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What Are The Different Types Of Real Estate Contracts?

Key Takeaways

  • There are four different types of real estate contracts: purchase agreements, lease agreements, assignment contracts and power of attorney documents.
  • The type of purchase agreement used will depend on what region you’re operating in, whether you’re working with an agent or not, and if you have an exit strategy in mind.
  • A power of attorney document is often overlooked, but it can prove most helpful in situations where you can’t sign a real estate contract.

If you’re new to the real estate investing trade, you may be wondering what the different types of real estate contracts are? What role do these real estate legal contracts play? And, perhaps even more importantly, what benefits do they provide investors?

There are essentially four types of real estate contracts: purchase agreement contract, contract for deed, lease agreements and a power of attorney contract. They each have their different uses and stipulations. In this article, we will cover the different types of real estate contracts and give you the foundational knowledge to make informed investor decisions.

The 4 Types Of Real Estate Contracts

Real estate legal contracts

1. Purchase Agreement

This is the most common type of real estate contract. As the name suggests, this is a contract that lays out an agreement between the buyer and seller of a specific property. This type of real estate contract includes all the typical elements of a contract: purchase price, signatures, party identification, etc. In addition, it also specifies the closing date for the transaction.

Now, as one might expect, there are different types of purchase agreements that you can utilize as a real estate investor. Which type you end up using, however, will depend on a variety of factors. Here’s a quick look at the different types of purchase agreements at your disposal:

State/Association Purchase Agreement: Many states, and the realtor associations that serve local markets, have standardized purchase agreements they use to guide their transactions.

General Purchase Agreement: This is a stripped-down, usually much shorter, version of the state/association purchase agreement. A great option when working directly with sellers, and not buying a property through a real estate agent. If you do prefer to use a general purchase agreement with an attorney or real estate agent, be sure to point why you want to use the agreement, and emphasize how it can save time for all parties.

Property-Specific Purchase Agreement: If you’re buying a property outside the traditional single-family paradigm, such as a mobile home or piece of vacant land, you may need to use property-specific purchase agreements (this will depend on the market). Though there is quite a bit of similarity with these types of purchase agreements, these types of contracts do have certain clauses which pertain to the type of property being transacted.

2. Real Estate Assignment Contract

A real estate assignment contract is used, primarily, in a wholesaling investment strategy, in which you find a distressed property, secure it under contract and “assign” that contract over to second buyer (usually at a small profit to you).

The “meat” of real estate assignment contracts is very similar to a regular purchase agreement. Often times, an assignment contract simply has the addition of a few, extra words. As an example, you might add the following phrase to a purchase agreement: “John Smith, and/or assigns.” (When people refer to “wholesale real estate contracts,” this is the document they mean.)

The “assigns” part gives you the opportunity to lock up a property with a purchase contract and pass along that property to someone else if you so desire. Though the extra words may not take up much ink, they do provide a tremendous amount of flexibility to you as an investor.

3. Lease Agreements

Even if you’ve never purchased property before, chances are you’re familiar with lease agreements, or have signed one in the past. As one might surmise, these real estate contracts outline an agreement between the lessor (the property owner or landlord) and a lessee (the tenant).

Agreements of this kind specify important considerations such as the rent amount, security deposit, how utilities are handled. It should go without saying that lease agreements that are intended to avoid future issues between lessor and lessee, and protect both parties in the event that something unforeseen happens.

4. Power of Attorney

Though not used exclusively in a real estate setting, power of attorney documents are a form of real estate contract, and can be exceedingly useful in certain situations.

This is because if you’re not able to sign a real estate contract, whether because you’re out of the country or because of some mental incapacity, this document gives another party the power to sign on your behalf.

This type of real estate contract can be quite helpful if you’re the owner of rental properties or you are caring for an elderly parent, or relative, who may encounter a situation when they can’t sign their own real estate contract.

Reading the Fine Print

Real estate contracts don’t have to be overwhelming or confusing. A good, first step is to understand the types of real estate contracts available, how they benefit you as an investor, and the best situations for using them. Knowing this will put you one step closer to investing mastery.

How well do you know your real estate contracts?  Do you have some favorites of your own? Perhaps there are some you would rather avoid?  Feel free to share which real estate contracts have influenced your career path the most in the comments below.  You may find that great investors think alike.

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