4.1 Contract Types and Required Elements

Why contracts dominate the national exam

Real estate is the transfer of rights in land, and every transfer rides on a contract. Roughly 17 percent of the national salesperson exam tests contracts and agency, so mastering the vocabulary here is high-yield. The exam rarely asks you to draft language; it asks you to classify an agreement and decide whether it is enforceable.

The four required elements

A contract is a legally enforceable promise. To be valid it must contain four essentials. Memorize them as a checklist; exam questions strip one element away and ask what the contract becomes.

Note the precise wording: the meeting of the minds is mutual assent. An offer becomes a contract only when accepted exactly as written. Any change in terms is a counteroffer that kills the original offer and reverses the roles of offeror and offeree.

The three classification axes

The exam loves to test pairs. Learn each axis separately.

Express vs. implied

An express contract states its terms in words, written or spoken. An implied contract arises from conduct: a buyer who walks into an open house and tours with the agent has not formed an agency by words, but conduct can create implied duties.

Bilateral vs. unilateral

In a bilateral contract both parties promise to perform; a purchase agreement is bilateral because the seller promises to convey and the buyer promises to pay. In a unilateral contract only one party is obligated until the other acts. An open listing and an option are the classic unilateral examples on the exam: the owner is bound only if and when someone performs.

Executory vs. executed

An executory contract has unperformed obligations remaining. A signed purchase agreement before closing is executory. Once closing occurs and all terms are fully performed, the contract is executed. Watch the trap: a contract can be in writing and signed (executed as to signatures) yet still be executory until performance is complete. The exam uses 'executed' to mean fully performed.

Validity status: void, voidable, unenforceable

These three are constantly confused. Distinguish them precisely.

• Void: has no legal effect from the start; missing a required element such as legal purpose. Nothing to enforce.
• Voidable: valid until one party elects to cancel; arises from minority, fraud, duress, undue influence, or misrepresentation. The innocent party chooses.
• Unenforceable: a valid contract that a court will not enforce, usually because it violates the Statute of Frauds (not in writing) or the statute of limitations has run.

A fraudulent contract is voidable by the defrauded party, not automatically void.

Statute of Frauds: the writing requirement

The Statute of Frauds requires certain contracts to be in writing and signed by the party to be charged. In real estate this covers:

1. Contracts for the sale of real property
2. Leases for more than one year
3. Listing agreements in most states (to collect a commission)

An oral agreement to sell land is not void; it is unenforceable. If both parties voluntarily perform, the deal stands, but neither can sue to compel the other. The exam phrasing 'an oral contract for the sale of land is ___' expects the answer 'unenforceable,' not 'void' or 'illegal.'

Offer, Counteroffer, and Acceptance

A contract forms only on a clear offer met by an unqualified acceptance communicated to the offeror. The mechanics generate many exam items:

• A counteroffer legally rejects the original offer and creates a new one; the original cannot then be revived by acceptance unless the other party re-extends it.
• An offeror may revoke any time before acceptance is communicated, even if a deadline was stated, unless the offeree paid for an option to hold it open.
• Acceptance must mirror the offer (the mirror-image rule); adding or changing a term is a counteroffer, not acceptance.
• Death or incapacity of either party before acceptance terminates the offer.

Trap: a seller who responds to a $300,000 offer with '$310,000' has rejected the $300,000 offer. If the buyer then says 'never mind, I'll pay $300,000,' there is no contract, the seller is free to walk, because the original offer is dead.

Earnest Money and Consideration

Earnest money is a good-faith deposit the buyer submits with the offer. It is not required to form a valid contract, the promises exchanged are the consideration, but it signals commitment and becomes part of the buyer's funds at closing. The deposit is held in the broker's trust (escrow) account, never commingled with operating funds.

If the buyer defaults without a valid contingency, the contract usually lets the seller retain the earnest money as liquidated damages. If the seller defaults, the buyer's deposit is refunded and the buyer may pursue further remedies. When a dispute arises over who is entitled to the deposit, the broker should not simply hand it to one side; the proper course is to hold the funds and, if the parties cannot agree, file an interpleader so a court decides. Mishandling earnest money is one of the most common license-discipline triggers.