Chapter 11: Real Estate Contracts Flashcards
1
Q
Real Estate Contracts
A
Real estate licensees must understand the essential elements of a valid contract. A real estate transaction depends on a clear and concise agreement between the parties to the contract. The two most commonly used contracts in real estate brokerage are the listing contract, and the purchase and sale contract.
2
Q
Listing Contract
A
is an employment contract for professional services negotiated between a member of the public and a real estate broker.
3
Q
Purchase and Sale Contract
A
is negotiated between an owner of property and a potential buyer, which specifies the terms and conditions for the transfer of ownership.
4
Q
What is a contract?
A
By definition, a contract is an agreement between two or more competent parties that creates an obligation to do or not to do a particular thing.
A contract is not required to be in a certain format, to be on a single piece of paper, or to even be in written form. The agreement can be either written or oral.
5
Q
What is an assignment?
A
The sale, transfer, or subrogation of rights in a contract. An assignment is a contract between the assignor and the assignee. Most contracts are assignable unless prohibited in the agreement.
The assignor of a contract is not relieved of performance as a result of assignment. If the assignee fails to perform, the assignor is responsible for performance of the contract as originally agreed.
6
Q
What is an assignor?
A
The party who grants the rights.
7
Q
What is an assignee?
A
the party who receives the rights.
8
Q
What are the 4 essential elements necessary to create a valid contract?
A
- Lawful Subject
- Offer and Acceptance
- Consideration
- Competent Parties
9
Q
Lawful Subject
A
a contract must be for a lawful (legal) purpose and not contrary to public welfare. For example, an agreement between two parties to rob a bank would not be a valid contract since the subject of the agreement is unlawful.
10
Q
Offer and Acceptance
A
there must be an offer and acceptance, agreement, or meeting of the minds. A mutual understanding of the terms of the contract is reached when an offer made by one party is accepted by another party, and communicated to all parties.
11
Q
Consideration
A
a contract must specify a sufficient consideration. Either valuable or good consideration may be sufficient. Valuable consideration is money or anything of value that can be converted to money. This includes cash, personal property, real property, or enforceable promises. Love and affection, which are incapable of being expressed in terms of money, are called good consideration. An executor contract must be accompanied by a sufficient consideration. However, once a contract is executed, the sufficiency of the consideration will not come into question.
12
Q
Competent parties
A
a valid contract is an agreement between two or more competent parties. Minors, persons who are declared as incompetent by the courts, and persons known to be mentally incompetent do not have the capacity to contract. The law affords special protection to individuals who lack the capacity to contract. A contract made with an incompetent party is voidable. The incompetent party may void the contract and cannot be held accountable for performance. Conversely, an incompetent party can enforce a contract that cannot be enforced against them.
13
Q
Creation of a Contract
A
A contract is created when the offer of one party is accepted, and acceptance of the offer is communicated to the person who made the offer.
Communication of acceptance indicates that a complete meeting of the minds exists. A contract does not exist until communication has taken place.
Delivery of a contract to all parties is proof that communication has taken place.
14
Q
Acknowledgement by the Parties
A
Frequently, contracts have an acknowledgement by the parties as to the voluntary nature of the transaction. The acknowledgment is accomplished when the parties appear before an officer of the court such as a notary public or judge. Proof of identity is required and signature of the parties is made in the presence of the public official. Acknowledgment is necessary if a document is to be recorded in the public records.
A notary public applies a stamp or impresses a seal to the document to attest to the authenticity of the signatures of the parties. The seal of a notary public, called an acknowledgement, should not be confused with the word “seal” as used in connection with contract law. In contract law, the word “seal” does not refer to the acknowledgement. The seal is the placement of the word “seal” or the letters “L.S.,” locus sigilli, following the signatures of the parties.
15
Q
The Statute of Frauds
A
The original Statute of Frauds was enacted in England in 1677 to provide protection against fraud in the sale of real property.
16
Q
In Writing to be Enforceable
A
The Statute of Frauds requires a contract for the transfer of a right or interest in land to be in writing in order to be enforceable.
Real estate sales contracts, leases for more than one year, deeds, mortgages, and option contracts are conveyed by the Stature of Frauds. Any document that purports to convey a right or interest in land must be in writing to be enforceable.
