Legal status of Real Estate Contracts: Valid, Void, and Voidable

Understanding the basics of contract law is fundamental for your real estate exam prep and future career as an agent or broker. That’s why we bring you these three concepts: valid, void, and voidable contracts. They may seem similar words, but there’s a tricky difference between all of them. Stay and keep reading because we will explain each of them to you.

What Is a Valid Contract in Real Estate?

A valid contract meets the essential aspects of contract law to be enforceable. For example, if you signed a contract to buy a two-story house and the house has two stories, the contract is valid because you got what you were promised.

For a real estate contract to be valid, there are essential elements it must have:

• Capable parties
• Lawful object
• Consideration
• Offer and acceptance (Meeting of the minds)

Let’s learn what they’re about next, one by one.

Capable Parties

Capable parties are individuals with the legal capacity to enter into and perform the terms of the contract. That means they must be of legal age, of sound mind, and not subject to any legal disabilities that would prevent them from entering into a binding contract.

The following are other examples of capable parties:

• Emancipated minors
• An Attorney in fact (Someone in possession of a power of attorney)
• Someone who has the authority to contract on behalf of the entity they represent
• An agent who has the authority to contract

Lawful Object

On the other hand, a lawful object refers to the purpose of the contract. Such a purpose cannot be prohibited by law or public policy, for example, if someone sells a house in exchange for drugs or any illegal activity, then that is not an actual contract because it is not lawful. An illegal purpose would make a contract “void.”

Consideration

We usually associate consideration with money, but consideration can be anything of value, such as money, property, services, or even a promise to do something. Consideration can also be love and affection, which we call “good consideration.”

Offer and Acceptance (Meeting of the Minds)

Offer and acceptance is also known as a meeting of the minds or mutual consent. That means an offer must contain the exact terms and conditions, be precise enough for the other party to understand and respond, and be accepted without changes.

The offer must describe the property in detail and mention an exact price, not something like “a big amount of money.” It must say the exact amount it’s offering, such as a million dollars.

The party that makes the offer is called the offeror, and the party that receives the offer is called the offeree. It usually involves a potential buyer (offeror) presenting terms under which they are willing to purchase a property from a seller (offeree).

There are some scenarios when an offer can be terminated; some of them are death or mental disability of any of the parties, destruction of the property, a material change, or when the other party makes a counteroffer.

A counteroffer occurs when the offeree changes the terms of the original offer. After this, the roles change: the offeror becomes the offeree, and the offeree becomes the offeror.

Void vs. Valid Contract: The Difference

On the contrary, a void contract is missing at least one of the four essential elements mentioned before. In other words, it is not even a contract.

For instance, if one of the parties has a mental disability, that would make the contract “void” because one essential element is missing. Can you guess which one? That’s right, “competent parties” is the essential element being violated.

In summary, a void contract has no legal force and is unenforceable by the law. Also, remember that a contract with an illegal purpose of any sort is void.

Voidable Contracts in Real Estate: An In-between

A ‘voidable’ contract gives either party the option to rescind, meaning they could terminate the agreement. It could be valid initially because it met all the essential elements mentioned before. However, in some circumstances, it could become void later on.

For example, if you signed a contract to buy a house with a bedroom but got a house with two, you could make that contract void and refuse the house because you didn’t get what was exactly in the contract. Still, you could also have the option to keep going with it and accept the house, that’s why the contract is voidable.

Following the same line of thought, the fact that a two-story house must be provided to you since you signed for a two-story home is an example of a contingency. If a contingency provision in a contract is not met, said legal document could be legally voided.

Another way a contract is voidable is if they were signed under duress, misinterpretation, or fraud. Let’s say someone forces you to buy a house. Then, you entered that contract under duress. However, even signing a contract under those circumstances does not make it void. The contract is “voidable” because you still have the chance to purchase the property if you want to. What if you actually like the property? You can still buy it. In this imaginary case, the contract is only voidable by you, which means that you can cancel it because it was signed under duress, but you don’t have to if you don’t want to.

In Conclusion

The difference between valid, void, and voidable contracts in real estate is very clear. To summarize: A valid contract meets all the essential elements of contract law, a void contract lacks one or more of these essential elements and has no legal force, and, finally, a voidable contract, initially valid, gives parties the option to rescind the agreement under specific circumstances. Keep learning these real estate concepts and more to pass your real estate exam on the first try.