Real Estate Investing Contract Basics

Every investor must have at least a basic understanding of contract law. Contracts are legally binding. Real property transactions require a written contract in order to be binding in most states, a contract type that is called “expressed.” A handshake will not do. The way the contract is written will make or break the parties’ ability to enforce it or walk away from it and will spell out the consequences.

There are certain other elements that must be included in a written contract in order to make it legal: All parties must be competent and of legal age to sign; all parties must mutually agree to the terms; legal consideration (something of value such as money, real property or services) must be given; the contract must have a legal purpose; the purchase price must be listed; and, the document must be signed by all parties.

The structure and language used in real estate contracts is fairly consistent from state to state. All forms supplied by a trainer or a legal document company should be reviewed by a local attorney before being used because there are sometimes specific terms, clauses and forms that are unique to different states. Some state and local recorders may even have specific font and margin requirements for documents that are to be filed. Here are a few basics that generally hold in all states:

1. Most agents and major lenders will prefer, and may require, use of the State Bar-approved Purchase and Sale Agreement as the standard offer document for a real property sale. This is a type of bilateral agreement which is a legal and binding agreement between two parties where each has responsibilities and consequences if the terms are not met. Requirements and consequences may vary depending on the clauses that are inserted into the document. For example, a contract where the buyer “and/or as assigned” is included as the purchaser will protect the possibility of assigning over a deal to someone else. An addendum that specifies that the buyer may cancel up to a given date if certain conditions apply (for example, failure to get financing, failure to negotiate satisfactory lender approval, inspection issues) protects to a large degree against loss of deposit money.

2. Most investors when purchasing directly from a homeowner will use an Option contract rather than a Purchase and Sale Agreement for their wholesale deals when the homeowner agrees to it. This is a unilateral contract that gives the buyer the right to cancel up to closing for reasons that are spelled out, or sometimes for virtually any reason, but obliges the seller to complete the transaction as long as the buyer meets all of the terms of the Agreement. Option Agreements are generally assignable and give the buyer the ultimate choice of exit strategies. There needs to be a clear end date on the document when the option expires and the option deposit is lost if the buyer fails to exercise or cancel the option in time.

Before all aspects of the contract are fulfilled and the contract is  turkey citizenship by investment signed by all parties it is considered “in escrow” or in the executory status. A signed contract is said to have been “executed” and is therefore complete.

A “valid” contract is one that meets all requirements of the law and is legally enforceable. An “invalid” contract is nullified and unenforceable because there is some illegal or fraudulent intent or activity that causes the document to carry no force of law. A “voidable” contract is one that fails to meet some legal requirement and may therefore be rescinded by either party during a certain period of time. For example, some courts are voiding illegally signed foreclosure documents and rescinding foreclosures because legal procedures were not properly followed.

A contract with no legal remedies spelled out is deemed unenforceable, while one with specific consequences for not executing the contract requirements is considered enforceable. Those consequences can be invoked by the wronged party.

Again, always consult a real estate attorney before signing any contract for the purchase of property.


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