The Elements of a Legally Valid Real Estate Contract
Every real estate transaction, residential, commercial, or otherwise requires a contract, even if it's verbal. However, a valid contract must always have certain elements, or it could be voided by a court of law. Let's take a look at those required elements.
A Legal Purpose
Parties cannot execute a contract to do an illegal act. The purpose of the contract must conform to the law. A contract between parties that involves fraud upon another would not be valid. Don't go see the judge to get your money back if your written contract with a drug supplier for 100 kilos of cocaine wasn't honored. It's an illegal act. Not only will you not get any relief, you'll likely end up in jail. For real estate, no matter how the contract is worded, if the seller isn't the legal owner, it's not going to work.
Legally Competent Parties
The parties to a contract must all be legally competent to enter into an agreement. This includes being of legal age and mentally competent at the time of entering the contract. You find out that a 15-year-old has inherited a prime piece of real estate and you really want it. Don't have them sign a sales contract and expect it to hold up in court. They're not old enough to do so. If someone is in an institution or getting special care to handle their affairs, the same thing applies. If there is any doubt in your mind about the capacity of the seller, do some more due diligence.
Agreement by Offer and Acceptance
In real estate, this is illustrated by an offer to purchase a property by a buyer and the acceptance of that offer by the owner/seller. In some states, this can be a handshake with a witness, but it's certainly not the way I'd want to buy or sell a property. The right way is a written contract with signatures of the parties involved. The buyer is offering a price with contingencies and the seller is accepting with contingencies.
Consideration is anything of legal value offered and exchanged in the contract. This could be money, services, or other valuable goods. Love and affection is even an example of consideration in some contracts. The consideration must be spelled out in the contract.
In most of today's real estate deals money is the consideration. That doesn't mean cash, as there will often be financing involved as well. Earnest money does move with the agreement, while the down payment and financing come at closing.
This element is the requirement that the parties to the contract have consented willingly and knowingly to the terms of the contract. There cannot be fraud, misrepresentation, a mistake, or undue duress on any party to the contract.
You've probably seen some of the Western movies with the evil rancher baron forcing his smaller neighbors off their ranches and making them sign the sale at gunpoint. That's definitely a no-no, and I'm sure it was then as well. Everybody must want the deal to happen or it's not valid.
When a Contract Is Valid
A contract is valid if it satisfies all of the required elements. It then becomes legally enforceable, meaning that the parties can be legally required to perform per the terms of the contract.
Should a party to the contract not perform per the terms or by deadlines set forth in the contract, they would be in default and could be legally required to perform or pay damages to the other parties.
In real estate, it's called suing for "specific performance." Let's say that a seller and buyer agree on a contract and it's working its way to closing. The seller is approached by another buyer offering a lot more money for the home, so they back out of the deal. They couldn't find any contingency or clause to allow that without a problem, but they back out anyway and refuse to close.
The buyer can go to court to force them to sell the property as agreed, specific performance. The reality is that there aren't many judges out there who will force this. They instead usually award some kind of monetary restitution from the seller to the buyer.