The Statute of Frauds does not make an oral real estate sales contract illegal or invalid. An executed oral real estate sales agreement that reaches a successful conclusion is perfectly legal. The courts will not overturn an executed oral real estate sales contract.
An exception to the Statute of Frauds exists when a buyer makes a partial payment and either takes possession of, or makes improvements to the property.
Memory Device: “COLIC” competent parties, offer and acceptance, lawful subject, in writing, consideration.
17
Q
The Statute of Limitations
A
The Statute of Limitations provides time limits in which parties are allowed to bring legal action to enforce their rights under a contract.
18
Q
The periods allowed for various types of contracts are?
A
Oral contracts
Written contracts
19
Q
Oral Contracts
A
if a contract is entirely oral, action must be brought within four years.
20
Q
Written Contracts
A
a contract wholly in writing may be enforced if action is brought within five years.
21
Q
Partially Oral and Partially Written
A
A contract, which is partially oral and partially written, can be enforced based on whether the portion in dispute is oral or written and in accordance with the time limits indicated above.
22
Q
Express Contract
A
all the terms and conditions are specified and agreed to by the parties. In this case, a complete understanding exists. An express contract can be either oral or written.
23
Q
Implied Contract
A
exists when some or all of the terms and conditions can be assumed by the nature of the agreement or the words and actions of the parties. An implied contract can be either oral or written, or could be an implied provision of another contract.
24
Q
Bilateral Contract
A
both of the parties to the contract mutually agree to be bound to performance of the terms and conditions specified. One party exchanges a promise to perform an act based on a promise of the other party. A promise is given in exchange for a promise.
25
Unilateral Contract
only one party expressly agrees to perform an act. Only the one who agrees to perform the act is bound by the terms of the contract. One party gives a promise of performance based on performance by the other party. A promise is given in exchange for an act.
26
Executory Contract
any term or condition remains to be performed.
27
Executed Contract
when all parties have fully performed.
28
Formal Contract
is written, contains all the elements of a valid contract, and may be recorded in the public record. A formal contract is enforceable under the Statute of Frauds. One definition of a formal contract is “a contract that is wholly written and under seal.” In past years, the existence of a seal was a significant matter, but today a seal is a formality that does not affect the validity or enforceability of the contract.
29
Informal (Parol) Contract
is an oral agreement (made solely by word of mouth), or partially written contract between the parties that may or may not contain all the elements of a valid contract and is not recorded in the public record. An informal contract can be a valid, legal contract, but is not enforceable under the Statute of Frauds. Oral contracts are often referred to as parol contracts.
30
Void Contract
a contract that is void is inherently unenforceable. A void contract cannot be performed under the law. A contract can be void as a result of meeting one of the following criteria:
• It requires a party to perform an act that is impossible or illegal
• It became illegal due to changes in the law or government policy
• It was legal, but was declared null by the courts because it violated a fundamental principle such as fairness, or is against public policy.
31
Voidable Contract
is a valid agreement that can be enforceable. However, one or both of the parties to the contract can cancel or revoke the contract at any time. A voidable contract can be legally rejected by one party and is said to have a defect. Reasons that can make a contract voidable include:
• Failure by a party to disclose a material fact
• A mistake, misrepresentation, or fraud
• Coercion, undue influence, or duress
• Lack of capacity: a party was unable, due to intoxication or other impairment, to understand and form a contract
• A breach of contract
• A minor enters into a contract with an adult
32
Offer and Counteroffer
The party who makes an offer is called the offeror; the party who receives the offer is the offeree. If the offeree changes any of the terms or conditions of the original offer, it becomes what is known as a counteroffer.
A counteroffer has the effect of rejecting the original offer and replacing it with an entirely new offer. The original offeror becomes the offeree ad the original offeree becomes the offeror. The original offer no longer exists.
33
Offer Termination Memory Device "WILD CARD"
• Acceptance: an offer accepted by the parties becomes a contract.
• Withdrawal: the offeror can withdraw an offer at any time up to the time that acceptance of the offer has been communicated. If the offeror has received valuable consideration in return for keeping the offer open for a period-of-time, the offer may not be withdrawn during that time.
• Rejection or counteroffer: an offer is terminated if the offeree rejects the offer. A counteroffer is considered to be a rejection of an offer.
