Ch. 12 Real Estate Contracts

What are the written agreements (contracts) most commonly used by real estate professionals? (7)

1. Client representation agreements 2. Real estate sales contracts 3. Options 4. Escrow Agreements 5. Property Management Agreements 6. Leases 7. Owner financing contracts, such as land contracts or contracts for deed

What is the amount of an earnest money deposit sufficient to? (3)

1. Discourage the buyer from defaulting 2. Compensate the seller for taking the property off the market 3. Cover any expenses the seller might incur if the buyer defaults.

Minimum requirements for a contract to be legally valid (5)

1. Offer and Acceptance 2. Consideration 3. Consent 4. Legal Purpose 5. Legally Competent Parties

The contract clause that provides a contingency will include the following 3 elements:

1. The action necessary to satisfy the contingency 2. The time frame within which the action must be performed 3. The party who is responsible for paying any costs involved.

In addition to essential elements of a contract, a real estate contract will include: (5)

1. The sales price and terms 2. An adequate description of the property and improvements 3. A statement of the kind and condition of the title and the form of deed to be delivered by the seller 4. The kind of title evidence required, who will provide it, and how many defects in the title will be eliminated 5. A statement of all the terms of the agreement between the parties, including any contingencies - conditions that must be met to successfully complete the transaction.

The validity of a contract can be described as... (4)

1. Valid 2. Void 3. Voidable 4. Unenforceable

A contract must be (5)

1. Voluntary - no one must be forced 2. An agreement or promise 3. Made by legally competent parties 4. Supported by lawful consideration - supported by something of value 5. For a legal act - contract is invalid if it has an illegal objective

Breach of Contract

A Violation of any of the terms or conditions of a contract.

What is an example of a unilateral contract?

A broker lists a property with MLS. Any other broker who a part of MLS may or may not bring a buyer to the listing broker. The offer by the listing broker to share compensation with a cooperating broker is an offer for a unilateral contract. The briers who receive the offer are not obligated to bring a buyer to the listing broker, but if a cooperating broker does produce a buyer, the listing broker is obligated to share the compensation on the transaction on the terms specified.

Amendment

A change or modification to the existing content of a contract. Can also be the change to the existing words or provisions in a preprinted contract form. Must be separately initialed or signed by all parties proper to or at the time the contract is signed.

Option

A contract by which an optioned (generally an owner) gives and optionee (prospective purchaser or tenant) the right to by or lease the owner's property at a fixed price within a certain period of time. *Common = a lease that includes an option for the tenant to purchase the property.

Requirements for a valid contract: Consent

A contract must be entered into by consent as a free and voluntary act of each party. Each party must be able to make a prudent and knowledgable decision without undue influence.

Can a counteroffer be withdrawn?

A counteroffer can be withdrawn any time before it has been accepted.

Purchase Money Mortgage

A note secured by a mortgage or deed of trust given by a buyer, as a borrower, to a seller, as a lender, as part of the purchase price for real estate.

Acceptance

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

Offer

A promise made by one party; requesting something in exchange for that promise.

Contract

A voluntary agreement or promise between legally competent parties to perform (or not perform) some legal act.

Land Contract

AKA, contract for deed, contract of sale, bond for title, installment contract, land sales contract, or articles of agreement for warranty deed. The owner/seller retains legal title. The buyer, takes possession and gets equitable title to the property. The buyer agrees to give the seller a down payment and makes regular monthly installments of principal and interest over a number of years. Buyer also agrees to pay real estate taxes, insurance premiums, repairs, and upkeep on the property. Although buyer obtains possession, seller is not obligated to provide deed to buyer until terms of the contract have been satisfied (all payments due have been made).

Binder

AKA: Letter of Intent Typically used when a transaction includes commercial or industrial property. The binder is typically shorter and it states the essential terms of the offer and acknowledges that the buyer;s representative has received the buyer's deposit. A more formal, complete contract of sale is drawn by an attorney once the seller accepts and signs the binder. *Useful when the details of the transaction are too complex for the standard sales contract form.

The Uniform Vendor and Purchaser Risk Act

Adopted by some states, provides that the seller bear any loss that occurs before the title passes or the buyer takes possession.

Requirements for a valid contract: Legally Competent Parties

All parties to the contract 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.

Reasons for Termination: Impossibility of Performance

An unforeseen circumstance has made an act required by the contract impossible or impractical. Ex: When a buyer is laid off and can no longer complete the purchase.

Counteroffer

Any change by the seller to the terms proposed by the buyer. The original offer ceases to exist because the seller has rejected it.

Addendum

Any provision added to an existing contract that may change or be an addition to the content of the original. An addendum includes the original contract's provisions for reference, meaning the addendum mentions the original contract and must be signed by all parties. Ex: An agreement to split the costs of repairing certain items discovered in a home inspection.

Voidable Contract

Appears on the surface to be valid, but it may be rescinded or disaffirmed but one or both parties based on some legal principal. Considered by the courts to be valid if the party who has the option to disaffirm the agreement does not o so within a specific period of time.

Bilateral Contracts

Both partied promise to do something; one promise is given in exchange for another. Real Estate Sales Contract is bilateral because the seller promised to sell a parcel of real estate and transfer title to the property buyer who promises to pay a certain sum of money and other lawful consideration for the property.

