If you do any real estate investing or are looking to purchase an apartment or home you’re likely going to review and sign a real estate contract.
A real estate contract is a contract between parties for the purchase and sale, exchange, or other conveyance of property.
Knowing general information about several types of contracts can help you. However, when it comes to the fine print, you may want to have a good real estate lawyer look at it. Our recommendation is that you never sign a real estate contract without your lawyer first checking it and giving you the okay.
These are the main types of real estate contracts:
An option-to-purchase contract is an arrangement in which, for a fee, a tenant or investor acquires the right to purchase a property sometime in the future within a given deadline. It is important that the option agreement is clear on the timing as per when the purchase of the house shall be done and at what price.
If at the end of the agreed period you exercise the option to buy, then the contract becomes a binding private contract and the payment of the option is discounted from the entire price. However, if you do not exercise the option to purchase, you lose the money you have paid for the option.
In many cases the buyer is a tenant, in which case it’s called a “lease-option contract”; or it might be a developer, interested in a plot of land but needing to do more research and perhaps obtain permits before committing to the purchase. This type of contract is also frequently used by buyers of commercial property and high end luxury homes.
This type of contract requires the buyer to pay a deposit to reserve a property for a set period, usually 30 days. At the end of this period you either withdraw and lose the deposit or proceed to a private sale contract. The deposit is usually between 3,000 and 6,000 euros.
This type of contract is very popular among real estate agents who want the buyer not to loose the property and help turn the visit into a commitment. Reservation contracts are usually very basic documents.
Arras contract (or earnest money deposit contract)
This type of contract requires the buyer to pay a deposit to the seller, showing the buyer’s good faith and commitment.
When paying the arras or deposit, the buyer is given a document specifying the location of the property and the maximum date for formalizing the purchase contract. The contract should also include the agreed price. Typically, in Spain the set amount is paid to the seller. The seller shall make no further offers to any other party.
When the deadline is reached and the real estate purchase contract formalized, the funds are discounted from the total price. However, if the deal falls through because of the buyer’s fault the buyer cannot reclaim the deposit.
In the area of arras contracts things get complex because there are three contract subtypes, and each one has different legal consequences in the case that you want to withdraw from the purchase contract. That is why you should only sign an arras contract once you have been given the approval of your lawyer.
You can read more about the three types of arras in our article “The ‘arras’ contract: an explainer”.
Private purchase contract
A private purchase contract is a binding, bilateral agreement between two or more parties with legal capacity for the purchase of real property.
The contract will contain:
- Identification of the parties, the real estate property, and the agreed upon purchase price
- The essential details, rights, and obligations of the contract
- The contingencies or conditions that must be met
- The condition of property, as well as what is included and not included
- The amount of the deposit
- The closing costs and who pays what
- Final completion date
- The signature of each party
If the buyer has a change of heart, the path for cancelling the contract involves more steps. First, you should check if any procedures for cancellation are outlined in the original contract. If there is no clear solution within the text of the contract itself you may want to talk to the seller. If the seller of the house has received other offers they might not have any issue with releasing you from your contractual obligations.
In the case of disagreement, however, as with any legal dispute, there are a few avenues you can take. First, we recommend you consult an attorney. Legal guidance can be invaluable if you haven’t navigated these waters before. In general, however, legal disputes can be settled through the courts (litigation), by arbitration, or by both parties opting for mediation.
At AvaLaw we are experts in real estate deals. Our lawyers can help ensure that your real estate dealings proceed smoothly. If you need help or want additional information don’t hesitate to contact us at +34 932 553 107.