• Lapse of time: the offer is terminated at the end of the time specified for acceptance in the offer.
• Death or insanity: the death or insanity of either party terminates an offer.
• Destruction of the property: when improvements are destroyed by fire or natural disaster, the offer is terminated.
WILD CARD
34
Contract Termination Memory Device "BBRLAP"
• Breach- occurs if a party to a contract fails to meet the obligations or perform as agreed. The injured party can seek relief in court.
• Revocation- a party who is legally entitled can revoke and terminate the contract. In some situations, a party can have the power to revoke, but not have the legal right to do so.
• Renunciation- is the mutual consent of the parties to terminate the agreement.
• Lapse of Time- a contract typically specifies a time for performance by the parties.
o If no times for performance has been specified in a contract, a reasonable time will be allowed. Usually, only a court can determine how much time is reasonable.
o If time for performance is important to the parties, the contract should include the wording “time is of the essence.” The parties have agreed that time for performance is a significant feature of the agreement and should be strictly enforced. When “time is of the essence” appears in the contract, one minute late is too late.
• Abandonment- if a party to the contract walks away from the contract and does nothing toward performance or completion, the other party can terminate the contract.
• Performance- if both parties perform as agreed and fulfill the required obligations stated in the contract, the contract is terminated.
35
Breach of Contract
occurs when one contracting party fails or refuses to carry out the terms and conditions agreed upon in the contract.
Legal remedies exist to allow the plaintiff (the injured party) to seek court action to enforce rights created by the agreement.
36
What are the three basic remedies for a breach of contract?
1. Suit for Cancellation (Rescission)
2. Suit for Specific Performance
3. Suit for Damages
37
Suit for Cancellation (Rescission)
the party who is not in breach can bring a suit in court to cancel the contract and ask the court to put the parties back in their original positions.
38
Suit for Specific Performance
the party who is not in default asks the court to require the other party to perform as agreed in the contract. This remedy is usually available in connection with the sale of real estate, and is usually a remedy taken by the buyer.
39
Suit for Damages
the injured party can sue for damages. A suit for damages typically involves a request to the court to be financially compensated for harm suffered.
40
Action for Declaratory Judgment
Is a request to a court to interpret a contract in advance of a breach. This would be used if the parties to a contract are in dispute and request clarification or interpretation of provisions in the contract.
41
A court's interpretation of a contract is called what?
Construction
42
What are the two types of damages?
Liquidated and unliquidated
43
Liquidated Damages
are those that are specified and agreed upon in the contract. The parties have agreed to the penalty to be imposed in the event of a breach by either party. This usually involves the seller retaining the deposit in the event of a buyer default.
44
Unliquidated Damages
are those that are not specified in the contract, but are determined by a court. A suit for damages involves unliquidated damages.
45
Parties to a Sales Contract
The parties to a purchase and sale contract are the vendor (seller) and the vendee (buyer).
A real estate purchase and sale contract is an agreement between a property owner and a potential purchaser concerning a specific real estate parcel or parcels.
Sale contracts are bilateral; the vendor promises to sell and the vendee promises to buy.
46
Elements of a Sales Contract
```
The purchase and sale contract must meet all of the essential elements for other contracts that include:
• Competent parties,
• Lawful subject matter,
• Meeting of the minds, and
• Consideration
```
47
Are witnesses required on a purchase and sale contract?
Witnesses are not required on a purchase and sale contract, although most standard forms have spaces for them.
48
A typical sales contract includes
* Parties to the contract
* Property description
* Real and personal property included/excluded
* Purchase price
* Effective date
* Closing date
* Occupancy and possession
* Financing terms
* Closing costs to be borne by the seller or buyer
* Required disclosures
* Property inspections
* Addenda and additional terms
* Signatures
49
Earnest Money Deposits
The vendee customarily gives a binder deposit, also called earnest money, to show serious intent to buy the property.
However, money does not have to change hands for the purchase and sale contract to be valid. Enforceable promises have been made by both parties, which constitute valuable consideration.
50
Seller (Vendor) Default
Most purchase and sale contracts stipulate that the earnest money is to be returned to the vendee in the event of default by the vendor.
