Real Estate Contracts: Types, Key Elements, and How to Automate

According to Zillow, the average value of a home in the US is $362,481. With property valuations so high, real-estate contracts call for utmost scrutiny. 

Real estate contracts cover buying and selling transactions from all angles, with provisions to protect the interests of the buyer and lesser.

These complex documents require time and effort to prepare, and even legal professionals can make mistakes, especially when working under pressure, with looming deadlines and impatient clients.

In this article, we will learn about the different types of real estate contracts, and how Docupilot can help you automate and streamline the contract creation process.

What is a Real Estate Contract?

A real estate contract is a legally binding agreement between parties in a real estate transaction. These contracts are used to sell, purchase, rent, or lease residential and commercial properties.

Real estate contracts don’t only protect both sides in a transaction: with everything laid out in black and white, parties to a transaction know their obligations and the risks of non-compliance, which helps to streamline the process and produce a mutually beneficial outcome.

Key Elements of Real Estate Contracts

For legal enforceability, a real estate contract must meet the following requirements.

Offer and Acceptance

A legal contract requires a party (the offerer) to make an offer the other party (the offeree) accepts. 

This requirement provides for mutual understanding of the terms of the contract and a clear intention of entering into a legal relationship. It also implies voluntary acceptance, as opposed to acceptance made under duress.

In the real estate context, for example, a contract would be formed when a  buyer (offerer) makes an offer and a  seller (offeree) accepts the offer. 

Consideration

Consideration, in legal terms, refers to something of value. A valid contract involves an exchange of consideration. This exchange provides support to the contract. 

For example, an owner sells a house in exchange for suitable compensation: the seller’s consideration is the house, and the buyer’s consideration is the money they pay for the house.

Capacity

Here, capacity refers to legal capacity, or the valid authority to enter a legal agreement. 

In personal dealings, a minor, a person under the influence of drugs, or a person unable to understand contract language, does not have legal capacity.

In business dealings, a person not authorized to conduct business and sign contracts on behalf of a corporation lacks legal capacity. 

Legality of Purpose

Another requirement for a valid contract is the legality of purpose and compliance with relevant laws and regulations. 

Types of Real Estate Contracts

There are several types of real estate contracts. In this section, we will discuss the most important ones in detail. 

Purchase Agreement 

A purchase agreement is a contract between a buyer and seller outlining the terms and conditions of the sale of a property.

The buyer, refers to an individual, a business, or even a real estate agent. Similarly, the seller can be a homeowner, a realtor, or a corporation. 

Besides elements common to real estate contracts, purchase contracts include the purchase price, earnest money, contingencies, financing terms, and the closing date.

Depending on the exact details of a transaction, you might need one of the following specific types of purchase agreements. 

State/Association Purchase Agreement

A state's real estate commission or a professional association draws up a state/associate purchase agreement. It includes state-specific terms and conditions, standardized clauses, and language. The main intent behind such an agreement is to ensure all parties understand their rights and obligations under the law and to streamline the transaction.

General Purchase Agreement

A general purchase agreement is a summarized and shorter version of the state/association agreement that can be adapted to various real estate transactions. It is especially useful when buyers and sellers deal directly, i.e. without an intermediary such as a real estate agent. 

Property-Specific Purchase Agreement

A property-specific purchase agreement is a customized agreement used when the property is associated with unique aspects. 

For example, consider transactions that involve vacant land or mobile homes. Unique conditions related to property can include existing leases, environmental concerns, or restrictions on development.

Rental Agreement

A rental agreement is a contract between a property owner and a tenant who wants to take temporary possession. The agreement outlines the terms and conditions under which the tenant can lease the property for a short duration, typically less than a year.

Key elements of rental agreements include the property description, the rent amount, contract duration, security deposit, utility payments, and termination conditions. 

There are several types of rental agreements, including the following:

• Residential rental agreement: A contract between a landlord and tenant outlining the terms and conditions for renting a residential property.
• Commercial rental agreement: A contract between a landlord and a business tenant outlining the terms and conditions for renting commercial property, such as office space, retail locations, or warehouses.
• Month-to-month agreement: An agreement that renews monthly until either party terminates, such as a tenant renting a single-family home in Los Angeles, with either party having the right to terminate with a 30-day written notice.
• Short-term/vacation rental agreement: An agreement to accommodate short stays, typically less than 30 days. For example, newlyweds on their honeymoon renting a vacation rental home through Airbnb.

