When you are a beginner in the world of real estate investments, you might not be familiar with a real estate contract or its different types.
A real estate contract plays an important role when it comes to investing in real estate properties.
Property investors need to sign and negotiate contracts every time they strike a real estate deal.
This is why it is important you are familiar with the different real estate contracts you will be using in your real estate venture.
What is a Real Estate Contract?
Real estate contracts are legally binding agreements between two or several parties for purchase, exchange, or other forms of real estate transactions.
These documents outline the terms that were agreed upon during negotiations.
The Statute of Frauds in the United States common law requires real estate contracts to be in writing with the signature of both parties for it to be considered enforceable.
Like all types of legal transactions, a real estate contract is critical for executing real estate transactions. These contracts have been designed for the protection of both parties.
These serve as the basis for legal action that could be taken once any of the parties fail to fulfill the contract’s terms.
But the laws on real estate contracts might differ from one state to another. Thus, it is advisable to hire a lawyer prior to signing any contract.
Can You Get Out of a Real Estate Contract?
Even though real estate contracts can differ from jurisdiction to jurisdiction and every contract is individually negotiate. Most comtracts have contingencies that give either party the right to cancel the contract under certain circumstances.
But you cannot just change your mind without suffering some consequences.
- Getting out of a real estate contract as a buyer
Buyers usually give an earnest money deposit when making an offer on a property.
This deposit gets credited to your down payment, or you can get it back after the legitimate cancellation of the contract. If you wish to get out of the contract without meeting its terms, you will lose your deposit.
Your contract often includes contingencies that should be met by a certain date. You can retrieve your deposit if any of these contingencies are not satisfied.
The most common contingencies are the following:
- Satisfactory property inspection
- Specific timeframe to review homeowner association or condominium documents
- Title survey
Sellers and buyers typically negotiate any problems that arise during the property inspection or negotiate the deal again if appraisal comes short.
There are buyers who use document review or home inspection to get out of the contract if they changed their mind.
However, it will be better to wait to sign the contract until you are completely sure you want the property and can afford it.
If you wish to get out of a contract and there are no available contingencies, you can simply breach the contract.
But by doing so, there is the risk of losing your deposit along with the money you spent on the appraisal, title survey, and home inspection.
The seller can also charge you for breach of contract.
There are contracts with a liquidated damages clause which states the maximum the seller will keep once a breach of contract was made by the buyer.
The sellers can also sue for specific performance.
It means the court can decide that the buyer should do whatever was promised in the real estate contract.
Getting out of a real estate contract as a seller
When you are a seller who changed your mind about selling your property or selling it to a certain buyer, you can get out of the contract depending on how it was negotiated.
There are contracts written with an escape clause or kick-out clause that lets you accept a much better offer once one arrives during a set timeframe.
If there is no kick-out clause and the contract was signed with the buyer, there is the risk of getting sued by the buyer once you refuse to sell your property.
The Main Real Estate Contracts You Will Use in Your Investing Business
Below are the main real estate contracts you will often use in your real estate investing business:
Purchase Agreement Contract
As the most common type of real estate contract, a purchase agreement specifies all the details about the sale of the property. This includes the price of the property, the address, the names of the parties, the signatures of the two parties, and the closing date.
The contract specifies details about the sale of the property.
Association or state purchase agreement is the standard agreement between the seller and purchaser if there is an involved real estate agent.
Purchase agreements have different types including general purchase agreement, association or state purchase agreement, and property-specific purchase agreement.
A general purchase agreement is the shortened version of the first contract and used if the transaction doesn’t involve an agent.
A property-specific purchase agreement can be used for mobile homes or vacant land.
Real Estate Lease Agreement to a Tenant
This type of real estate contract binds a tenant or renter and a landlord or property owner to the property.
The property owner agrees to offer the property where the tenant can live in at a specific monthly rate.
Aside from the amount of the rent, the agreement also contains essential provisions like the payment of utilities and security deposit.
All critical items must be indicated in the lease agreement to prevent legal issues in the future. Standard lease agreements are available online and can be adjusted for your personal use.
Assignment of Contract
This real estate contract is used in the wholesale strategy to assist in the sale of the property between an end buyer and a homeowner.
This is initiated once the property owner agrees to sell the rights to buy the property to an investor with both parties signing a contract that binds themselves to this imminent deal.
Power of Attorney Contract
This real estate contract is quite unique as it is used in instances the principal cannot physically sign the contract.
The principal appoints another party who will be acting as the power of attorney for them to sign the real estate contract in their behalf.
Purchase Agreement Contract
How to Use the Purchase Agreement When You are Buying Real Estate
The buyer or the seller alike can prepare the purchase agreement.
