Consideration

Key Takeaways

• Consideration is one of the essential elements of a valid contract, and every party has to give or promise something of value for the contract to be enforceable.
• Consideration does not have to be money. Services, a transfer of ownership, a transfer of rights, or a promise to do something can all serve as consideration.
• In a purchase and sale agreement the consideration is the exchange of promises: the buyer promises to pay and the seller promises to convey.
• Earnest money is not the consideration that makes a purchase contract valid. It is a deposit that shows the buyer is serious and is credited toward the price at closing.

What It Means

Consideration is what each side gives up, or promises to give up, to make a contract binding. It is one of the elements a Valid Contract needs, and the point of it is simple. The law will not enforce a one-sided promise. Both parties have to be putting something on the table.

Money is the obvious form, but it is only one form. Consideration can be a transfer of ownership, a transfer of rights, an exchange of services, or anything else of value. In a residential sale, the consideration on the buyer's side is usually a promise rather than cash in hand: a promise to pay the purchase price at closing. On the seller's side it is the promise to convey the property by Deed. Two promises, traded for each other, are enough.

Courts look at whether consideration exists, not at whether the trade was smart. A seller who agrees to $40,000 under market has still received consideration, and the contract still binds. Value has to be present. It does not have to be equal, and a bad bargain is not the same thing as a missing element.

How It Works in Washington

In Washington, consideration is not only a contract-law box to tick. It is what the state taxes. RCW 82.45.010 defines a sale, for real estate excise tax purposes, to include any conveyance, grant, assignment, quitclaim, or transfer of the ownership of or title to real property for a valuable consideration. RCW 82.45.030 then defines the selling price the tax is computed on, and defines total consideration paid or contracted to be paid as money or anything of value, paid or delivered or contracted to be paid or delivered in return for the sale. Property traded in counts, because it is a thing of value delivered in return for the sale. That is why a straight swap between two owners still produces an excise tax bill, even though neither party wrote the other a check.

The writing rule is the second Washington hook. RCW 19.36.010 makes certain promises void unless they are in writing and signed by the party to be charged, and the list includes an agreement employing a broker to sell or purchase real estate for a commission. A verbal promise to pay a Washington broker is still a promise of consideration, but it is one the statute will not enforce. Get the commission agreement signed before the work starts.

Example

Dana lists her Tacoma condo at $389,000. Ben offers $383,500 with $5,000 in Earnest Money, and Dana accepts. The consideration is the pair of promises now recorded in the Purchase And Sale Agreement: Ben promises to pay $383,500, Dana promises to convey the condo by deed.

Ben is putting 20 percent down, so his down payment is $383,500 times 0.20, or $76,700, and his loan is the remaining $306,800. His $5,000 earnest money is credited to him at closing, so he brings $71,700 toward the down payment plus his closing costs. Washington's excise tax is computed on the $383,500 selling price, because that is the total consideration Dana contracted to receive.

Suppose Ben had offered no earnest money at all. The contract would still be supported by consideration, because each side has promised something of value. What Dana would lose is the deposit she could pursue if Ben walked, not the contract itself.

Common Mistakes and Exam Traps

• Earnest money is not required for a contract to be valid. The exchange of promises is the consideration, and a distractor answer will claim a deposit is what binds the deal.
• Consideration does not have to be adequate or equal. A test answer saying a contract fails because one side got a bargain is wrong.
• Love and affection is not consideration in a bargained-for sale. A gift deed transfers property without it, which is a conveyance rather than an enforceable exchange.
• Consideration is a separate element from mutual agreement. A question that describes both parties agreeing on price has told you about agreement, not about what each side is giving.