4.1 Contract Types and Required Elements

Why Contracts Drive the Exam

Every real estate transaction is a chain of contracts: a listing, an offer, a purchase agreement, sometimes an option or a lease. The national exam expects you to classify a contract and verify that it meets the legal requirements to be enforceable.

Core Contract Types

Express contract - terms are stated outright, in writing or by spoken word. A signed purchase agreement is the prime example.

Implied contract - formed by the conduct of the parties rather than stated words. A buyer who occupies a property and pays monthly while both sides act as landlord and tenant has an implied agreement.

Unilateral contract - a promise in exchange for an act. Only one party is bound until the other performs. An option is the classic real estate example: the seller is bound to hold the price open, but the buyer is not obligated to buy.

Bilateral contract - a promise exchanged for a promise. Both parties are obligated. Most purchase agreements are bilateral because the buyer promises to buy and the seller promises to sell.

Table: Contract Types

The Five Required Elements

A contract is valid only when all five elements below are present. Memorize them as a checklist:

1. Competent parties - each signer has legal capacity (of legal age and of sound mind).
2. Mutual consent - a meeting of the minds shown through a clear offer and an unaltered acceptance.
3. Consideration - a bargained-for exchange of value (the price plus the promise to convey title).
4. Legal purpose - the contract's object and objective must be lawful.
5. Described object - the property and essential terms are identified clearly enough to perform.

If any element is missing, the agreement may be void (no legal effect), voidable (one party may cancel), or unenforceable (valid but not actionable in court).

Mutual Consent: Offer and Acceptance

Mutual consent requires that both parties agree to the same terms. An offer must be definite, and acceptance must mirror it exactly. If the offeree changes even one term, that response is a counteroffer, which rejects and terminates the original offer.

Worked example: a buyer offers $400,000 with a 30-day close. The seller signs but writes in a 45-day close. No contract exists yet; the seller has made a counteroffer, and the buyer is now free to accept, counter again, or walk away.

Consideration Versus Earnest Money

Consideration is the value each side gives up. In a sale, the buyer's consideration is the price and the seller's is the promise to deliver title. A bare promise to make a gift has no consideration and is unenforceable.

Earnest money is a good-faith deposit that shows the buyer is serious. It is held in trust and credited at closing. It is not a required element. A contract with a $1,000 deposit and one with no deposit can both be fully valid as long as consideration exists.

Common trap: a question asks what makes a contract valid and lists earnest money, notarization, recording, and consideration. Only consideration is an element; the others are formalities.

Capacity and Legal Purpose

Competent party means legal capacity. Contracts with minors or the legally incompetent are usually voidable by the protected party, who may either enforce or cancel.

Legal purpose means the contract cannot require an unlawful act. An agreement to refuse to sell based on a protected class, or to conceal a known material defect, is void because it violates law and public policy.

Exam Traps to Watch

• Treating earnest money as a required element.
• Assuming a minor's contract is void; it is voidable.
• Forgetting that a counteroffer kills the original offer.
• Confusing an express contract (words) with an implied one (conduct).

Termination of an Offer Before Acceptance

An offer is not a contract; it can disappear before it is accepted. An offer terminates by:

• Lapse of time - the stated deadline passes, or a reasonable time passes if none is stated.
• Revocation - the offeror withdraws the offer before acceptance is communicated.
• Rejection or counteroffer - the offeree says no or changes a term.
• Death or incapacity - of either party before acceptance.

Worked example: a buyer offers $250,000 with the offer open until Friday at 5 p.m. The seller says nothing and the deadline passes. The offer lapses; the seller can no longer accept on Saturday and force a deal.

When a Writing Is Required

For an interest in land, the agreement must be in writing and signed to be enforceable under the statute of frauds (covered fully in 4.2). Many simple listing and option agreements are also required to be written. Knowing the elements is not enough; the exam often pairs a valid-elements question with a writing-requirement twist.

Quick Analysis Drill

For any contract fact pattern, run this sequence: (1) Is there an offer with definite terms? (2) Was acceptance communicated and unaltered? (3) Did both sides exchange consideration? (4) Are the parties competent? (5) Is the purpose legal? If all five clear, you almost certainly have a valid contract; if one fails, decide whether the result is void, voidable, or unenforceable.