3.1 Iowa Contract Requirements
Key Takeaways
- Iowa's Statute of Frauds (Iowa Code Chapter 622) requires real estate sale and lease contracts (over one year) to be in writing and signed by the party to be charged
- A valid contract needs five elements: offer, acceptance (mirror-image), consideration, legal capacity, and lawful purpose
- Earnest money must be deposited in the broker's trust account no later than 5 banking days after the last signature of acceptance (IAC 193E-13.1), and only the broker (never the salesperson) may hold it
- Iowa's mandatory Seller Disclosure of Property Condition and lead-based-paint disclosure (pre-1978 homes) attach to most residential purchase agreements
- Financing, inspection, and appraisal contingencies plus a 'time is of the essence' clause are tested heavily on the 40-question Iowa state portion
Exam Context
The Iowa salesperson exam is administered by PSI (not Pearson VUE) and contains 120 scored multiple-choice questions plus 5-10 unscored experimental items. The 80-question national portion allows 2 hours and the 40-question Iowa state portion allows 1 hour; you must score 70% on each independently (56/80 and 28/40). Contract law and property law dominate both portions, so this chapter targets high-yield material.
Statute of Frauds
Iowa's Statute of Frauds lives in Iowa Code Chapter 622. To be enforceable in court, certain contracts must be in writing and signed by the party to be charged (the person being sued to enforce the deal) or that party's authorized agent.
Contracts that must be written in Iowa real estate practice include:
- Any contract for the sale of real property or an interest in land
- A lease longer than one year
- A listing or buyer-agency agreement that promises a commission
- A contract that cannot be performed within one year
Key Point: An oral promise to sell a house is generally unenforceable. The narrow part-performance exception can apply when a buyer takes possession, pays part of the price, and makes improvements in reliance on an oral deal.
Iowa's electronic transactions law (Iowa Code Chapter 554D, the Uniform Electronic Transactions Act) means electronic signatures and emailed agreements are valid if both parties agree to transact electronically. So the trap answer 'email contracts are never valid' is false.
The Five Elements of a Valid Contract
| Element | What it requires | Common exam trap |
|---|---|---|
| Offer | Definite terms, price, parties, property | An ad is an invitation to offer, not an offer |
| Acceptance | Unequivocal, mirror-image of the offer | A change = counteroffer, killing the original |
| Consideration | Something of value (money, a promise) | Earnest money is evidence, not consideration itself |
| Legal capacity | Competent adults (18+), sane, sober | A minor's contract is voidable by the minor |
| Lawful purpose | Legal object | A contract to violate fair-housing law is void |
A counteroffer legally terminates the original offer; the original cannot later be 'snapped up.' This mirror-image rule is a frequent state-portion question.
Worked Example: Counteroffer Trap
A seller lists at $310,000. A buyer offers $295,000. The seller counters at $305,000. While the seller's counter sits open, the buyer's $295,000 offer is dead. If the buyer now says 'I accept your original $295,000,' there is no contract unless the seller agrees again, because the counteroffer extinguished it.
Earnest Money Handling
Earnest money (a good-faith deposit) demonstrates the buyer's serious intent. Iowa Real Estate Commission rules treat it as trust money with strict handling.
| Requirement | Rule |
|---|---|
| Where deposited | The broker's trust (escrow) account, never an operating or personal account |
| Who holds it | The broker is responsible; a salesperson must deliver funds promptly to the broker |
| Timing | Deposited per contract terms; if silent, no later than 5 banking days after the last signature of acceptance (IAC 193E-13.1) |
| Commingling | Prohibited - mixing trust funds with brokerage operating funds is a disciplinary violation |
| Conversion | Using client funds for personal use is a serious offense risking license revocation |
Disbursement Disputes
When buyer and seller disagree on who gets the deposit, the broker must not simply pick a side:
| Situation | Proper action |
|---|---|
| Both parties agree in writing | Disburse per the signed agreement |
| Genuine dispute | Hold the funds in trust until resolved |
| Litigation | Release only on a court order |
| Interpleader | Broker may deposit funds with the court and let it decide |
Required Iowa Disclosures
Iowa imposes statutory disclosure duties that ride along with the purchase agreement:
- Seller Disclosure of Property Condition (Iowa Code Chapter 558A) - the seller of most 1-4 family residences must deliver a written condition statement to the buyer before the buyer makes a written offer (or the buyer may withdraw).
- Federal lead-based-paint disclosure for homes built before 1978, giving the buyer a 10-day inspection window.
- Agency disclosure under Iowa Code Chapter 543B identifying who each licensee represents.
Common Contingencies
Contingencies let a party exit if a condition fails. Each must state a specific deadline.
| Contingency | Protects | Key detail |
|---|---|---|
| Financing | Buyer | Buyer must apply within X days; may need a written loan denial to cancel |
| Inspection | Buyer | Buyer may accept, request repairs, or terminate within the inspection period |
| Appraisal | Buyer | If value < price, seller cuts price, buyer pays the gap, or deal cancels |
| Sale of buyer's home | Buyer | Often paired with a kick-out clause letting the seller take a better offer |
Time Is of the Essence & Contract Status
Most Iowa purchase agreements state 'time is of the essence,' making every deadline strict; missing one can be a breach. Extensions must be in writing.
- An executory contract is signed but not yet fully performed (between acceptance and closing).
- An executed contract has been fully performed by both sides (after closing).
Exam Tip: Liquidated damages (often the earnest money) is the seller's typical remedy when a buyer defaults; specific performance and actual damages are alternatives.
Under Iowa's Statute of Frauds, which statement is TRUE about real estate contracts?
A buyer offers $295,000. The seller responds with a written counteroffer of $305,000. Before the seller acts further, the buyer says, "I'll take it for your asking price instead." What is the legal status of the original $295,000 offer?
Where must earnest money be deposited in an Iowa real estate transaction, and who is responsible for it?
What does a "time is of the essence" clause do in an Iowa purchase agreement?