4.1 Contract Types and Required Elements

Contract Types and Required Elements

A contract is a legally enforceable agreement to do or refrain from doing some legal act. Real estate exams test contract law heavily because every transaction is a chain of contracts: the listing, the purchase agreement, the option, the lease, and the financing instruments. You must be able to spot whether an agreement is valid, void, voidable, or unenforceable, and why.

The five essential elements

Every valid contract requires all five elements below. Memorize them; missing-element questions are common.

Drop any one element and the contract fails or weakens. For example, an agreement signed by a buyer who is legally insane lacks capacity and is void, not merely voidable, because the party cannot form intent.

Mutual assent and the mirror-image rule

Acceptance must mirror the offer exactly. Any change in price, terms, dates, or conditions is a counteroffer, which legally rejects the original offer and creates a new offer that the original offeror may accept or reject.

Worked example: A seller lists at $400,000. A buyer offers $385,000 with a 45-day close. The seller responds at $395,000. That response is a counteroffer; the buyer's original $385,000 offer is dead and cannot later be "accepted" by the seller. If the buyer then says yes to $395,000, a contract forms at $395,000.

An offer terminates by: (1) acceptance, (2) rejection, (3) counteroffer, (4) lapse of time, (5) revocation before acceptance, or (6) death or incapacity of either party before acceptance.

The statute of frauds

The statute of frauds requires that contracts for the sale of real estate (and most leases longer than one year) be in writing and signed by the party to be charged (the party being sued for enforcement). An oral agreement to sell land is generally unenforceable even if both parties admit it exists.

Consideration

Consideration is the bargained-for exchange of legal value. It need not be money; a promise, a forbearance, or property can qualify. Earnest money is evidence of good faith but is not a required element of a valid purchase contract — the mutual promises to buy and sell already supply consideration.

Classifying contracts

Exams classify contracts three ways. You should be able to label any agreement on all three axes.

• By formation: Express contracts state terms in words (written or spoken). Implied contracts arise from conduct (a buyer's broker showing homes under an implied expectation of representation).
• By performance: An executory contract is not yet fully performed (a signed purchase agreement before closing). An executed contract is fully performed by all parties (after closing).
• By obligation: A bilateral contract is a promise for a promise — both parties are obligated (a standard purchase agreement). A unilateral contract is a promise for an act — only one party is obligated until the other performs (an option, or an open listing where commission is owed only if a broker produces a buyer).

Void, voidable, valid, unenforceable

The option contract

An option is a unilateral contract in which an optionor (owner) gives an optionee the right to buy within a set period at a set price, in exchange for option consideration. The optionee is not obligated to buy; the optionor is obligated to keep the offer open. If the optionee exercises, a bilateral purchase contract forms. Option money is generally non-refundable but often credited to the price if the option is exercised.

California Contract Rules a Salesperson Must Know

The national elements above all apply in California, but the state layers on specifics the DRE tests.

The Statute of Frauds in California

California Civil Code 1624 is the state statute of frauds. It requires a writing for the sale of real property, leases longer than one year, and an agreement authorizing a broker to sell real estate for compensation — meaning a listing agreement must be in writing to be enforceable for a commission. A salesperson who relies on an oral listing cannot sue to collect the commission. The mirror-image and counteroffer rules apply on California's standard C.A.R. forms exactly as described above.

Electronic Signatures and Records

California adopted the Uniform Electronic Transactions Act (UETA, Civil Code 1633.1 et seq.), so an electronic signature on a purchase agreement is as valid as ink, provided both parties agreed to transact electronically. This is why e-signature platforms are standard practice; a question suggesting an emailed, e-signed purchase agreement is "not a real contract" is testing UETA, and the contract is valid.

Capacity and Disaffirmance

A contract with a minor (under 18) is voidable by the minor, who may disaffirm it, but an emancipated minor may contract for real estate. A contract with a person judged legally incompetent is void. The exam distinguishes voidable (minor, undue influence, duress, fraud) from void (illegal object, total lack of capacity).

A Worked Counteroffer Timeline

A seller lists at $620,000. A buyer offers $600,000; the seller counters at $615,000 with a 30-day close. The buyer counters again at $610,000. At this point two original offers are dead — only the buyer's $610,000 counter is live. If the seller signs it and the acceptance is communicated, a binding bilateral contract forms at $610,000. If instead the seller tries to revive the earlier $615,000 counter, there is no contract, because each counteroffer extinguished the one before it.

Trap: Earnest money is not a required element of a valid California purchase contract. The mutual promises supply consideration. A distractor stating "the contract is void because no deposit was paid" is wrong.