51
Buyer (Vendee) Default
The vendee usually forfeits the deposit if he or she defaults. In this case, the earnest money is generally divided equally between broker and vendor. The vendor is protected somewhat by the deposit and is reimbursed for the inconvenience of having removed the property from the market. Likewise, the broker receives some return on the time and effort expended in obtaining the agreement. The broker is not entitled to more than the amount of his or her normal commission had the transaction gone to closing.
52
Equitable Title
The vendee acquires equitable title as a result of having entered into a binding contract to purchase the property.
Equitable title is the interest held by one who has agreed to purchase property but has not yet closed. Although the vendor retains the legal title until closing, the vendee has the right to receive at closing that which was bargained for at the time the contract was entered into.
This imposes on the vendor the obligation to maintain the property in the same condition it was when the agreement was entered into.
53
What you may prepare in contracts
Real estate licensees can legally prepare listing contracts, sales contracts, option contracts, and buy representation agreements, including deposit receipts when applicable. However, complex sales and option contracts should be referred to an attorney.
54
What you may not prepare in contracts
Licensees are not allowed to prepare documents for mortgages, deeds, leases, assignments, or other legal documents.
55
Rules for Leases
An attorney must prepare leases, although licensees are allowed to fill in the blanks on certain residential lease forms for lease periods not to exceed one year. The Florida Supreme Court has specifically approved these residential lease forms.
A licensee:
• May not modify these lease forms in any way.
• Must refer any and all questions regarding the interpretation of these lease forms to an attorney.
• May prepare the purchase or option portion of a lease-purchase or lease-option agreement.
• Must use an approved lease form for the lease portion of a lease-purchase or lease-option agreement or allow an attorney to prepare it.
56
As-Is Contracts
Material Defects Must be Disclosed
| Sellers of residential property in Florida are required to disclose any material defects.
57
What is a Material Defect?
A material defect is any fact that could have a significant and reasonable impact affecting the property’s value.
58
Duty to Disclose Exists Even with As Is Contracts
The use of an as is provision in a contract does not relieve the seller of this responsibility. In Johnson v. Davis, the Supreme Court of Florida stated, “We hold that where the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer.”
59
As-Is Contract Seller Not Obligated to Make Repairs
however in a Standard Contract: Seller May Be Liable for Repairs
In contrast, with a standard sales contact, the seller may be liable to make repairs up to a predetermined percentage of the sales price or reimburse the buyer for repairs at settlement.
60
Disclosures required in sales contracts
1. Seller Disclosure of Known Material Facts Affecting Value
2. Lead-Based Paint
3. Radon Disclosure
4. Energy- Efficiency Rating
5. Property Tax Disclosure
6. Foreign Investment in Real Property Tax Act (FIRPTA) Disclosure
7. Homeowners' Association
8. Timeshare Resale Purchase Agreement Disclosure
9. Cooperative Resale Disclosure
61
Seller Disclosure of Known Material Facts Affecting Value
all real estate licensees have a duty to disclose all known facts that materially affect the value of residential real property and are not readily observable to the buyer. This disclosure, included in the Purchase and Sale contract, notifies the seller of his or her responsibility in providing this required information. Licensees and property owners have an affirmative duty to disclose material defects in a property. When in doubt, disclose. The use of an “as is” provision in a contract for sale is not enforceable unless all known defects have been disclosed to a potential purchaser.
62
Lead-Based Paint Disclosure
federal law prohibits the use of lead-based paint subsequent to January 1, 1978. Any property constructed prior to that date may contain such a substance, which may produce permanent neurological damage especially in young children. The federal Residential Lead-Based Paint Hazard Reduction Act of 1992, also known as Title X, requires that a pamphlet prepared by the EPA be given to any party interested in either buying or leasing such properties. The seller or landlord must also disclose information such as the location of the lead-based paint and/or lead-based paint hazards, and the condition of the painted surfaces. Buyers must be given a 10-day period after a contract is signed to test for lead-based paint hazards. Tenants, however, do not have the right to conduct tests. Licensees should become familiar with this law and the exemptions that apply.
63
Radon Disclosure
any party interested in either buying or leasing for periods of more than 45 days must be provided with a written disclosure containing the following wording: RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county health department.
