What is a contract?

As you know, I’m not a lawyer. This post is not intended to provide legal advice, only to provide a bit of enlightenment. If you need legal advice, please contact an attorney.

Randall Brennan, Highlands Ranch CO realtor

I’ll bet you’ve made promises before. Did you know you were subjecting yourself to a contract when you did?

So what is a contract?

People spend years studying that question, and devote entire careers to the practice of contract law, but it comes down to a simple concept: a contract is an exchange of promises.

That’s it.

But what does that mean? Aye, there’s the rub.

Let’s not complicate this unnecessarily. Contracts are incredibly important to our business model, and our very way of life. There are only four parts to a valid contract, and once you understand them, the whole concept of contracts becomes quite clear. Those four parts are, and I list in no particular order, since all must be present:

  • mutual assent
  • legal purpose
  • competent parties
  • consideration


Let’s take this piece by piece, and start with mutual assent.

A contract, as stated above, is an exchange of promises. It’s an agreement between multiple people (both real and legal people; corporations are considered “people” in the eyes of the law), and all the parties (the people in the contract) have to agree to what the contract is trying to do. They all have to mutually assent to ALL the terms of the contract. Mutual assent actually has several components; I’ll address these more in depth in a future post.

A contract also has to have a legal purpose. In other words, you can’t make a contract with someone to break the law. That would make the “contract” invalid. When you hear about the “mob” having a “contract” out on someone, know in your heart that that is not really a contract, since murder is against the law. Such a “contract” is invalid because of its purpose.

Did you know that not everyone is allowed to enter into a contract? In order to do so, you have to be what the law calls “competent.” That is generally defined as being of legal age (often 18, but sometimes 21 or older), sane, and in good mental order. You can’t be drunk, stoned or high, or otherwise of diminished mental capacity even if its only temporary, or acting under duress when you enter into the contract, or the “contract” is considered invalid. When I say “you,” I mean everyone involved in the contract.

The final requirement for a valid contract is consideration. This one confuses people the most, but it needn’t.  All parties to a contract must get something in return for what is being given up, but it doesn’t have to be a physical thing. Consideration can simply be a promise. The consideration in a contract might be, and usually is, a promise to do something in exchange for the other party’s promise to do something.

It goes like this: one party says, “In consideration of you doing something, I promise to do something else.” The other party, in mutual assent (remember that?) replies, “Well, in consideration of you doing something else, I promise to do something.” Do you see the exchange of promises there? As long as we have competent parties, a legal purpose, and all the parties agree to what the purpose of the contract is (i.e. what promises are being exchanged), we’ve got a legal contract.

In very simple terms, a real estate contract looks like this:

Party A: In consideration of you promising to sell me your property, I promise to pay you a certain amount of money.

Party B: In consideration of you promising to pay me a certain amount of money, I promise to sell you my property.

That’s it. Easy-peasy. Four little requirements, and the contract is made. Let’s presume this little scenario is made between competent parties (one requirement). Selling real estate is not against the law, so we have a legal purpose (requirement #2). The parties have agreed to what will be happening, so we have mutual consent (third requirement), and we have an exchange of consideration: one party’s promise to give up property; the other party’s promise to give up money (the fourth and final requirement). Note that the contract doesn’t actually cause the real estate to change hands. The contract is the exchange of promises to buy and sell real estate at some specific time in the future, providing all the other requirements are met by everyone.

Now, of course, real estate contracts are never this simple, which is why they go on for pages. In future posts, I’ll be talking about all the little side issues (“additional terms”) that are addressed in a real estate contract. It’s gonna be fun, I promise (there’s that word again).

By the way, did you notice that “written” is not one of the requirements of a valid contract? I also didn’t say that earnest money is required, but a lot of people think it is. I’ll discuss that more later, too, but for now, this is enough to think about. As always, let me know if you’ve got any questions or comments. You can reach me several different ways, if you just keep scrolling down the page.

What’s next? Take your pick.


Yeah. You should probably do at least one of those things right now.