Section 10: Unit 6 Option Contract and Terminating an Offer in Michigan

True or false regarding option contracts: It's illegal to attach an option contract to a lease.

False

True or false regarding option contracts: With an option attached to a lease, a landlord can increase the option amount if a better offer comes in.

False

Amendment

A change to an existing contract (it changes the original terms of the contract)

What does the statute of limitations provide?

A deadline for how long an aggrieved party to a contract may sue for damages

Open listing agreement

A non-exclusive listing where the seller can have open listing agreements in place with multiple licensees, and only the licensee who procures the buyer earns the commission

At what point does an option contract become binding for both parties? - Once the optionee pays the option fee - Once the optionor agrees to sell the property to the optionee - As soon as both parties sign the option contract - Once the optionee exercises the option

Once the optionee exercises the option

Voidable contract

One in which one party has the option to void the contract

What is "partial performance" of a contract?

One or both parties did not meet all the terms of the contract (the other party) can determine whether to accept partial performance or not)

What is a contractual breach?

One party fails to meet the obligations of the contract

Which of the following items are required for an option contract to be valid and enforceable? The property's sales price or the way in which the price will be determined must be stated in the contract. - Required - Not required

Required

What are the essential elements of a valid contract?

Competent parties, mutual agreement, lawful objective consent, and consideration. Contracts for the transfer of real property must be in writing and contain the signatures of the parties to be enforceable

What is "performance" fo a contract?

Completing the terms of the contract

Bilateral contract

One in which both parties have obligations

Net listing

One in which the agent earns commission only in the property sells above a specified price

What is an exclusive right-to-sell listing agreement?

One in which the listing agent has earned the commission, regardless of who brings the buyer

Unilateral contract

One in which there is only one party making a promise (e.g., an offered reward to help find a lost pet)

A newlywed couple comes to you asking for help with an option contract. What do you do? - Thank them for coming and politely show them the door. - Whip out an option contract and begin filling in the blanks. - Advise them to seek the advice of a real estate attorney. - Explain to them that a sales contract is a better option.

Advise them to seek the advice of a real estate attorney.

Identify whether each of these is a valid reason to counter. Seller wants buyer to pay for entire title report - yes - no

No

Void contract

Not a contact because of lack of legality

Which of the following items are required for an option contract to be valid and enforceable? The contract must specify the date that the optionee will purchase the property. - Required - Not required

Not required

Which of the following items are required for an option contract to be valid and enforceable? The agreement must be in writing and signed by the seller. - Required - Not required

Required

Which of the following items are required for an option contract to be valid and enforceable? The amount of consideration the optionee is paying the optionor must be stated in the contract. - Required - Not required

Required

Which of the following items are required for an option contract to be valid and enforceable? The contract must state the length of the option period. - Required - Not required

Required

Identify each statement as either "lease with option to buy" or "right of first refusal." With this option, the holder must wait until an event occurs (another offer is made on the property by a third party) and then must decide whether to exercise the option, or let the property go.

Right of first refusal

True or false regarding option contracts: An option contract attached to a lease gives the lessee the option to purchase the property at some point in the future.

True

True or false regarding option contracts: An option contract that's attached to a lease is known as a lease option, or a lease with an option to buy.

True

What are the two contractual promises of an option contract? - The optionee will purchase the property within the option period. - The optionor will not sell the property to anyone else during the option period. - The optionor will sell the property to the optionee, if the optionee so chooses, under the contract terms and conditions. - The optionee will not offer less than the sales price stated in the contract.

- The optionor will not sell the property to anyone else during the option period. - The optionor will sell the property to the optionee, if the optionee so chooses, under the contract terms and conditions.

Fill in the blanks: Margo Kent wants to make an offer on a specific piece of property owned by Grant Lee, but she doesn't want to be forced to buy. Grant is okay with this, so the two enter into an option contract. Margo is the ____1____, and Grant is the _____2_____. Grant is fully aware that an option contract is a ____3_____and that only ____4____ is bound to carry out the contractual obligations unless the buyer decides to exercise the option to buy. However, he also knows that if Margo decides not to purchase his property, he gets to keep the ____5_____ and is free to sell the property to someone else. In fact, payment of the fee is Margo's only obligation, and she can fulfill it with a gift card, if Grant agrees to it. - optionor - unilateral contract - optionee - option fee - the seller

1 - optionee 2 - optionor 3 - unilateral contract 4 - the seller 5 - option fee

Addendum

An addition to an existing contract

Can you define an option contract? - Another name for a sales contract - An offer to purchase a specific piece of real estate but without the obligation to buy it - An agreement in which the seller has the option to withdraw the offer to sell at any time - An agency agreement that gives the client the option of terminating without a written notice

An offer to purchase a specific piece of real estate but without the obligation to buy it

Option

An offer to purchase a specific piece of real estate, but without the obligation to buy it. In an option contract, the potential buyer (optionee) is required to pay an option fee to the seller (optionor). If the optionee decides not to exercise the option and purchase the property, the optionee gets to keep the option fee

What are the elements required in a valid option contract?

It must be in writing and signed by the optionor and state the amount of consideration, the length of the option period, and the sales price of the property

Identify each statement as either "lease with option to buy" or "right of first refusal." With this option, the holder can decide when and whether to exercise the right to the property.

Lease with an option to buy

Identify each statement as either "lease with option to buy" or "right of first refusal." This option is often used by prospective purchasers who can't purchase immediately but intend to soon, and would like to buy the property they're renting.

Lease with option to buy

Statute of Frauds

Legal requirement that certain contracts, including the sale of real property, be in writing to be enforceable

Express contract

May be oral or written and clearly states the terms of the agreement between the parties

What is "substantial performance" of a contract?

Most, but not all, of the terms specified in the contract have been met, and the party not meeting the remaining terms may be required to pay damages for the terms not met

Exclusive agency listing agreement

One that pays commission to the listing agent only when a real estate professional procures the buyer (if the seller does, no listing commission is owed)

Invalid contract

One that's missing a legal element

Implied contract

One that's not been expressly agreed upon, but relies on the actions of the parties to determine the agreement (e.g., when ordering lunch at a diner, it is implied that you will pay the bill)

What's an assignment of a contract?

Someone substitutes for one of the original parties to the contract (which requires the consent of the parties and the original party may still remain responsible for the terms in the event of a default of the substitute)

he right of first refusal process involves a specific order of events. Do you know what the order of events is? Which one of these is the LAST step in the process? - The prospective purchaser asks for (and often pays a fee for) a right of first refusal. - The holder of the right of first refusal must match the new party's offer, or allow the property to be sold/leased to the third party. - At some point, the owner puts the property up for sale or lease. - Another party makes an offer to the owner.

The holder of the right of first refusal must match the new party's offer, or allow the property to be sold/leased to the third party.

What happens when a minor enters into a contract?

The minor can void it; the other party can't

What is the "impossibility of performance" as it relates to a contract?

The parties cannot legally or practically do what they've agreed to do (in such cases, they released form their contractual obligations to one another)

What is "specific performance" of a contract?

The requirement to meet the terms of the contract exactly

What's a novation of a contract?

The substitution of one party for another in an agreement; the original party is released from all obligations

Identify whether each of these is a valid reason to counter. Contingencies - yes - no

Yes

Identify whether each of these is a valid reason to counter. Earnest money amount or date of deposit - yes - no

Yes

Identify whether each of these is a valid reason to counter. Inspection period length - yes - no

Yes

Identify whether each of these is a valid reason to counter. Price - yes - no

Yes