Contract Types and Required Elements

Real estate transactions are contract-driven. To pass the exam, you must know the basic types of contracts and the required elements that make a contract valid and enforceable.

Core Contract Types

Express contract - A contract with terms stated clearly, either orally or in writing.

Implied contract - A contract created by the actions of the parties rather than spoken or written words.

Unilateral contract - A one-sided contract where one party promises to do something if the other performs an act.

Bilateral contract - A two-sided contract where both parties promise to perform.

Most purchase agreements are bilateral because both buyer and seller promise to perform.

Contract Type Comparison

Table: Contract Types

Required Elements of a Valid Contract

A valid contract requires all of the elements below:

1. Mutual consent - Both parties agree to the same terms (meeting of the minds).
2. Consideration - Something of value is exchanged.
3. Legally competent parties - Parties must have legal capacity.
4. Legal purpose - The contract must be lawful.
5. Offer and acceptance - The contract must include a clear offer and an acceptance.

If any element is missing, the contract may be void, voidable, or unenforceable.

Mutual Consent (Meeting of the Minds)

Mutual consent means both parties agree to the same terms. If one party thinks the contract is for $300,000 and the other thinks it is for $330,000, there is no mutual consent.

Mutual consent is usually shown through a clear offer and acceptance. If the buyer changes a term, that is a counteroffer, not an acceptance.

Consideration

Consideration - Something of value exchanged between the parties. It can be money, services, or a promise.

In a real estate contract, consideration is usually the purchase price. Earnest money can support the contract but is not always required to create a valid agreement.

Legal Capacity

Competent party - A person who has the legal ability to enter a contract.

Minors and legally incompetent individuals can sign contracts, but those contracts are often voidable. That means the person lacking capacity can choose to cancel.

Legal Purpose

Contracts must have a legal purpose. A contract to sell illegal substances is void. A contract to misrepresent a property is also void.

Real estate contracts must comply with fair housing laws and disclosure requirements. A contract that violates those laws may be void or unenforceable.

Common Exam Traps

• Confusing express with implied contracts.
• Assuming all contracts must be written (some must be, but not all).
• Forgetting that a counteroffer rejects the original offer.
• Thinking earnest money is required for a valid contract.

Mini-Case: Implied Contract

A landlord provides a tenant with keys, and the tenant starts paying rent every month. No lease is signed. This is an implied contract based on conduct. The agreement is still enforceable, even without a written lease.

Summary

Know the core contract types and the required elements. On the exam, focus on mutual consent, consideration, legal capacity, and legal purpose. If any element is missing, the contract is not valid.

Step-by-Step: Building a Valid Contract

Use this quick checklist to analyze contract questions:

1. Offer - Is there a clear proposal with specific terms?
2. Acceptance - Did the other party accept without changes?
3. Consideration - Did both parties exchange something of value?
4. Capacity - Are both parties legally competent?
5. Legal purpose - Is the contract lawful?

If all five are present, the contract is usually valid.

Offer and Acceptance Basics

An offer must be clear and definite. Acceptance must be communicated and must match the offer exactly. If the buyer changes any terms, it becomes a counteroffer and the original offer is terminated.

Mailbox Rule (General)

Under the traditional mailbox rule, acceptance is effective when sent, not when received. However, real estate contracts often specify that acceptance is effective when received. Always read the contract language.

Consideration vs. Earnest Money

Earnest money is a good faith deposit, but it is not the same as consideration. Consideration is the entire exchange of value, typically the purchase price. A contract can still be valid even if the earnest money is small.

Applied Scenario

A buyer submits an offer at $500,000. The seller signs but changes the closing date. That change is a counteroffer. The buyer must accept it for a contract to exist.

Exam Application Check

If a question asks whether a contract exists, check for mutual consent and unaltered acceptance. If the acceptance changes a term, no contract exists until the original offeror agrees.

Capacity, Consent, and Legality

Contracts require capacity. Minors, intoxicated persons, and legally incompetent persons can enter contracts, but those contracts are usually voidable by the party who lacks capacity.

Businesses and estates must act through authorized representatives. If an unauthorized person signs, the contract may be unenforceable. Agents should confirm authority before accepting signatures.

Consent must be voluntary. If consent is obtained by fraud, misrepresentation, duress, or undue influence, the contract is voidable by the harmed party. Fraud involves intentional deception. Misrepresentation can be unintentional but still creates a voidable contract.

Legal purpose means the contract cannot violate law or public policy. A contract that requires discrimination or concealment of known defects is illegal and void.

Consideration vs. Gift

A promise to make a gift is not enforceable because it lacks consideration. In a purchase agreement, consideration is the purchase price and the promise to convey title. Earnest money supports the contract but is not the only consideration.

Exam Application Check

If a question mentions fraud or duress, the contract is usually voidable. If the contract requires illegal acts, it is void.