Chapter 11 - Real Estate Contracts

Amendment

A change or modification to the existing content of a contract.

Inspection Contingency

A contingency on the buyer's obtaining certain inspections of the property.

Mortgage Contingency

A contingency that protects the buyer's earnest money until a lender commits the mortgage loan funds.

Property Sale Contingency

A contingency where buyers may make the sales contract contingent on the sale of their current home.

Options

A contract by which an optionor (generally an owner) gives an optionee (a prospective purchaser or lesee) the right to buy or lease the owner's property at a fixed price within a certain time. The optionee pays a fee (the agreed actual consideration) for this option right. The optionee has to decide to either exercise the option right or allow the option to expire. It is enforceable by the optionee only (a unilateral contract). They must contain all the terms and provisions required for a valid contract.

Validity of Contracts

A contract can be described as valid, void, voidable, or unenforceable, depending on the circumstances.

Executed Contract

A contract in which all parties have fulfilled their promises; the contract has been performed.

Legal Purpose

A contract must be for legal purpose - that is, even with all the other elements (consent, competent parties, consideration, and offer and acceptance). A contract for an illegal purpose of an act against public policies is not a valid contract.

Consent

A contract that complies with all the basic requirements may still be either void or voidable. A contract must be entered into as a free and voluntary act of each party. Each party must be able to make a prudent and knowledgeable decision without undue influence. A mistake, misrepresentation, fraud, undue influence, or duress would deprive a person of that ability. If any of these circumstances is present, the contract is voidable by the injured party.

Executory Contract

A contract that exists when one or both parties still have an act to perform. A sales contract is an example - from the time it is signed until closing; ownership hasn't yet changed hands, and the seller has not received the sales price.

Earnest Money

A deposit, usually in the form of a check, is provided by a purchaser when making an offer to purchase real estate.

Offer

A licensee lists an owner's real estate for sale at whatever price and conditions the owner sets. When a prospective buyer is found, the licensee helps that consumer prepare a document to purchase. Then, it is signed by the prospective buyer and presented to the licensee to the seller.

Counteroffer

A new offer; it rejects the original offer. It may be withdrawn at any time before it has been accepted.

Unilateral Contract

A one-sided agreement. One party makes a promise to entice a second party to do something. The second party is not legally obligated to act. However, if the second party does comply, the first party is obligated to keep the promise.

Acceptance

A promise by the offeree to be bound by the exact terms proposed by the offeror. It must be communicated by the offeror.

Offer

A promise made by one party, requesting something in exchange for that promise. It is made with the intention that the offeror will be bound to the terms if it is accepted. The terms must be definite and specific and must be communicated to the offeree.

Escrow Accounts

A separate escrow account does not have to be opened for each earnest money deposit received; all deposits may be kept in one account. A broker must maintain full, complete,m and accurate records of all earnest money deposits. Real estate licensees may be revoked or suspended if deposits are not managed properly.

Breach of Contract

A violation of any of the terms or conditions of contract without legal reason. A contract can be terminated by one of the parties.

Contract

A voluntary, legally enforceable promise between two competent parties to perform (or not perform) some legal act in exchange for consideration.

Land Contracts

AKA: Contract for Deed, bond for title, an installment contract, a land sales contract, or articles of agreement for warranty deed. In this real estate sale, a seller (also known as the vendor) retains legal title. The buyer (also known as the vendee) takes possession and gets equitable title to the property.

Contingencies

Additional conditions that must be satisfied before a sales contract is fully enforceable. Create a voidable contract. If these are rejected or not satisfied, the contract is void.

Escrow Contract

An agreement between a buyer, a seller, and an escrow holder setting forth the rights and responsibilities of each. It is entered into when earnest money is deposited in a broker's account.

Listing Agreement

An employment contract. It establishes the rights and obligations of the broker as agent and the seller as principal.

Consideration of Acceptance

An offer is not considered accepted until the person making the offer has been notified of the other party's acceptance.

Addendum

Any provision added to an existing contract without altering the contents of the original. Essentially, it is a new contract between parties that includes the original contract's provisions by reference, which mentions the original contract. Must be signed in writing by all parties.

Voidable Contract

Appears on the surface to be valid but may be rescinded or disaffirmed by one or both parties based on some legal principle. This contract is considered by the courts to be valid if the party who has the option to disaffirm the agreement does not to so within a period of time. For example, a contract with a minor, a contract entered into by a mentally ill person is usually considered this type of contract during the illness and for a reasonable period after the person is cured. Other things include if this contract was made under duress, with misrepresentation, under the influence, and with intent to defraud.

Bilateral Contracts

Both parties promise to do something; one promise is given in exchange for another. An exclusive-right-to-sell listing contract is an example of this type of contract.

Conversion

Brokers using earnest money funds for their personal use.

Statue of Frauds

Certain types of contracts must be in writing to be enforceable in a court of law.