Similar to other contracts, this can be a standard document used by one party in the usual business course, or this can also be the final result of continuous negotiations.
If there are extra terms negotiated that are not part of the standard agreement, these could be stated in purchase agreement addendum.
Aside from coming up with an agreement that completely covers every aspect of the sale, it is a must for the agreement to be signed by people with legal authority to bind the parties to the real estate contract.
Real Estate Lease Agreement to a Tenant
This is a real estate contract wherein the landlord agrees to let the tenant stay in the property at a particular rate every month.
This kind of agreement specifies critical considerations like the amount of rent, the handling of utilities, and the security deposit.
It is safe to say that the purpose of real estate lease agreement to a tenant is to avoid any problems in the future.
There should not be and problems between the lessee and the lessor and offer protection for both parties in case something unexpected happens.
How to Use a Lease Agreement with the Tenants
The amount of the rent of every month and the length of the lease are documented and cannot be changed or altered.
It guarantees that the landlord won’t be able to arbitrarily increase the rent while the tenant cannot simply leave the property anytime they want with no repercussions.
Lease agreements are effective for the particular time-frame indicated in the agreement and considered finished after this time has ended.
If the tenant wants to stay in the property, the two parties need to enter another lease agreement.
The landlord has no obligation to renew the old lease’s terms and can change the rental amounts and terms.
This is the reason why some tenants choose to sign leases with a longer term if the monthly rent is reasonable and the property is located in a place where it is likely rents will increase.
Assignment Contract to Another Real Estate Investor or Buyer
Assignment contract to another real estate investor or buyer is when a certain party with a piece of real estate property under contract chooses to assign the rights of this contract to a different party.
Assigning a real estate contract is the common way of flipping real estate with no need for any capital to come out of your own pocket.
The use of assignment contract to earn profit is also called flipping contracts, real estate day trading, and wholesaling.
How to Use the Assignment of Contract
Assignment of contract in real estate is a wholesale strategy that real estate investors use to facilitate a property’s sale between an end buyer and an owner.
As the name suggests, the owner of the property signs a contract with the investor, giving them the rights to purchase the home.
This is an essential distinction to make since the contract only gives the rights to the investor to purchase the home without following through on a purchase. But once under contact, the investor will retain the sole rights to buy the home.
It means they can sell the rights to purchase the home to another buyer.
When a contract assignment has been executed by a wholesaler, they are not selling the home but instead their rights to buy that home.
Property Manager Contract
The property manager contract is a type of legally binding document between the portfolio or property owner and the management team or manager of the property hired to supervise it.
It is a standard requirement if you hire a manager to take over an investment property.
Fair contract protects the manager and the owner and clearly defines the role of each person for the agreement’s term.
How to Use the Property Manager Real Estate Contract
A property manager contract always contains similar basic information. This contract names all parties and gives the property’s address and legal description.
This defines the management team or manager’s responsibilities and includes various items.
These contracts are staples in the industry and are a valuable and essential way for property owners to protect themselves and their investments.
Whatever the property’s type might be, a fair and strong management contract serves as the foundation to a successful working relationship between the property manager and owner.
Power of Attorney
Power of attorney of property is the legal document that transfers the agent or attorney’s legal right to access and manage the property of the principal in case the principal cannot do this themselves.
How to Use the Power of Attorney Real Estate Contract
Power of attorney is often associated with instances where the principal lacks the physical ability to actively make decisions concerning their assets.
This includes being hospitalized ormedical care that hinder the ability of the principal to act on their own.
When the person is unconscious during the time assets should be managed, the agent can apply the power of attorney to take action in the meantime.
This authority can also be granted to let the agent oversee the handling of particular assets if the principal is not available.
The Bottom Line for Real Estate Contracts
A real estate contract shouldn’t be confusing or overwhelming.
The best first step is to get a good understanding of the different available types of real estate contracts, so you can be a step closer to mastering the art of real estate investing.
- How to Be A House Flipper | Finding, Fixing, and Making Money
- How to Get Portfolio Loans for Investing in Real Estate
- The Secret to Investing in Real Estate
- Capital Gains Tax in Real Estate Explained and How to Put Off Paying Taxes
- The Best Passive Income Ideas To Make Money and Retire Early
Premium online courses for any level of investor: beginner-advanced. Completely go at your own pace and can be taken through "Self-Study" or through "Membership".
Inside the membership, attend live 90-minute Group Coaching sessions with Coach Dustin Heiner as he and the MPI Coaches teach you how to build a successful real estate investing business.
Connect with the MPI Coaches and the other like-minded investors inside the MPI Mastermind Community. Ask questions about investing and get feedback how to be successful in your business.