Chapter 39: Making an offer

What is a contract?

-Agreement -btwn: 2 or more persons -containing (3): essential elements of capable parties, mutual consent, a lawful object & consideration, -& in a writing -signed by parties in real estate transactions -to be enforceable.

What is fiduciary duty ?

-Duty -owed by: agent -to: act in highest good faith toward their client & not to obtain any advantage over client by slightest misrepresentation, concealment, duress or undue influence.

What is an option?

-Irrevocable right -granted for: consideration to purchase or lease a property -on: specific terms w/in period of time, -w/o obligating the person who acquires the right to purchase or lease the property

What is an offer to purchase?

-Proposal made by buyer -to: acquire property on stated terms -which: property owner may accept or reject

What is condition precedent?

-Provision in agreement -calling for: occurrence of event or performance of act -by: another person - before buyer or seller is required to further perform

What is condition concurrent?

-Provision in agreement -calling for: performance of activity by buyer or seller -w/o concern for performance of other person

What is a counteroffer?

-Response to offer -which: itself is offer -to: perform on terms diff. from offer received; -a: rejection of an offer [See RPI Form 180]

Use of regular form in lieu of independently drafted forms to make an offer to buy or sell real estate is justified for two reasons (3):

1. Regular forms satisfy writing requirements mandated by Statute of Frauds 2. Regular form gives agreement btwn buyer & seller clarity of meaning & more uniformity than typically results from individually drafted contracts 3. Errors and Omission (E&O) carriers encourage the use of published forms in regular use.

To large extent, terms offeror and offeree are useless in practice. The cast of characters in real estate transaction are better viewed by their more common names, such as (4):

1.) buyer & seller 2.) landlord & tenant 3.) lender & owner; & 4.) broker & client.

Chapter 39 Key Terms (7):

1.) contract 1.) condition concurrent 2.) condition precedent 4.) counteroffer 5.) fiduciary duty 6.) offer to purchase 7.) option

For example, there may be a (3):

1.) defect in contract's formation (e.g., invalid acceptance, incapacity of a person to contract, uncertain terms, lack of essential terms, etc.) 2.) failure of 1 person to eliminate contingency provision allowing other person to avoid further performance by cancellation of the contract; or 3.) defense to closing has arisen (e.g., misrepresentation of the physical, title or income of the property, untimely performance, etc.)

Contingencies address clearance of significant conditions prudent buyers & sellers have regarding the transaction, including (5):

1.) financial conditions (mortgage availability, price corroboration by appraisal, sale of other property, etc.) 2.) operating conditions (expense of ownership, tenant leases/income, service contracts, etc.) 3.) title & zoning conditions (CC&Rs), use ordinances, etc.) 4.) physical conditions (home inspection/certification, energy efficiency, environmental analysis, utilities, etc.); & 5.) location-related conditions (ordnances, green belts, neighbors, natural hazards, etc.).

To be definite & certain in its terms & conditions for enforcement, an offer needs to set forth the essential elements of the transaction, including (4):

1.) identity of the parties; 2.) description of the real estate; 3.) price & form in which it will be paid; and 4.) time for performance

Persons include (2)?

1.) individual people & 2.) those entities qualified to contract w/in CA state

For example, a sales transaction involving broker acting on behalf of buyer or seller is structured using a variety of contracts - agreements - including (7):

1.) listing agreement employing broker 2.) purchase agreement, option or exchange agreement documenting the sales transaction 3.) escrow instructions to close the sales transaction 4.) interim or holdover occupancy agreement btwn buyer & seller 5.) note & trust deed executed by buyer 6.) service agreements for investigations, reports, repairs & coordinators; & 7.) insurance policies for title, home warranty, hazards & personal liability

Similarly, the following communications w/ respect to the purchase of real estate are not offers (4):

1.) listing agreements 2.) advertisements 3.) letters of intent (LOI) to contract; or 4.) preliminary negotiations or letters of proposal.

To form contract, the agreement needs have following elements (5):

1.) offer 2.) acceptance 3.) consideration — a bargained-for exchange 4.) capable parties; & 5.) lawful purpose

Other examples of bad seller's agent behavior include (4):

1.) pre-screening offers & submitting only those agent believes seller is most likely to accept (in essence, making unauthorized discretionary decisions on the client's behalf) 2.) dismissal w/o presentation of offers submitted on an unfamiliar form (a conflict of interest arising from a broker's bias toward or against a publisher) 3.) discarding an offer based on a belief the offer isn't likely to gain a short sale lender's approval; or 4.) refusal to submit offers presented on non-trade union forms in the mistaken belief their E&O insurance policy will not cover claims arising from a dispute

Chapter 39 Learning Objectives (4):

1.) recognize elements of legally enforceable contract 2.) follow lifecycle of contract used in negotiating a real estate transaction 3.) manage submission of an offer for the: sale, lease or exchange of real estate 4.) fulfill your agency duty to: present all offers to seller & maintain records of all offers presented

Rejection of offer occurs by either (2):

1.) returning a signed, written rejection stating no counteroffer will be forthcoming [See RPI Form 150] 2.) preparing & submitting counteroffer, using either: counteroffer form or purchase agreement form stating diff. terms. [See RPI Forms 180 and 150]

To be valid, an offer needs to (3):

1.) show intent to enter into an agreement; 2.) be definite & certain in detailing the essential elements, such as price, terms of payment, property identification & conditions for performance; & 3.) be communicated to person who can accept offer

