There is a class of investors out there who believe that, because they are investors and not lawyers, they don’t need to trouble themselves with the details of the real estate contract. These investors couldn’t be more wrong. The contract is what lays out exactly what you are buying, what you are bound to, and what is owed to you. It is essential to know exactly what you are getting into on every deal that you make, so that you can plan accordingly and protect your profit margin. The good news is, the real estate contract is pretty standard, simple, and easy to navigate and understand. In simple terms, here is an explanation of a basic real estate contract.
The contract will clearly identify both (or all) parties involved, as well as the property in question. This means an address and description of the property. The main ingredient in the contract brew is mutual agreement, whereby both or all parties agree to the same terms of a deal, following an offer, usually a counteroffer, and finally acceptance of terms. These must all be clearly laid out in the contract.
In addition to identifying parties and mutual agreement, here are some other elements which all real estate contracts should and in fact must possess. It must be in writing in order to be enforceable. An oral agreement is nice, but unfortunately if things go south, then the victimized party will be out of luck trying to cite the contract is binding.
A price for the property must be stipulated. This does not necessarily mean a number of dollars that the buyer must pay (although it could); rather, it has to point to a value which can be reasonably ascertained at a later date, such as an appraisal value. This, like everything else in the contract, must be as specific as possible: not just “an appraisal value”, but a specific appraisal done by an agreed-upon appraiser at an agreed-upon time.
Usually, a contract will include some consideration. Consideration is essentially the value of the agreement itself (as opposed to the transaction), and it comes in the form of a small good-faith fee paid by the buyer to instill confidence in both parties.
Finally, signatures are required, as in all contracts. No third parties or notaries have to be used, but both parties (or representatives thereof) must ink the contract. Beyond that, it’s just about filling in the particular details of your transaction. As stated above, the real estate contract is standard and simple, but you need to know what you are looking for when reviewing a contract.
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Based out of Indiana, Jay Redding is a real estate entrepreneur, with experience in single family and multi-family investing.
