4.1 Contract Types and Required Elements
Key Takeaways
- A valid contract needs offer/acceptance, consideration, legal capacity, legal purpose, and mutual assent; real estate sales contracts must also be in writing under the Statute of Frauds.
- Contracts are classified as express vs. implied, bilateral vs. unilateral, and executory vs. executed; an option is a classic unilateral contract.
- A void contract never existed legally; a voidable contract is valid until the protected party disaffirms; an unenforceable contract is valid but cannot be sued upon.
- Acceptance must mirror the offer; any change is a counteroffer that rejects the original and shifts the power to accept.
- Earnest money is evidence of good faith, not the consideration that makes a sales contract valid.
What a contract is
A contract is a legally enforceable agreement between two or more parties to do, or refrain from doing, some lawful act. In real estate the most tested contracts are the listing agreement, the buyer-representation agreement, the purchase (sales) contract, the option, and the lease. Every national exam puts several questions on whether a contract is valid and what to call it.
The required elements
Memorize these. A common mnemonic is "CC-LOLA": Capacity, Consideration, Legal purpose, Offer, Lawful (mutual) Assent — plus a writing for real estate transfers.
| Element | What it means | Trap to watch |
|---|---|---|
| Offer & acceptance (mutual assent) | A definite offer accepted without change; "meeting of the minds" | A counteroffer is a rejection, not an acceptance |
| Consideration | Something of legal value exchanged (money, a promise, an act) | Earnest money is good-faith evidence, not the consideration |
| Legal capacity | Parties of legal age and sound mind | A minor's contract is voidable by the minor |
| Legal purpose | The object must be lawful | A contract to violate zoning or fair-housing law is void |
| In writing | Statute of Frauds requires real-estate transfer contracts to be written and signed | An oral listing may still earn a commission in some states, but the sale of land must be written |
The Statute of Frauds is the writing requirement. It applies to any contract that conveys or creates an interest in real property and to leases longer than one year in most states. An oral agreement to sell land is unenforceable, not automatically void.
The Six Elements of a Valid Contract
Every binding real estate contract needs the same elements; the exam tests which one is missing in a fact pattern:
| Element | What it means | Failure example |
|---|---|---|
| Offer and acceptance | A meeting of the minds (mutual assent) | A counteroffer rejects and replaces the original offer |
| Consideration | Something of value exchanged | A bare promise with nothing in return |
| Legally competent parties | Of age and sound mind | A minor's contract is voidable by the minor |
| Legal purpose | Lawful object | A contract to sell property for an illegal use is void |
| Mutual assent / reality of consent | Free of fraud, duress, undue influence, mistake | Signature obtained by threat is voidable |
| Writing (per Statute of Frauds) | Land contracts must be written | Oral land sale is unenforceable |
Counteroffer trap: A counteroffer is simultaneously a rejection of the prior offer and a new offer. The original offeror is now free to walk; the original offer cannot later be "accepted" because it no longer exists. Examiners build chains of offers and counteroffers and ask which offer is open.
How contracts are classified
The exam loves the classification axes below. Learn each pair as an either/or choice.
- Express vs. implied — express is stated in words (written or oral); implied is created by conduct (a buyer accepting brokerage services).
- Bilateral vs. unilateral — bilateral is a promise for a promise (a sales contract: I promise to buy, you promise to sell). Unilateral is a promise for an act, performance is optional until done (an option contract, or an open listing where only performance earns the fee).
- Executory vs. executed — executory means something is still left to do (a signed sales contract before closing); executed means all parties have fully performed (after closing).
Worked example: option contract
A buyer pays a seller $3,000 for a 90-day option to purchase a lot for $180,000. The option is unilateral: the seller is bound to keep the offer open, but the buyer has no obligation to buy. If the buyer exercises, the contract becomes a bilateral sales contract. If the $3,000 is non-refundable and not credited, the buyer's true cost to close is $180,000 + $3,000 = $183,000. If the option says the fee credits to price, the buyer pays only $180,000 at closing.
A frequent trap: students call the option "voidable" because the buyer can walk away. It is not voidable — the buyer simply holds an unexercised right under a fully valid unilateral contract.
Void, voidable, valid, and unenforceable
This four-way distinction is one of the most missed topics on the national exam. Read the chart slowly.
| Status | Meaning | Classic example |
|---|---|---|
| Valid | Binding and enforceable on both parties | A properly signed sales contract |
| Void | No legal effect from the start; nothing to enforce | A contract for an illegal purpose, or signed by someone declared mentally incompetent by a court |
| Voidable | Valid until the protected party chooses to disaffirm | A contract signed by a minor, or one induced by fraud or duress |
| Unenforceable | Valid in form but a court will not enforce it | An oral land-sale contract (Statute of Frauds); a claim past the statute of limitations |
Key reasoning rule: ask who can escape the contract. If no one could ever enforce it, it is void. If only one protected party can escape (the minor, the defrauded party), it is voidable. If it cannot be sued upon but is otherwise fine, it is unenforceable. A contract signed under undue influence or fraud is voidable by the victim — the wrongdoer cannot void it.
A 17-year-old signs a contract to buy a condominium. Before closing, the seller wants to back out and argues the contract is void. What is the correct status?
Which statement about earnest money is correct for a residential sales contract?