Real Estate Contracts

1. Essential Elements of a Valid Contract

A legally enforceable real estate contract requires five essential elements, memorized with the acronym COLLC or CLOAC:

Competent Parties (Legal Capacity): All parties must have the legal ability to enter into a contract. Minors (under 18), individuals adjudicated mentally incompetent, and intoxicated persons lack capacity. Contracts with parties lacking capacity are typically voidable — the incapacitated party may disaffirm. Corporations must act through authorized representatives.

Offer and Acceptance (Mutual Assent): Also called "meeting of the minds." The offeror makes a definite proposal to the offeree. The offer must contain all essential terms (parties, property description, price, terms). Acceptance must be unequivocal — any change to the terms constitutes a counteroffer, which rejects the original offer. Silence generally does not constitute acceptance unless a prior course of dealing or special circumstances apply.

Lawful Objective: The purpose of the contract must be legal. A contract to sell property for an illegal purpose (e.g., to operate an illegal gambling establishment) is void — treated as if it never existed.

Consideration: Something of value exchanged between the parties. In a purchase agreement, the buyer's consideration is the promise to pay; the seller's consideration is the promise to convey. Earnest money demonstrates the buyer's good faith but is not technically required for a binding contract — a promise alone can serve as consideration.

In Writing (Statute of Frauds): Most real estate contracts must be in writing to be enforceable. This is required by the Statute of Frauds, which mandates that contracts for the sale of an interest in real property be (1) in writing, (2) signed by the party against whom enforcement is sought (the defendant), and (3) contain essential terms including a description of the property, the price, and the parties.

2. The Statute of Frauds

The Statute of Frauds is one of the most frequently tested concepts. It requires that certain contracts be in writing to be enforceable in court. For real estate, the Statute of Frauds covers: (1) contracts for the sale or transfer of an interest in real property, (2) listing agreements and buyer agency agreements, (3) lease agreements for more than one year, and (4) option contracts.

The writing does not need to be a single document — multiple documents can be read together if they reference each other. However, the writing must contain the essential terms: identification of the parties, a description of the property, the price, and the signature of the party to be charged.

Exceptions to the Statute of Frauds include part performance (when the buyer has taken possession, made improvements, and/or paid part of the purchase price — courts may enforce an oral agreement to prevent injustice) and equitable estoppel (when one party has reasonably relied on the oral promise to their detriment).

3. Contingencies

A contingency is a condition that must be satisfied for the contract to become binding. It allows a party to withdraw from the contract without penalty if the condition is not met. Common contingencies in real estate purchase agreements include:

• Financing Contingency: The buyer must be able to obtain a loan at specified terms (or any terms). If the buyer is denied financing after making a good-faith effort, they can cancel the contract and recover their earnest money.
• Inspection Contingency: The buyer may have the property inspected by professionals (general home inspector, pest inspector, structural engineer, etc.) within a specified period and may request repairs, credits, or cancel based on findings.
• Appraisal Contingency: The property must appraise at or above the purchase price. If the appraisal comes in low, the buyer can renegotiate or cancel. This protects the buyer and the lender.
• Sale of Existing Home Contingency: The buyer's obligation is contingent on selling their current home. Sellers often resist this because it introduces uncertainty.
• Title Contingency: The seller must provide clear and marketable title. A title search may reveal defects that must be cured before closing.

Contingencies have specific time deadlines. If a buyer fails to object to an inspection by the deadline, the contingency is typically waived — the buyer accepts the property as-is regarding that inspection.

4. Counteroffers, Revocation, and Option Contracts

A counteroffer is a rejection of the original offer and the simultaneous presentation of a new offer. Once a counteroffer is made, the original offer is dead — it cannot be revived or accepted later unless re-presented. The original offeree becomes the new offeror. Common exam question: "A seller receives an offer for $300,000 and counters at $310,000. The buyer rejects the counteroffer. Later, the buyer tries to accept the original $300,000 offer. Can they?" Answer: No. The counteroffer terminated the original offer.

An offer may be terminated by: (1) revocation by the offeror any time before acceptance (except in option contracts), (2) rejection by the offeree, (3) counteroffer, (4) lapse of time (offer expires per its own terms or after a reasonable time), or (5) death or incapacity of either party before acceptance.

An option contract is a separate agreement in which the seller grants a potential buyer the exclusive right to purchase the property at a specified price within a specified time. The buyer pays consideration (option money) for this right. During the option period, the seller cannot revoke the offer — it is irrevocable. Option money may or may not be credited toward the purchase price.

5. Breach and Discharge of Contracts

A breach of contract occurs when one party fails to perform their obligations without legal justification. The non-breaching party has remedies: specific performance (a court order compelling the breaching party to perform — especially relevant in real estate because each parcel is unique), monetary damages (compensation for losses caused by the breach), rescission (cancellation of the contract with parties returned to their original positions), or liquidated damages (if specified in the contract — often the earnest money deposit serves as liquidated damages for buyer breach).

Contracts may be discharged (terminated) by: performance (both parties fulfill their obligations — the most common), mutual agreement (both parties agree to cancel), impossibility of performance (the property is destroyed, making performance objectively impossible), operation of law (bankruptcy, statute of limitations), or breach followed by the non-breaching party's election of a remedy.

6. Listing Agreements and Buyer Representation

Listing agreements are employment contracts between a seller and a broker. Key types: Exclusive Right to Sell (broker earns commission regardless of who procures the buyer — the most common and most protective listing for the broker), Exclusive Agency (broker earns commission unless the owner sells the property themselves, in which case no commission is owed), and Open Listing (non-exclusive — the seller may list with multiple brokers and only the one who procures the buyer gets paid; the seller may also sell independently with no commission owed).

Listing agreements must contain an expiration date. In some states, automatic renewal clauses are prohibited or must be conspicuous. Net listings (where the broker keeps any amount above a minimum set by the seller) are illegal or heavily restricted in many states because they create a conflict of interest with the broker's fiduciary duty to obtain the best price for the seller.