64
Energy-Efficiency Rating Disclosure
the Florida Building Energy-Efficiency Rating Act requires that a prospective buyer of real property containing a building for occupancy must be provided with an energy-efficiency information brochure at the time of or prior to the execution of the contract for sale or purchase.
65
Property Tax Disclosure
a prospective purchaser of residential property must be presented a disclosure summary at or before execution of the contract for sale. Unless a substantially similar disclosure summary is included in the contract for sale, a separate disclosure summary must be attached to the contract for sale. The disclosure summary must be in a form substantially similar to the disclosure summary form F.S. 689.261.
66
Foreign Investment in Real Property Tax Act (FIRPTA) Disclosure
the sale of a U.S. real property interest by a foreign person is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. It does this by mandating that in covered transactions, buyers must withhold 10% for the sale of a personal residence where the amount realized is above $300,000 and up to $1,000,000, directly to the IRS. Effective February, 2016, a new 15% IRS withholding requirement applies to the sale of a personal residence where the amount realized is above $1,000,000. If Seller is a “foreign person” as defined by the FIRPTA, the buyer and seller will comply with FIRPTA; which may require the seller to provide additional cash at closing.
67
Homeowners' Association Disclosure
whenever mandatory membership in a homeowners’ association is required as a condition of a purchase a written disclosure must be provided as specified in F.S. 720.401.
68
Timeshare Resale Purchase Agreement Disclosures
common area expenses- whenever a broker negotiates a contract for the resale of a timeshare resale unit, the contract must contain specific language related to common are expenses, ad valorem taxes, and other ownership charges. The disclosure that follows must appear just above the space reserved for the signature(s) of the purchaser in capitalized ten-point, bold type or larger.
69
Cooperative Resale Disclosure
each prospective purchaser who has entered into a contract for the purchase of an interest in a cooperative is entitled, at the seller’s expense, to a current copy of the articles of incorporation of the association, the bylaws, rules of the association, as well as a copy of the question and answer sheet. Each contract for the resale of an interest in a cooperative shall contain in conspicuous type, one of the two disclosures below.
70
Cooperative Resale Disclosure Option 1:
the buyer hereby acknowledges that buyer has been provided a current copy of the articles of incorporation of the association, bylaws, rules of the association, and the question and answer sheet more than 3 days, excluding Saturdays, Sundays, and legal holidays, prior to execution of this contract;
71
Cooperative Resale Disclosure Option 2:
this agreement is voidable by buyer by delivering written notice of the buyer’s intention to cancel within 3 days, excluding Saturdays, Sundays, and legal holidays. After the date of execution of this agreement by the buyer and receipt by buyer of a current copy of the articles of incorporation…
72
Employment Contract Between a Broker and Property Owner
A listing contract is an employment contract between a broker and the owner of real estate. A buyer as well as a seller can employ a broker, but the term listing generally applies to a contract between an owner and a broker to either sell or lease the owner’s property.
A listing contract gives a broker authority to perform specified real estate service(s) on behalf of an owner. If the broker is successful in accomplishing the purpose of the employment, he or she is entitled to a fee or commission for the service performed.
73
Listing Contract Belongs to the Broker
If a listing is obtained through the efforts of one of the broker’s sales associates or broker associates, the listing contract belongs to the broker. A licensee, whether a sales associate or broker associate, works under the supervision of, and is an agent of the broker. The listing was obtained by the licensee as an agent of, and on behalf of, the broker.
74
Use of the MLS for Listings
The Multiple Listing Service (MLS) operated by the local Board of REALTORS is a means of collectively marketing properties listed with the service. The member-brokers agree to share information about properties for sale by listing them with the service. Properties can be more effectively marketed when brokers and sales associates throughout the area are aware that a property is for sale. By having information at their fingertips, licensees have instant access to hundreds or even thousands of properties for sale. A small fee may be charged to pay for this service. These listings are usually restricted to exclusive or exclusive right of sale listings, discussed later in this section.
75
Required Elements of Written Listing Contracts
• Definite termination date
• Legal description of the property
• Price and terms offered
• Fee or commission to be earned by the broker
• Signature of the property owner(s)
Written listing agreements cannot include an automatic renewal provision. The broker must deliver a copy of any written listing agreement to the property owner within 24 hours of execution.
