Legal Matters & Taxes4 Types of Real Estate Contracts: A Beginner’s Guide by Alex Karani July 9, 2019July 9, 2019 by Alex Karani July 9, 2019July 9, 2019If you are new to real estate investing, you may not be familiar with what a real estate contract is or the different types of real estate contracts.Real estate contracts play a significant role in real estate investing. As a property investor, you will be required to negotiate and sign contracts when you strike any real estate deal. Therefore, it is absolutely necessary for you to be well-informed about the various real estate contracts that you might use throughout your real estate career. This blog will give you foundational knowledge on what a real estate contract is and the different types of real estate contracts to enable you to make informed investing decisions.What Is a Real Estate Contract?A real estate contract is a legally binding agreement between two or more parties for exchange, purchase, or any other type of real estate transaction. This document outlines the terms agreed upon after negotiations have ensued. Real estate contracts are required by the Statute of Frauds (SOF) in U.S. common law to be in writing and signed by both parties to be enforceable.As in any legal transaction, real estate contracts are essential in the execution of real estate transactions. They are designed to protect both parties. They form the basis of legal action that can be taken if any of the parties does not fulfill the terms of the contract. However, the laws regarding real estate contracts may vary from state to state. Therefore, it is prudent to hire an attorney before signing anything.Requirements for a Real Estate ContractAs it is the case with other contracts, the following requirements must be met for a real estate contract to be enforceable:Offer: One party typically makes an offer by preparing a written real estate contract, signing it, and handing it to the other party. The other party either accepts the offer, makes a counteroffer, rejects it, or fails to respond.Acceptance: The other party can accept the offer by signing it. The contract must possess original signatures by both parties for it to be enforceable. Both parties should initiate any alterations to the contract. If a counteroffer is made, the original offer will be terminated and it won’t be legally binding since both parties didn’t agree to the terms. When the offer is rejected, it is terminated. If there is no response to the offer, it automatically terminates by the expiration date indicated on it.Consideration: This is something of value that is exchanged between the two parties in the real estate transaction. Consideration is mostly in the form of money. It could also be a promise to perform or another property.Legal Capacity: The parties involved should be eligible to enter into a contract. They should not be mentally impaired, minors, etc.Legality of Purpose: The contract should not call for illegal action.Types of Real Estate ContractsHere are 4 common real estate contracts that you need to familiarize yourself with, based on the different types of real estate transactions:1. Purchase AgreementOut of all the types of real estate contracts, this is the most common. A purchase agreement (also called a sales contract) is a binding contract between two parties (property buyer and property seller) to transfer a particular property. This contract specifies the details regarding the sale of a property.The following are the main components of a purchase agreement:Identity of the partiesDescription of the propertyCondition of the real estate propertyPurchase priceThe important details, obligations, and rights of the real estate contractA list of contingenciesAppliances and fixtures that are included in the sale and those excludedEarnest money depositType of deedClosing costs and the party responsible for paying each costThe signatures of both partiesTerms of possessionDate of closingThere are three different types of purchase agreements based on the clauses regarding the type of property being transacted:State/Association Purchase Agreement This is a standard agreement between a property seller and buyer when a real estate agent is involved. Many states, as well as real estate associations, usually have such agreements to guide their real estate transactions.General Purchase AgreementThis is a shorter version of the state/association purchase agreement and is typically used when you’re buying the property without a real estate agent.Property-Specific Purchase AgreementThis purchase agreement is normally used in the purchase of properties that are not in the traditional single-family paradigm. For instance, it could be used for mobile homes or vacant lands.Related: Buying an Investment Property Is Easy with Mashvisor2. Real Estate Assignment ContractThis real estate contract is usually used in a wholesale strategy to facilitate the sale of a property between a homeowner and an end buyer. A real estate assignment contract is initiated when the property owner agrees to sell the rights to purchase the property to an investor and both parties sign a contract binding themselves to the imminent deal. The contract gives a real estate investor the rights to purchase a property (they don’t actually buy the property) and they can then sell their rights to buy the subject property to another buyer. The investor will be paid a small assignment fee by the end buyer, who will proceed to purchase the property from the owner. It is important to note that a real estate assignment contract does not give investors the title to the property. The assignment of the contract will also not appear in the title chain.Related: The Basics of a Wholesale Real Estate Contract and How to Prepare One3. Lease AgreementA lease agreement is a real estate contract that binds a property owner (landlord) and a renter (tenant) to the property. The landlord agrees to offer his/her property for the tenant to reside in at a specified monthly rate. Apart from the rent amount, the agreement also includes important provisions such as the security deposit and payment of utilities. All important items should be included in the lease agreement to prevent any legal disputes in the future. You can find standard lease agreements on the internet and adjust them for your use.Related: Landlord Tenant Law: Basics Every Real Estate Investor Should Know4. Power of AttorneyOf all the types of real estate contracts, this one is quite unique. A Power of Attorney is used in situations where the principal (a person who has given permission for someone to act in his/her place) is not physically able to sign a real estate contract. In this case, the principal will appoint another party to act as the power of attorney so that they can sign the contract on their behalf. This may happen when the principal is in the following situations:Mentally disabledHospitalized or has any other illness that restrains his/her ability to sign the contractNot physically present in the country to be able to sign the contractOwns several investment propertiesIs an elderly parent or relative who may not be able to sign the contractThe Bottom LineIf you are looking to purchase your first investment property or to do any other real estate transactions, you are most probably going to sign a real estate contract. There are many types of contracts in real estate that are used by beginners and experienced investors alike. Each of them has different uses and requirements. Therefore, having sufficient knowledge of these types of real estate contracts will enable you to have smoother navigation in the world of real estate. However, you may need to hire a real estate attorney experienced in these types of transactions when it comes to the fine print.To learn more about real estate investing for beginners, be sure to use Mashvisor. Start Your Investment Property Search! START FREE TRIAL LandlordTenantsWholesaling 0FacebookTwitterGoogle +PinterestLinkedin Alex KaraniAlex is an entrepreneur and an experienced content writer focused on personal finance, business, and investing. For over six years, he has contributed to a number of publications, both online and print. When he's not writing or working, Alex enjoys reading, traveling, and the outdoors. Previous Post 20 Cheapest States to Buy a House for Investment in 2019 Next Post Learn How to Calculate Vacancy Rate for Rental Property Related Posts How a 1031 Exchange Can Help You Buy More Rental Properties Why Is It a Good Idea for a Real Estate Investor to Make a Will? Is It a Good Idea to Invest in Real Estate in These States With No Property Tax? What Landlords Need to Know About Filing an Eviction Notice How Do House Price Trends Look Like at the Beginning of 2018 in the US Real Estate Market? How to Check Property Tax History Before Buying What the TCJA Means for Rental Property Owners How to Prepare for Tax Season 2021 as a Real Estate Investor Which Are the US Cities with the Most Airbnb Legal Issues at the Beginning of 2018? Tenant Not Paying Rent? Here’s What You Need to Do Which are the US cities with the least Airbnb legal issues at the beginning of 2018? What Rental Property Tax Deductions Apply to You?