Contracts
Contracts are the backbone of every real estate transaction and the most heavily weighted national topic. This topic covers what makes a contract valid, how offers work, the main contracts used in practice, and remedies for breach.
Essential Elements and Validity
A valid contract requires: mutual assent (a clear offer and acceptance), consideration (something of value exchanged), legal capacity of the parties (of age and sound mind), lawful object, and, under the statute of frauds, a writing for real estate sale contracts. Contracts are classified as valid (fully enforceable), void (no legal effect, e.g., an illegal purpose), voidable (one party may cancel, e.g., a minor's or a defrauded party's contract), or unenforceable (valid but cannot be enforced in court, e.g., an oral land-sale contract).
Offer, Acceptance, and Counteroffers
An offer becomes a binding contract only when accepted exactly as made and the acceptance is communicated to the offeror. Any change to material terms is a counteroffer, which rejects the original offer and creates a new one. An offer may be revoked before acceptance, and it terminates on rejection, expiration, or the death or incapacity of a party. An option is a separate contract in which the optionor gives the optionee, for consideration, the right to buy within a set time.
Common Real Estate Contracts
A listing agreement is an employment contract between a seller and a broker (types include exclusive right to sell, exclusive agency, and open). A purchase and sale agreement sets the terms between buyer and seller. A buyer-broker agreement engages an agent to represent a buyer. A lease conveys the right to occupy. An installment (land) contract lets the buyer take possession while the seller keeps legal title until the price is paid.
Performance, Breach, and Remedies
A contract may end by full performance, mutual agreement, assignment, or novation (substituting a new contract or party). When a party breaches, remedies include specific performance (a court order to complete the sale, available because land is unique), money damages, liquidated damages (a pre-agreed amount, such as forfeiture of the earnest money), and rescission (canceling the contract and restoring the parties to their original positions).
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