Lease Agreement

Lease agreements, like rental agreements, outline terms for the lease of a property. In contrast to short-term rental agreements, lease agreements are long-term contracts, typically up to a year for residential leases and 3 to 25 years for commercial leases.

Key elements for lease agreements are similar to those for rental agreements, the difference being lease agreements usually can only be modified at the end of the term.

These are some of the different types of lease agreements:

• Lease-Purchase Agreement: A lease-purchase agreement gives the tenant the right to purchase the leased property at a later date. Payment of an upfront option fee gives the tenant exclusive rights to the purchase.
• Absolute net lease agreement: A strict commercial lease where the tenant is responsible for all property-related costs, including base rent, property taxes, insurance premiums, maintenance costs, and structural repairs.
• Sublease agreement: This agreement allows a tenant to rent out all or part of a leased property to another person or business (the subtenant). For example, consider the case of a college student with a one-year apartment lease subleasing the apartment for the summer months.
• Commercial lease agreement: An agreement for renting property for commercial or business purposes. An example would be a tech startup renting office space in a commercial building in San Francisco.
• Fixed-term lease agreement: An agreement for a specific period, with the tenant committing for the entire term with penalties for premature termination. For example, a 12-month lease for an apartment in New York. 

Real Estate Assignment Contract

Real estate assignment contracts allow one party to transfer their rights and obligations under an existing real estate contract to another party. Investors often use these contracts to ‘flip’ real estate.

In addition to the original purchase price agreed between the property owner and the assignor (the investor), the assignee (new buyer) must pay an assignment fee to the assignor for their rights. 

For example, David discovers an undervalued property that needs repairs and believes that he can make a profit by flipping it. He negotiates with the owner and agrees to purchase it for $200,000 for which they sign a purchase agreement. Instead of purchasing the property himself, he finds a buyer, Sarah. 

David signs a real estate assignment contract that allows him to transfer his rights under the original purchase agreement to Sarah. David charges Sarah a $20,000 assignment fee. Sarah agrees to pay the owner the agreed-upon purchase price directly and pays the assignment fee to David. She will officially take ownership of the property once the payments are done. 

After acquiring the property, Sarah makes necessary repairs and improvements to increase its value. Once completed, she sells the property at a higher price, allowing her to cover her expenses and make a profit.

Key contract elements include the parties involved (assignor, assignee, seller), original purchase agreement, assignment fee, assignment terms, purchase price, earnest money, and closing date.

Power of Attorney Agreement

A power of attorney agreement is used to grant a person or persons the authority to make legal and financial decisions on another person’s behalf.

Key agreement elements include the principal (person granting the authority), agent (person or entity getting the authority) and their responsibilities, scope of authority, duration, effective date, incapacity clause (for durable power of attorney contracts), and governing law.

Depending upon the situation, you can use different power of attorney agreements:

• General Power of Attorney: Gives broad authority for legal and financial matters
• Limited Power of Attorney: Grants authority for a specific purpose, such as selling real estate.
• Durable Power of Attorney: Remains in effect even if the principal becomes incapacitated.

Real Estate Partnership Agreement

Partners use real estate partnership agreements when they decide to work together to purchase and manage properties.

Key elements include details of parties involved, capital contributions, ownership structure, responsibilities, profit/loss distribution, decision-making authority, terms of the partnership, buyout clause, and amendments.

Listing Agreement

A listing agreement is a contract between a property owner and an estate agent/broker that gives the agent the right to list, market, and sell the property on the owner’s behalf.

Key contract elements include details of parties involved, property description, listing price, agent’s commission, type of agreement, duration, and the responsibilities of the seller and the agent.

Automate Real Estate Contracts with Docupilot

There are many types of real estate contracts. In addition to general requirements (offer/acceptance, consideration, etc), each type of contract has its key elements, clauses, and requirements.

In other words, it’s a minefield, and failure to navigate it safely can have serious consequences, such as financial losses, lawsuits, title and ownership disputes, and increases in legal costs.

Docupilot is a document automation platform you can use to automate the creation of your real estate contracts. You can use Template Builder to create a template for each type of contract you use, make suitable adjustments anytime you want to create a contract, and the contract will be ready at the press of a button.

And that’s not all: you can use the 70+ integrations to set up automated workflows, deliver contracts to clients, sign electronically, or store them securely.

To top it all off, Docupilot is affordable: plans start at $29/month, and all plans include unlimited templates, third-party integrations including Zapier, Airtable, and Make, and API access.

Signup for a 30-day free trial and see your contract success improve exponentially.