. The contract must identify the parties. Although not legally required, a contract commonly sets forth full names and middle initials (it helps the title company in preparation of the title commitment). If one of the parties is a corporation, it should so state (e.g., “North American Land Acquisitions, Inc., a Nevada Corporation”).
- Property Description. The contract must identify the property being sold, including the street address and a legal description to clearly identify the property.
- Purchase Price. The purchase prices/sales prices must be stated or a figure such as the appraised value as of a specified date.
- Legal Consideration. All parties to a contract must offer a consideration for the contract to be enforceable. Consideration is the benefit, interest or value that induces a promise; it is the glue that binds a contract.
- Signatures. A contract must be signed by all parties to be enforceable. The party signing must be of legal age and sound mind.
Can a vendor cancel a Contract of Sale?
Unlike the buyer, the vendor has fewer opportunities for cancelling a Contract of Sale. The most common reason why a vendor may want to cancel the contract is if the buyer/purchaser fails to pay the full deposit. Unfortunately, in this case, the process to cancel the contract is a long one -- requiring a default notice to first be sent to the buyer. When this happens, the buyer has an opportunity to fix the default. Generally, a vendor can’t simply change their mind unless there is a Special Condition in the Contract of Sale that allows the vendor to cancel the contract at will.
There are instances when a buyer has the right to cancel the transaction and get their money back, even when contracts have been exchanged and the cooling-off period has passed or been waived. This is rare but can happen. A contract could also be cancelled where the vendor has failed to disclose certain restrictions imposed on the property.
As the real estate contract is a legally binding document it is important to consult a lawyer or a conveyancer to ensure your contract is drawn up correctly.