Bilateral Contract in Real Estate: Definition & Examples

The contract is the backbone of any transaction. From the sale of a home to a lease, knowledge regarding the different types of these contracts cannot be undermined, as they are particularly important for the real estate exam. Probably the most common type of contract you will encounter is the bilateral one. It’s some sort of agreement whereby both parties promise to perform some act, thereby creating mutual obligations.

For instance, the seller promises to give you ownership of the house when you agree to buy it, and you agree to pay the price already agreed upon. That is a bilateral contract in operation.

This article explains what a bilateral contract is, how it differs from other contracts, and why it is an important concept in real estate. We’ll even give some tips and examples to clarify things a bit more so that you feel confident in acing this part of your exam.

What is a bilateral contract in real estate?

A bilateral contract in real estate is an agreement between two parties in which each party makes a promise to the other, thereby creating a mutual obligation. This can be an agreement between individuals, companies, or any combination of the two.

In real estate, bilateral contracts apply to property purchases and leases. One major example is a purchase agreement where the buyer promises to pay the agreed price and the seller promises to transfer the property. Here, both parties must perform their promises to complete the contract. What the seller is actually transferring is the bundle of rights attached to the property — possession, control, enjoyment, exclusion, and disposition. The bilateral contract defines how and when that transfer of rights takes place.

That’s because they clearly stipulate the responsibilities of both parties, hence allowing each side to know what they are getting themselves into when sealing the deal.

Key characteristics of bilateral real estate contracts

Understanding the main features of bilateral agreements in real estate will help you recognize them in real estate transactions:

1. Mutual Promises: Both parties make binding promises to perform specific actions. For example, a seller promises to sell a property, and the buyer agrees to pay for it.
2. Legal Obligations: Once both parties sign the contract, it becomes legally enforceable, meaning either party can seek legal recourse if the other fails to uphold their end of the deal. In real estate, enforceability usually depends on having the agreement in writing and signed. The statute of frauds generally requires contracts for the sale or transfer of land to be written and signed to be enforceable in court. This means a verbal agreement to buy or sell property is generally not enforceable as a real estate sales contract, even if both parties agree.
3. Clear Terms: Bilateral contracts include detailed terms such as price, closing dates, and any contingencies — including restrictions that may limit how the property can be used after purchase. For example, deed restrictions recorded on the property can affect what the buyer is actually getting, so they should be addressed in the contract terms.
4. Enforceability: Since these contracts are legally binding, breaching them can result in legal consequences. For instance, if a buyer backs out without valid grounds, they risk losing their earnest money deposit — the good-faith payment made when signing the contract. Understanding when earnest money is refundable and when it isn’t is one of the most commonly tested contract topics on the licensing exam.

Common types of bilateral contracts in real estate

In real estate, several types of bilateral contracts play an important role in property transactions. A few common ones are:

• Purchase agreements / sales contracts: Probably the most common type of bilateral contract, this agreement states that the buyer promises to pay the agreed price and the seller promises to transfer ownership of the property. These agreements usually include the purchase price, financing terms, property condition requirements, contingencies, and closing details. Purchase agreements are the most frequently tested bilateral contract on the licensing exam. Louisiana is unique — its contract law follows the Louisiana Civil Code tradition rather than common law, so the free Louisiana real estate practice exam frames purchase agreement questions differently than the free Wisconsin real estate practice exam or any other state.
• Lease agreements: In a lease agreement, the landlord promises to provide the tenant with the right to possess and use the property during the lease term, while the tenant promises to pay rent and follow the lease rules. These continuing duties make both parties aware of what is expected during the tenancy.

Another important bilateral contract is the exclusive agency listing, where the seller agrees to work with one agent and the agent promises to market the property. Both parties make binding commitments, making it a classic bilateral agreement. These contracts are foundational in real estate transactions, clearly defining the expectations and commitments of each party.

Bilateral vs unilateral contracts: What’s the difference?

A bilateral contract differs from a unilateral contract in one major way: mutuality of obligation. In a bilateral contract, both parties make promises to perform. In a unilateral contract, only one party makes a promise, which is fulfilled only if the other party completes a specified action. For example:

• Bilateral Contract Example: In a home purchase, both buyer and seller make promises — one to pay, the other to transfer ownership.
• Unilateral Contract Example: An open listing is a common real estate example. The seller only promises to pay a commission if an agent brings a ready, willing, and able buyer, but the agent has no obligation to act.

This distinction matters because bilateral contracts create binding obligations for both parties from the start, while unilateral contracts only become binding when the specified action is performed. California and Florida — the two states with the highest transaction volumes — test this distinction heavily because agents in those markets deal with both contract types daily. The California real estate salesperson exam and the Florida real estate sales associate exam include multiple questions on bilateral vs. unilateral contract scenarios.

Why are bilateral contracts important in real estate?

Bilateral contracts are essential in real estate because they create security and trust. Since both parties are legally obligated to fulfill their promises, there’s a sense of predictability and commitment. For instance, when a seller signs a purchase agreement with a buyer, both know what to expect in terms of payment, property condition, and transfer timing.

Besides, bilateral contracts lessen the probabilities of misunderstanding or disputes since clear obligations are known to each party. Should one party fail to meet their obligations, the other has legal grounds to enforce the contract or seek compensation.

Real-world example of a bilateral contract in real estate

To bring this concept to life, imagine that the buyer of a house, Sarah, who is buying for the first time, signs a purchase agreement with the seller, who promises to transfer the title of the house against a given agreed price; in return, Sarah will promise to get financing and pay the full amount of money on the closing date.

These are legally binding promises on the part of both Sarah and the seller: failure to fulfill these promises by either party entitles the other to seek any available legal remedies.

This is characteristic of mutual commitment in real estate transactions and underlines the fact that property dealings are based on bilateral contracts.

Bilateral contract FAQ

What are examples of bilateral and unilateral contracts in real estate?

A bilateral example is a purchase agreement where the buyer promises to pay and the seller promises to transfer title. A unilateral example is an open listing where the seller only pays a commission if an agent finds a buyer, while the agent has no obligation to act.

Once a sales contract is completed with all parties fulfilling their promises, what is it called?

The contract is considered executed. An executed contract is one where all parties have fulfilled their obligations, as opposed to an executory contract, which is still being performed.

Which of the following creates a bilateral contract?

A purchase agreement creates a bilateral contract. When both buyer and seller sign and exchange promises, one to pay and one to transfer title, a bilateral contract is formed.

Wrapping-up

Bilateral contracts go to the core of real estate and provide a format that maintains the transaction safe, clear, and lawfully binding. Grasping these types of contracts could be highly beneficial to anyone studying for their real estate license or starting a career as a real estate professional since it makes agreement handling much easier. 

Understanding bilateral contracts is essential for both the licensing exam and real-world transactions. For more practice and resources, explore Lexawise — our real estate exam prep will help you deepen your understanding and build confidence for exam day.