For DRE auditing purposes & in compliance w/ CA law, a copy of any document handled in transaction needs to be kept for a min. of __________ years. This includes all offers to purchase a seller's agent receives, even if seller did not accept or respond to them. Seller's agent is encouraged to have seller who rejects an offer, initial the offer as a rejection, submit it to buyer's agent & put a copy in client's property file

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However, consider a seller who puts their real estate up for sale w/o contracting for the services of a seller's broker. A buyer responding to the "For Sale By Owner" sign writes seller a letter expressing interest in buying the property, as long as a broker is not used. Buyer asks what price seller expects to receive. Seller writes back, informing buyer they will agree to negotiate the sale w/o a broker as long as buyer provides cash. They also provide buyer w/ price they expect to receive for the property. Buyer responds stating they agree to seller's terms. Seller later refuses to convey the property, claiming a binding contract was never entered into since their letter to buyer was a mere invitation for an offer — a solicitation by seller for an offer from buyer — & did not express a serious intent by seller to enter into sales agreement. Does seller's letter stating the cash price they expected to receive constitute an offer to sell which buyer may accept?

No! The letter did not show a serious intent to contract. Rather, it was an invitation to buyer to make an offer to purchase. The letter lacked words of an offer to sell, preventing a reasonable buyer from believing the letter was intended to be an offer capable of acceptance

____________ form is used in purchase & sale of: fee simple & existing leasehold estates, (such as: ground leases, long-term leases or master leases) [See RPI Form 150]

Real Estate Purchase Agreement

Purchase agreement is divided into 4 stages of activity (4):

Think: FCPF 1.) formation (offer & acceptance) stage 2.) conditions (contingencies) stage 3.) performance (closing) stage; & 4.) failure of performance (breach) stage [See Figure 1]

Consider a seller who lists their property for sale w/ broker. Seller's broker & agent are employed to locate a qualified buyer who will make the most attractive offer for seller to consider. While marketing the property, seller's agent receives an offer to purchase the property from a buyer at a price substantially lower than the listing price sought by seller. Shortly after receiving the first offer, seller's agent receives another offer to purchase the property. This 2nd offer is for a price greater than the listed price. Seller's agent has previously dealt w/ this 2nd buyer & believes buyer is less financially qualified - & less likely to close escrow - than buyer who submitted the first offer. The agent, sensing the second buyer will have difficulty securing purchase-assist financing called for as a contingency in purchase agreement offer, does not submit 2nd offer to seller. Despite inadequate price, seller believes 1st offer is the only available option & accepts this offer by entering into purchase agreement. Seller closes escrow on 1st offer Later, seller discovers the existence of the second offer & its superior net sales proceeds. Seller seeks to recoup their money losses from broker for the difference btwn amount received & amount of the second offer. Seller's agent claims they did not believe 2nd offer was credible & discarded it in service to seller, who already received a bona fide offer to purchase. Is seller's agent liable for seller's losses?

Yes! Seller's agent breached their fiduciary duty to care for & protect seller's best interests.

For example, consider a landlord & tenant who sign lease agreement giving tenant the option to renew the lease. The amount of rent due on exercise of renewal option is to be "agreed on" at time the option is exercised. An option is an offer which has not yet been accepted. It is irrevocable for a period of time during which it may be accepted, called exercising the option. Here, the option given the tenant to renew the lease does not specify an essential term (i.e., the rental rate, which is the price to be paid for use of property). Later, tenant tries to exercise (accept) the option (irrevocable offer). Landlord refuses to comply & claims: option is unenforceable as the rent terms are too vague. Is the option to renew too vague to be enforced?

Yes! The purported renewal option was merely an "agreement to agree" since it expressed an intent to change the rent to be charged under the lease, which leaves the option unenforceable

If defect in agreement is serious enough, either (2): 1.) broker or agents may negotiate compromise btwn persons in agreement, legally called ___________, or 2.) dispute may need to be resolved by court order.

accord and satisfaction

When failure to perform or deficiency arises in 1 of 1st 3 stages of contract's life, -->transaction has shifted into ______ stage.

breach stage

Buyer or seller needs to complete mutual performance obligations, called ___________ during: conditions stage prior to: closing

conditions concurrent

The acceptance of offer forms a binding agreement. However, agreement may not yet be enforceable by actual performance due to conditions contained in agreement. Actual performance of agreement cant be enforced until 2nd stage, _____________ is completed.

conditions stage

During ______ stage, contingencies in purchase agreement are to be: satisfied or waived before sales process can move toward closing. These contingencies are called ___________

conditions stage conditions precedent

________________ is agreement btwn persons binding them to do or not to do something

contract

During ________ stage, offers are made btwn buyer & seller. Negotiations commence & eventually, 1 of counteroffers may be accepted

formation stage

Contract is formed when?

offer to purchase is made & accepted

Person who makes the offer is called the ___________ Person to whom the offer is directed is called the ___________

offeror offeree

Purchase agreement has arrived at _________ stage when all contingencies & activities to close escrow have been cleared. To fully perform an agreement, ALL closing documents need to be signed & delivered & funds handed to escrow by: ALL persons.

performance stage

Specifically, purchase agreements contain clauses for:

• the identities of the parties; • the location of the real estate sold, leased or encumbered; • the time for acceptance and performance; • the time for opening and closing escrow; • the price and financing; • title conditions and vesting; • the physical condition of the property; • the property's natural hazards and environmental conditions; • tax planning; and • the broker fee