Time is of the Essence

Contracts must be performed within a specific time. A party that fails to perform on time is liable for breach of contract.

Buyer Agency Contract

Establishes the relationship between a buyer and the buyer's agent.

Statute of Limitations

Every state limits the time during which parties to a contract may bring legal suit to enforce their rights.

Void Contract

Has no legal force or effect because it lacks some or all the essential elements of a contract. A contract that is void was never a legal contract. For example, the use of a forged name in a listing contract would make that contract void.

Specific Performance

If a seller breaches a real estate contract, the buyer may sue for this.

Acceptance

If the seller agrees to the original offer or later counteroffer exactly as it is made and signs the document, the offer has been accepted and a contract is formed.

Most Common Agreements Most Commonly Used Among Licencees

Listing Agreements and buyer agency agreements; real estate sales contracts; options agreements; escrow agreements; leases; and land contracts or contracts for deed.

Unenforceable Contract

May also appear on the surface to be valid; however, neither party can sue the other to force performance. For example, an oral agreement for the sale of a parcel of real estate.

Mutual Assent

Meeting of the minds; that is, there must be complete agreement between the parties about the purpose and terms of the contract.

Valid Contract

Meets all the essential elements that make it legally sufficient, or enforceable, and is binding in a court of law.

Sue for Damages

Monetary contributions to help cover any costs and hardships suffered as a result of the other parties' action(s).

Commingling

Money mixed with a broker's personal funds.

Legally Competent Parties

Must have legal capacity; meaning they must be of legal age and have enough mental capacity to understand the nature or consequences of their actions in the contract. In most states, 18 is the age of contractual capacity.

Essential Elements of a Valid Contract

Offer and Acceptance; Consideration; Legally Competent Parties; Consent; and Legal Purpose.

Valid as between the Parties

Once the agreement is fully executed and both parties are satisfied, neither has reason to initiate a lawsuit to force performance.

Assignment

Refers to the transfer of rights or duties under a contract. Substitution of parties - generally the rights and obligations can be given to a third party. Obligations may be delegated, but the original party remains primarily liable unless specifically released.

Disclosures

Required by law.

Consideration

Something of legal value offered by one party and accepted by another as an inducement to perform or to refrain from performing some act.

Novation

Substitution of a new contract for an existing contract. The new agreement may be between the same parties, or a new party may be substituted for either. The parties' intent must be to discharge the old obligation.

Interest Bearing Escrow Accounts

The account may or may not pay interest, depending on state law. If the account bears interest, there must be some provision in the contract for how the interest earned will be distributed. The broker must provide the parties with an accounting of the amount and dates of interest payments. Often, a check for the interest amount is given to the buyer at closing. On the other hand, the contract may provide for the interest to be paid to the seller as part of the purchase price.

Contingency Elements

The actions necessary to satisfy the contingency; the time frame within which the actions must be performed; who is responsible for paying any costs involved.

Implied Contract

The agreement of the parties is demonstrated by their acts and conduct.

Equitable Interest

The interest held by a vendee under a contract for deed or installment contract; the equitable right to obtain absolute ownership to property when legal title is held in another's name.

Real Estate Sales Contract

The most important document in the sale of real estate. It establishes the legal rights and obligations of the buyer and seller. Depending upon the area, the contract may be referred to as an offer to purchase, a contract of purchase and sale, a purchase agreement, and earnest money agreement, or a deposit receipt. Contains the complete agreement between a buyer of a parcel of real estate and the seller. It is an offer to purchase real estate as soon as it has been prepared and signed by the purchaser. If the document is accepted and signed by the seller, it becomes a contract of sale.

Express Contract

The parties state the terms and show their intentions in words, either oral or written.

Offeree

The person to whom an offer is made.

Offeror

The person who makes the offer.

Elements of a Sales Contract

The sales price and terms; a legal description of the land; a statement of the kind and condition of the title and the form of deed to be delivered by the seller; the kind of title evidence required, who will provide it, and how many defects in the title will be eliminated; and a statement of all the terms and conditions of the agreement between the parties, and any contingencies.

Conditions of a Land Contract

The seller is not obligated to execute and deliver a deed to the buyer until the terms of the contract have been satisfied.

Escape Clause

The seller may want this clause, which permits the seller to continue to market the property until all the buyer's contingencies have been satisfied or removed. The buyer may retain the right to eliminate the contingencies if the seller receives a more favorable offer.

Offer and Acceptance

There must be an offer by one party that is accepted by the other. Usually, most states need this in writing.

Liquidated Damages

To avoid a lawsuit if one party breaches the contract, the parties may agree on a certain amount of money that will compensate the non-breaching party.

Recession

When a party cancels or terminates the contract as though it had never been made. Cancellation terminates a contract without a return to the original position. However, this returns the parties to their original positions before the contract, so any monies exchanged must be returned.

Discharged

When an agreement is terminated, such as the contract being completely performed, or breach or default.