Chapter 14: Contracts for the Sale of Real Estate
In a sale contract, what is true:
Both the seller and the buyer can default by failing to perform the terms of a contract.
An Earnest Money Contract is best defined as:
A binding and enforceable agreement wherein a buyer agrees to buy an identified parcel of real estate and the seller agrees to sell it under certain terms and conditions; It is the document that is at the center of the transaction.
Who must legally sign an agreement of sale?
All owners of the property; Failure to do so does not necessarily invalidate the contract, but it can lead to encumbered title and legal disputes.
What is an option-to-buy?
An enforceable contract in which the right to purchase a property is for a stated time and a stated price and terms. In exchange for these accommodations, the potential buyer pays the seller extra money.
In a scenario regarding liquid damages, what is true of the broker and the seller?
It is customary for the broker and the seller to share the liquidated damages as long as the broker does not receive them in excess of what the commission would have been.
Option-to-buy creates equitable interest, is assignable, and should be recorded. (T/F)
TRUE
Which of the following best characterizes a conventional sale contract?
Voluntary, bilateral, and executor
What does the closing clause state?
What must occur upon closing to avoid default
For an option-to-buy to be valid and enforceable, it must include all of the following, except: a.) earnest money deposit b.) non-refundable consideration c.) an expiration date d.) be in writing
earnest money deposit
What secures contract validity and a buyer's equitable interest?
earnest money escrow
In the legal description, what is necessary?
enough information for the surveyor to identify the property
The purpose of an escrow account is to
entrust deposit monies to an impartial fiduciary
What type of items are normally included in the sale?
fixtures; Unless expressly excluded, items commonly construed as fixtures are included in the sale. Items commonly considered personal property are not included unless expressly included.
Legal aspects of option-to-buy include all the following, except: a.) give sole ownership to potential borrower b.) is assignable c.) should be recorded d.) creates equitable interest
give sole ownership to potential borrower
If an earnest money deposit is provided and the broker is not the escrow agent, where is the money placed?
in a third party trust account
Where must the earnest money be placed?
in a third party trust account or escrow, as is written in the sale contract
A party's failure to meet a contingency, does what for the party's involved?
it does not constitute default, but rather enables the cancelation of the contract
Which of the following is most correct regarding option-to-buy?
it is assignable unless the contract expressly prohibits assignment
All of the following provisions would generally be included in a sale contract, except: a.) lending institution b.) inspections c.) due-on-sale clause d.) environmental hazards
lending institution
All of the following provisions would generally be included in a sale contract, except;
lending institution
During the executor period of a sale contract, the buyer acquires an equitable title interest in the property. This means that
the buyer can potentially force the seller to transfer ownership
If the broker is to receive liquidated damages, it cannot be in excess of:
the commission he or she would have received
What happens with the earnest money after the buyer performs under the sale contract?
the deposit is applied to the purchase price
In a sale contract, what provides potential compensation for damages to the seller if the buyer fails to perform?
the earnest money deposit; The buyer's earnest money deposit fulfills the consideration requirements for a called sale contract and provides potential compensation for damages to the seller if the buyer fails to perform.
What is the most common remedy for the failure to perform under the terms of a sales contract?
the forfeiture of the buyer's deposit; he or she gives up his earnest money deposit as liquidated damages.
What is generally true regarding the buyer's financing?
the higher their down payment, the better the chances of securing financing due to equity
An important legal characteristic of an option-to-buy agreement is that
the optionor must perform if the optionee takes the option, but the optionee is under no obligation to do so.
Several buyers are competing for the last available home in a desirable new subdivision. One buyer calls the owner-developer directly on the phone and offers $10,000 over and above the listed price. The developer accepts the offer. At this point,
the parties have completed a verbal, executor contract; If a developer is offered a price and states to the buyer that he accepts that price, the parties have completed a verbal, executor contact.
Who or what provides the escrow instructions for handling and disbursing escrow funds?
the sale contract
An important distinction between a contract for deed and a contract for sale is
the seller retains legal title in a contract for deed transaction until fully executed.
A potential danger involved in a contract for deed is that
the vendee may not have a right of redemption; Viewed as one of the dangers encountered in contracts for deed is the fact that the vendee does not have a right of redemption as is the case with out purchasing scenarios.
How many parties must there be in a sale contract?
at least two
Why must an option be recorded?
because it creates an equitable interest which can affect the marketability of title
A due-on-sale clause in a sale contract puts parties on notice that
third-party loans surviving closing may be accelerated by the lender
What might occur if a contingency in a sale contract is viewed to be excessive in duration?
It may invalidate the contract; If a contingency is too broad, vague, or excessive in duration, it may invalidate the entire contract on the grounds of insufficiency of mutual agreement.
What is the purpose of an escrow clause?
It provides for the custody and disbursement of the earnest deposit and releases the escrow agent from certain liabilities in the performance of escrow duties.