76
Timeshare Listing Agreements Disclosure (Written)
Whenever a broker lists a timeshare resale unit, the contract must contain specific language related to common area expenses, ad valorem taxes, and other ownership charges. The disclosure that follows must appear in conspicuous type just above the space reserved for the signature(s) of the owner: There is no guarantee that your time-share period can be sold at any particular price or within any particular period of time.
77
Residential Listings includes
1. Open Listing
2. Exclusive Agency Listing (Exclusive Listing)
3. Exclusive Right of Sale Listing
78
Open Listing
is a unilateral contract. The property owner promises to pay a commission if the broker finds a buyer willing to purchase the property at a price and at terms that are acceptable to the property owner. Open listings may be either oral or written. An owner can give an open listing to any number of brokers for the sale of the same property. In effect, the brokers are in competition with each other to find a buyer for the property. In addition, the seller reserves the right to sell it him or herself without paying a commission to anyone.
79
Exclusive Agency Listing (Exclusive Listing)
is a bilateral contract in which the property owner promises to list the property with only one broker. The property owner promises to pay a commission if the broker successfully performs. The owner reserves the right to sell the property him or herself. The broker is not entitled to a commission if the owner sells the property. If a broker is employed as a single agent, this time of listing may be referred to as an exclusive agency listing. Exclusive listings may be either oral or written.
80
Exclusive Right of Sale Listing
is a bilateral contract in which the property owner promises to pay a commission regardless of who sells the listed property. If the owner sells the property him or herself, or sells it by using another broker, the broker who was employed under the exclusive right of sale contract is still entitled to a commission. Exclusive right of sale listing contracts must be in writing. In an exclusive right of sale listing contract, the broker promises to use his or her best professional efforts to locate a buyer who is ready, willing, and able to buy the listed property at the price and terms specified. The exclusive right of sale contract gives the broker the best protection of the three types of residential listing contracts.
81
Commercial Real Estate
is all real estate with the exception of residential property of one to four units, including vacant land permitted for such use and agricultural property which contains ten or less acres.
82
F.S. 475, Part III
is the Commercial Real Estate Sales Commission Lien Act. The Act presumes a broker to have a lien against the seller’s net sales proceeds upon performance by the broker under a written listing contract in a commercial real estate transaction. The lien is personal property of the broker and cannot be sold or assigned and attaches only to the seller’s net proceeds, not to the real property.
83
The listing agreement or a separate written agreement must contain a disclosure in substantially the following form:
“The Florida Commercial Real Estate Sales Commission Lien Act provides that when a broker has earned a commission b performing licensed services under a brokerage agreement with you, the broker may claim a lien against your net sales proceeds for the broker’s commission…”
84
For the lien the be enforceable
the broker must prepare a commission notice that contains language in substantially the same format as specified in the Act. The commission notice must be signed by the broker and witnessed by a notary public.
A copy of the commission notice is to be delivered to the owner and closing agent within 30 days of performance by the broker, but not less than one day prior to closing.
85
When is the lien not enforceable?
The lien is not enforceable should the broker fail to deliver copies to the owner and closing agent as required. Once both parties have received copies of the commission notice, the notice may be recorded in the public records in the county where the real property is located.
86
When must the broker record a release of lien?
within seven days after receipt of payment of the commission.
87
Net Listing
Any of the listings previously discussed can be structured as a net listing.
In a net listing, the property owner agrees to accept a stipulated amount, and no less, upon sale of the property. This amount is called the seller’s net. The broker retains all the money over the seller’s net as a commission.
Net listings are legal in Florida; however, a broker is not allowed to speculate with a property. The broker must inform the owner regarding the value of any property being listed. Net listings offer the potential for conflicts of interest and disagreements between owners and brokers, and are generally discouraged from use.
88
Total sale price of the property
The seller’s net plus the broker’s commission and closing costs is equal to the total sale price of the property. If the broker should sell the property for more than the listed price, any excess above the broker’s agreed upon commission must be paid to the seller. The broker cannot manipulate the transaction so as to make more than the commission agreed to.
89
Calculating a Brokerage Commission
The fee charged by a broker for his or her services may be based on an hourly rate, a fixed or flat fee, or more commonly, on a percentage of the sales price.
