Real Estate Basics-Contract Terminology

Posted by admin on July 24, 2010 under Real Estate License Basics | Be the First to Comment

When you are studying for the real estate license exam, there are a lot of real estate terms that you will have to familiarize yourself with during the course of your real estate training. Among the most important of these will be contract terminology. There is a great deal of terminology to cover, so we will focus on the terms that are required components of a legally binding contract.

First and foremost is the contract itself. A real estate sales contract can be referred to as a contract for purchase, an agreement of sale, an earnest money contract, or a contract of purchase and sale. In order for a contract to be valid, it must meet certain criteria.

A contract requires a vendee, which is someone to make the purchase, and a vendor to sell the property.  Offer and acceptance are terms that are a part of the first step of completing a sales contract referring to the negotiation process. The vendee must make an offer of the property for sale that must be accepted by the vendor to validate the contract.

A contract must be enforceable. This means it has to meet specific criteria to be considered a valid contract. It must be created as a voluntary act of mutual consent by competent parties with consideration and a legal purpose. The contract must be in writing with the purchase price, property and interested parties all clearly specified. Oral contracts are not enforceable.

An earnest money escrow deposit is the money that the vendee puts up to show good faith and hold the property until the contract is complete. This fulfills the consideration requirement needed to make a contract enforceable.

Contract contingencies are conditions that must be met for a contract to be completed. A statement of contingency must be clearly stated, have an expiration date, and requires parties to make diligent attempts to fulfill the stated contingency. The most common contract contingency is financing. When an offer is accepted it is generally accepted with the contingency that the vendee secures the financing needed to make the purchase. If the contingency of financing is met in a timely manner, then the sale can proceed. If the financing contingency is not met then the contract is terminated.

If the vendee does not make good on the offer that is accepted by the vendor, this could be considered buyer default.  If the buyer does not meet the contracts terms then the seller has the right to pursue the buyer legally for defaulting on their contract. Most often the buyer will forfeit their earnest money deposit in a process called liquidated damages.

An agreement of sale is an executory contract. This means that once the terms have been met and the signatures are in place, the contract is complete or fully executed and the contract is then terminated as it will have served its purpose. When a contract is completed, the interest in the property changes hands. This is called the transfer of equitable title.