What does an escrow clause provide?
It releases certain liabilities the escrow agent may have in his or her performance of escrow duties.
What is a financing contingency clause?
It states under what conditions the buyer can cancel the contract without default and receive a refund of the earnest money.
Failure by a party to meet a contingency does not constitute default, but rather entitles the parties to cancel the contract. (T/F)
TRUE
The most common contingency concerns financing. A buyer makes an offer contingent upon securing financing for the property under certain items on or before a certain date. (T/F)
TRUE
To be valid and enforceable, an option-to-buy must include a non-refundable consideration, price and term sofa sale, have an expirations date, be in writing, have a legal description, and meet general contract validity requirements. (T/F)
TRUE
An owner completes a contract to sell her property. Before closing, the seller runs into financial trouble and assigns the contract to her principal creditor. The buyer cries foul, fearing the property will be lost. Which of the following is true?
The assignor has completed a legal action; In this scenario, the assignor completed a legal action by assigning the contract to her principal creditor.
What happens to the earnest money deposit if the buyer is not able to secure financing by the deadline?
The buyer can cancel the contract and recover the deposit
What kind of title does a buyer have when involved in a sale contract?
The buyer has equitable title.
A sale contract may specifically deal with tax withholding responsibility if the seller is a foreigner. What is this responsibility?
The buyer must withhold 10% of the purchase price at closing for the seller's capital gain tax payment.
If a buyer defaults on certain terms of the sales contract, what is the usual legal remedy for the seller?
The forfeiture of the buyer's deposit as liquid damages; If a buyer fails to perform under the terms of a sales contract, the usual remedy is forfeiture of the buyer's deposit as liquidated damages.
A tenant has an option-to-purchase agreement with the landlord that expires on June 30. On July 1, the tenant frantically calls the landlord to exercise the option, offering the apology that she was busy with a death in the family. Which of the following is true?
The option is expired, and the tenant has no rightful claim to money paid for the option; After an expiration date, the option is no longer available and therefore the tenant has no rightful claim to money paid for the option.
A sale contract contains an open-ended financing contingency: if the buyer cannot obtain financing, the deal is off. Six months later, the buyer still cannot secure financing. Which of the following is true?
The seller may cancel the contract, since it can be ruled invalid.
A tenant exercises an option to buy a condominium. The landlord agrees, but raises the agreed price by $3,000, claiming financial distress. The landlord does, however, offer the tenant two months of free rent before closing as an offset. Which of the following is true?
The tenant can force the sale at the original terms.
Which of the following is true regarding the legal nature of option contracts?
They give the optionee an equitable interest in the property
In the event of a buyer's default, a provision for liquidated damages in a sale contract enables a seller to
claim the deposit as relief for the buyer's failure to perform
While a property is under a contract for deed, the seller, or vendor, mortgages her equity in the property, and has a separate judgment lien placed on the property. Faced with financial loss, the vendor assigns the contract to another party, then leaves town. What can the vendee do in this case?
comply with the contract and take legal title when its terms are fulfilled
Which of the following is most accurate regarding contingencies on a sale contract?
Contingencies are made to protect both the buyer and the seller in the transaction; However, it is possible for both to abuse contingencies; therefore contingencies must always be as specific as possible.
There is a clause in a sale contract denoting the buyer will pay a specific amount and how that payment should be made. What is this called?
Earnest money deposit; states how much the deposit should be for and how it should be paid.
Max is purchasing a property, but needs financing. He signs the sale contract, which has a contingency in place for securing financing, provides a deposit check and begins the process of obtaining a mortgage loan. After a few weeks, he is notified by the loan originator that unfortunately, he cannot receive as much financing as originally expected because of his student loans. This means that Max will not be able to purchase the property. What can Max do next?
He can cancel the sale contract and recover his deposit; If there is a contingency for securing financing and the buyer cannot secure financing by the deadline, then he or she can cancel the contract and recover the earnest money deposit.
If the broker is the escrow agent, then what must he or she do aside from depositing and accounting of the funds?
He or she must keep them separate from his or her own monies.
Why is a written sales contract better than an oral one?
With an oral contract, the buyer or seller cannot sue to force the other to comply with the contract, even if the contract is valid
Meredith and Grace are speaking to their mortgage loan originator about closing costs. They will end up having to pay around $9,000 in closing costs. In the calculation of closing costs, does the loan originator include their earnest deposit?
Yes, the earnest money deposit is credited towards their closing costs; An earnest money deposit is applied towards the closing costs of the loan. Therefore, the loan originator does consider it in his or her calculations.
What kind of contingency has the potential to invalidate the contract?
a contingency that is too broad, vague, or excessive in duration
What type of contingency clause enables a buyer to default if he or she cannot secure financing and receive a refund of his or her earnest money?
a financing contingency clause