The broker’s commission is based on the entire sales price, which may include expenses or other encumbrances that must be paid by the seller. In other words, any encumbrances are the responsibility of the seller and do not reduce the broker’s commission.
The brokerage fee is a major cost that must be calculated when preparing the seller’s net sheet.
The brokerage fee is usually divided between the listing and selling brokerage offices on an agreed upon percentage basis. Each brokerage office splits the gross commission received with their licensees, according to their independent employment contract.
There are two basic ways in which a brokerage commission may be established: a single percentage of the sales price, or on a sliding scale.
90
Compensation is based on?
Performance
91
Employed to Effect a Sale
a listing contract with a seller may require the broker to effect a sale by locating a ready, willing, and able purchaser, and obtaining a binding contract at the listed price and terms. The broker is entitled to compensation when the potential purchaser has been located and title successfully passes from seller to buyer at closing.
92
Employed to Find a Purchaser
a broker may be employed simply to find a purchaser who is ready, willing, and able to purchase. If so, the broker is entitled to compensation whether or not a sale is finalized.
93
Procuring Cause
the broker who successfully performs by locating a willing, ready, and able buyer is said to be the procuring cause of the sale ad is the only broker entitled to a commission.
94
Commission is Based on Actual Sales Price
if the buyer and seller agree to a price lower than the price in the listing, the broker receives a commission based on the actual sales price.
95
Compensation is a Negotiated Agreement Not a Standard Rate
a broker’s compensation is determined by negotiated agreement between the employer and the broker.
96
Protection Period
Brokers typically insert a protection period into their employment contracts. This specified period-of-time follows the expiration of the employment contract. If the owner sells the property during this period to anyone with whom the broker had dealings during the employment period, the broker is entitled to compensation.
The protection period does not apply to property that is re-listed with another broker after the expiration date of the employment contract.
97
Implied Listing
If an owner knowingly allows a broker to show property to prospective purchasers in the absence of a written listing, and the property is sold to one of them, the broker is entitled to a commission based upon an implied listing.
If a broker has performed according to an implied listing contract, but the seller refuses to pay the broker, the broker may bring legal action to enforce collection of a commission or fee.
98
Listing Termination as a result of
```
Breach
Renunciation
Lapse of Time
Abandonment
Revocation
Performance
Destruction of the Property
Death or Insanity
Bankruptcy
```
99
Breach
a breach of contract by one party allows the other party to terminate the listing.
100
Renunciation
the listing may be terminated by mutual consent of the parties.
101
Lapse of Time
the listing contract is terminated at the time specified in the listing contract.
102
Abandonment
the owner can terminate the listing contract if the broker fails to perform in accordance with the listing contract.
103
Revocation
the broker or owner can terminate the listing by giving notice of revocation to the other party. The broker may have legal recourse if the owner revoked and did not have the legal authority to do so. The owner would owe the broker a commission if the broker had performed prior to the revocation. If an owner revoked an exclusive listing and sells the property him or herself during the remaining term of the listing, the broker would not be entitled to a commission. However, if the owner revoked the exclusive listing and listed with another broker who then sells the property, the original broker may be entitled to damages or a commission from the seller. If an owner revokes an exclusive right of sale listing, and sells the property during the time the listing would still have been in effect, the owner would be liable to the broker for a full commission. If the owner does not sell the property during this period-of-time, he or she may still be liable to the broker for time and expenses.
104
Performance
the listing contract is terminated by full performance as stated in the listing contract.
105
Destruction of the Property
the listing contract is terminated if the property is destroyed.
106
Death or Insanity
the listing contract is terminated by the death or mental incapacitation of either the broker or the property owner.
107
Bankruptcy
the listing contract is terminated by the bankruptcy of either the broker or property owner.
108
Showing Agreement
A licensee can use a Showing Agreement to obtain loyalty from a buyer. In the Showing Agreement, the buyer agrees that if they purchase a home shown to them by the licensee, they will make that purchase through the licensee.
Section 2 of the Showing Agreement provides a place to keep a record of the properties that have been shown to the buyer. If the buyer purchases a property that is not on the list, they owe the licensee nothing.
109
Exclusive Buyer Brokerage Agreement
To act as the buyer’s broker and receive compensation from them, licensees may choose to use an Exclusive Buyer Brokerage Agreement.
