The 5 Most Common Types of Real Estate Contracts

Selling or buying real estate can be complicated. Significant sums of money are at stake, regulations must be followed, and everyone’s interests must be protected. Everything must be discussed and written to close a deal that benefits all parties. That’s when real estate contracts step in to ensure a smooth and lawful process.

However, these legal documents often have their fair share of confusing jargon and intricate clauses. Even so, they are classified depending on several aspects of the agreement, like the terms of possession or the parties involved.

From legalities to financial implications, there’s a lot to understand. But fear not! In this blog, we’ll share the five most common types of real estate contracts, helping you better understand this vital aspect of the real estate exam. Let’s dive in!

Different Types of Real Estate Contracts

Real estate contracts are legally binding agreements between two or more parties regarding the purchase, sale, exchange, or lease of property. Like any other contracts, they can be oral or written. Nonetheless, for a contract to be valid and enforceable, it needs to be written.

Real estate contract types depend on their objectives, duration, and financial terms. Here are the five most common types of real estate contracts.

Sales and Purchase Agreement (SPA)

A Sales and Purchase Agreement (SPA) is the most common type of real estate contract. It is a deal between a buyer and a seller to transfer ownership of a specific property. It includes several details regarding the purchase, such as the property’s description, parties’ identities, price, and terms of possession. Suppose there are appliances, furniture, or anything else that goes with the property’s sale. In that case, it should also be stated in the document.

Land Contract or Contract for Deed

Land contracts are an alternative for people who cannot afford to buy a property with a mortgage. They are a type of seller-finance; in this case, the buyer won’t get credit from a bank or any other financial institution; they borrow the money directly from the seller. This way, the buyer’s loan payments go to the seller until all is paid.

This type of real estate contract has different names depending on your location. It’s also called installment land contracts, contracts for deeds, or bonds for title.

Lease Agreement

These are contracts for rental properties. With them, a landlord agrees to rent a place for a tenant at a fixed monthly rate. Depending on the agreement between the parties, it can also include utility payment, security, or any other benefits.

To understand lease agreements better, you should also know the answer to these common questions:

• Can a landlord change the lease agreement? As real estate rents increase over time, people wonder if a landlord can change the lease agreement as they please. In this case, like any other, a real estate contract can only be changed in the middle of the lease term if both landlord and tenant agree.

• What is an option contract? It is a contract where the landlord (optionor, in this case) agrees to lease a property to a tenant (optionee) with the option to buy at a designated time. As a unilateral contract, the obligation only goes one way: the landlord has to sell the property to the tenant as agreed, but the tenant doesn’t have to buy it if they don’t want to. Notice that as long as the tenant doesn’t choose to buy it, it is a unilateral contract, but when they do, it becomes bilateral.

Assignment Contract

In an assignment contract, a property owner grants a real estate investor the right to purchase a property but not the property’s title itself. Then the investor can then sell that right to another. When a buyer finally buys the property, that buyer pays the investor a fee.

Power of Attorney

The power of attorney exists in all 50 states, allowing a person to represent another in legal contracts. For example, when someone cannot sign the agreement or participate in the negotiations because they are overseas, hospitalized, or not sound of mind, they can allow someone else to sign for them.

In this case, the word attorney may be confusing, but you don’t need to be a lawyer to have a power of attorney contract; anyone can have one as long as the represented person assigns them.

The power of attorney is limited to what is agreed in the contract. For example, it may authorize someone to sell a property but not to manage or make other decisions.

Learn these aspects about this type of real estate contract:

• Can a real estate agent be a power of attorney? Yes, a real estate agent can be named power of attorney. This decision could be beneficial because they can manage and close the deals signing by themselves instead of waiting for their client.

• Who can override a power of attorney? The only person who can override a power of attorney is the principal, who gave it in the first place. However, if the principal is not of sound mind for some reason, a legal guardian or loved one can override it.

Summarizing

By understanding the details of these common contract types, you’ll be equipped to make informed decisions and protect your future client’s interests. Be sure to learn them all to pass the real estate exam on the first try.