Reasons for Termination: Mutual Agreement (to cancel the contract)

Cancellation by one party will terminate a contract but does not automatically return the parties to their original position unless provided by law or by the terms of the agreement.

Contingencies

Conditions that must be satisfied before a sales contract is fully enforceable.

Real Estate Sales Contract

Contains the complete agreements between a buyer of a parcel of real estate and its seller.

"Time is of the essence"

Each of the elements of a contract must be performed within a specified time. A party who fails to perform an obligation under the contract on time is liable for breach of contract.

Statute of Limitations

Every state limits the time during which parties to a contract may bring a legal action, or lawsuit, to enforce their rights.

Executory Contract

Exists when one or both parties still have an act to perform. A sales contract is an executory contract from the time it is signed until closing; ownership has not yet changed hands, and the seller has not received the sales price.

Void Contract

Has no legal force or effect because it lacks some or all essential elements of a contract. Was never a legal contract.

Reasons for termination: Partial performance of the terms, along with written acceptance

If the parties agree that the work performed is close enough to completion, they can agree that the contract is discharged, even if some minor elements remain unperformed.

Requirements for a valid contract: Offer and Acceptance

In R.E. the sales contract sets out the offer by the buyer that is accepted by the seller. The person who makes the offer is the offerer. The person whom an offer is made is the offeree. *Must have mutual assent between parties about the purpose and terms of the contract.

Liquidation Damages Clause

In a real estate purchase contract specifies the amount of money to which the seller is entitled if the buyer breaches contract. The liquidation damages in the event that the buyer defaults may be specified as the buyer's earnest money deposit. In some states the amount of liquidation damages is limited to a percentage of purchase price, even if the buyer has made a down payment for a larger amount.

Reasons for termination: Substantial Performance

In which one party has substantially performed on the contract but does not complete all the details exactly as the contract requires. Such performance may be enough to force payment, with certain adjustments for any damages suffered by the other party. Ex: newly constructed addition to home is finished except the polishing of door knobs, the contractor is entitled to a final payment.

Earnest Money Deposits

It is customary, but not essential, for a purchaser to provide a deposit when making an offer to purchase real estate. It is evidence of the buyer's intention to carry out the terms of the contract in good faith.

Unenforceable Contract

May also appear on the surface to be valid; however, neither party can sue the other to force performance.

Enforceable Contract

Meets all elements of a valid contract, including compliance with any applicable statute of frauds or other law that requires it to be in wiring and signed by the parties.

Valid Contract

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

Executed Contract

One in which all parties have fulfilled their promises; the contract has been performed. A sales contract, at closing, when contract terms have been met is an executed contract.

Unilateral Contract

One sided agreement. One party makes a promise in order to entice a second party to do something. The offer made in a unilateral contract is usually accepted by performance of the party to whom the offer i made. The second party is not legally obligated to act, but if the second party does comply, the first party is obligated to keep the promise.

Express Contract

Parties state the terms and show their intentions in words, either oral or written. Most real estate contracts are express contracts.

Property Sale Contingency

Protects a buyer who ha to sell a come in order to buy the seller's property. The provision protects the buyer from owning two homes at the same time and also helps ensure that availability of cash for the purchase.

Mortgage Contingency

Protects the buyer's earnest money in the event that the buyer is unable to secure a mortgage on the property.

Inspection Contingency

Provides that the buyer may obtain certain inspections of the property and many cancel the contract if the inspections indicate unsatisfactory or unsafe property condition.

Assignment

Refers to a transfer or rights or duties under a contract. Generally rights and obligations may be assigned to a third party as long as they do not involve a contract for personal services.

Disclosure

Relevant information or facts that are known or should have been known presented to the buyer before an offer to purchase is made.

Recession

Returns the parties to their original positions before the contract, so any monies or property exchanged must be returned. Recessions normally a contractual remedy for beach, but a contract may also be rescinded by the mutual agreement of both parties.

Requirements for a valid contract: Consideration

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

Statute of frauds

State law that requires certain instruments, such as deeds, real estate sales contracts, and certain leases to be in writing to be legally enforceable.

Novation

Substitution of a new contract. May be between the same parties, or a new party may be substituted (novation of the parties).

Reasons for Termination: Operation of Law

Such as voiding a contract by a minor, or as a result of fraud, or because the contract was altered without the written consent of all parties involve.d

Implied Contract

The agreement of parties demonstrated by their acts and conduct.

Suit for specific performance

The buyer ask the court to force the seller to go through with the sale and transfer the property as previously agreed.

Requirements for a valid contract: Legal Purpose

The contract must have a legal reason for existence. A contract for an illegal purpose or for an act against public policy is not a valid contract.

Equitable Title

The interest held by a buyer under a contract for deed or an installment contract in hiccup the title is not immediately transferred; the equitable right to obtain absolute ownership to the property when legal title is in another's name. Equitable title is insurable title.

Liquidation Damages

The parties agree on a certain amount of money that will compensate the non breaching parties.

If a contract is ambiguous, who will the court normal rule against?

The party who prepared it.

Owner Financing

The seller provides credit for all or part of the funds that will allow the buyer to move forward with the transaction.

Offer (in purchasing real estate)

When the real estate sales agreement has been prepared, signed by the prospective buyer, and communicated to the seller.