This agreement establishes an exclusive representation with the buyer, provides for a retainer fee, and contains a limitation of the licensee’s liability with respect to tax, legal, environmental, engineering, or other specialized advice.
This agreement also includes a protection period whereby the buyer still owes compensation within a certain number of days after the agreement terminates if they purchase a property that the licensee introduced to them during the agreement term.
110
Option Contracts
An option contract is a right to buy a property during a specified period-of-time, at a specified price. It is not an obligation to buy the property, as is the case with a sales contract. It is a right that may or may not be exercised. Option contracts are, therefore, unilateral since the party who acquired the right has not promised to buy the property. To acquire this right, a party must pay a definite valuable consideration. This is true because any contract requires that both parties receive some benefit. The term valuable consideration in contracts is used to signify consideration sufficient to sustain an enforceable agreement.
The definite valuable consideration is given to the owner in lieu of a promise. The right cannot be obtained without some consideration being given. The consideration paid is called option money.
111
Parties to an Option
The property owner who gives the right is called the optionor; the party who receives the right is called the optionee. The optionor is the only party who is obligated either to do or not to do something.
112
Requirements for Option Contracts
* In writing- options are covered by the Statute of Frauds and must be in writing to be enforceable.
* Price and terms- the option must state the price and terms for the transaction.
* Length of time- this time period must be specified.
* Legal description- the contract must contain a full legal description of the property that is the subject of the option.
* Consideration- the optionee must pay a definite, valuable consideration, which is usually money.
113
Exercising an Option
Exercised Option Becomes Purchase and Sale Contract
The optionee has the legal right and can elect to purchase the property by exercising the option at any time within the specified option period. Once the optionee notifies the optionor of the intention to proceed with the purchase, the option becomes a purchase and sale contract, and is binding on both parties.
114
Refunding Option Money
All of the option money cannot be refunded if the option is not exercised because that would remove the consideration. An option can provide that all or a portion of the consideration paid by the optionee can be applied toward the purchase price if the option is exercised. An option not based on a definite valuable consideration is void.
115
Option Contracts as Listings
An option contract requires definite valuable consideration. An option that is accompanied by only a token consideration is considered to be a listing, not a contract. Since an unlicensed person cannot have a listing, he or she must pay a definite valuable consideration to obtain a valid option; otherwise, the agreement is void. Any attempt to conclude such transactions is a violation of law.
Real estate licensees are allowed to obtain options but must also pay a definite valuable consideration and, in addition, divest themselves of their identity as licensees. Licensees are not allowed to deal for themselves without advising members of the public of their licensed status.
116
Token consideration is a Listing
Not an Option Contract
A broker who acquires an option without paying option money or only a token consideration has obtained a listing, not an option, in the eyes of the Commission.
A broker can enter into option contracts without paying a definite valuable consideration because a broker is entitled to have listings. The broker would only be entitled to a commission in the transaction.
117
Contract for Deed
Also known as an agreement for deed, land contract, conditional sales contract, or installment sale contract.
A contract for deed is an agreement between a property owner and potential buyer in which the owner agrees to deliver a deed to the purchaser after certain conditions have been met. The buyer is given possession and use of the property. Generally, the buyer makes a down payment to the seller and continues to make payments over a period-of-time, similar to mortgage payments. The agreement calls for the title to be conveyed after the full purchase price, or a stipulated portion of the prices, has been paid.
118
What does Florida law consider a contract for deed to be?
Florida law considers this type of transaction to be a financing device. The buyer has equitable title rights even though the seller retains the legal title. If the contract is recorded, the buyer is entitled to homestead protection under the Florida Constitution, and may claim the homestead tax exemption.
This type of transaction can pose potential problems. The seller may encumber the property with loans, or the title could be clouded by judgment liens against it. If the seller should die prior to the end of the installment period, the buyer may have difficulty gaining legal title. If the seller is unable or unwilling to deliver the legal title to the buyer at the end of the contract, the buyer can bring suit for specific performance in court. Some states allow the seller to claim and retain all money paid upon default by the buyer. In Florida, if the buyer defaults, the seller must start foreclosure proceedings in court.
119
How to protect the parties involved in a contract for deed?
all documents associated with the transaction should be placed in escrow, and the contract should be recorded in the public records.
