Chapter 14 - Contracts for the sale of real estate Flashcards
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, executory contract
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.
The tenant can force the sale at the original terms.
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
The seller may cancel the contract, since it can be ruled invalid.
During the executory period of a sale contract, the buyer acquires an equitable title interest in the property. This means that
They give the optionee an equitable interest in the property.
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.
Which of the following best characterizes a conventional sale contract?
Select one:
a. Voluntary, bilateral, and executory
b. Involuntary, bilateral, and contingent
c. Involuntary, unilateral, and executory
d. Voluntary, unilateral, and executory
a. Voluntary, bilateral, and executory
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.
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
A sale contract may specifically deal with tax withholding responsibility if the seller is a foreigner. What is this responsibility?
The buyer must withhold 15% of the purchase price at closing for the seller’s capital gain tax payment.
The purpose of an escrow account is to
entrust deposit monies to an impartial fiduciary.
A sale contract is
executory: the signatories have yet to perform their respective obligations and promises
To be enforceable, a sale contract must
be validly created (mutual consent, consideration, legal purpose, competent parties, voluntary act)
be in writing
identify the principal parties
clearly identify the property, preferably by legal description
contain a purchase price
be signed by the principal parties
A contingency
is a condition that must be met before the contract is enforceable.
To avoid problems, the statement of a contingency should:
be explicit and clear
have an expiration date
expressly require diligence in the effort to fulfill the requirement
If a buyer fails to perform under the terms of a sale contract,
the breach entitles the seller to legal recourse for damages.
The usual remedy is forfeiture of the buyer’s deposit as liquidated damages, provided the deposit is not grossly in excess of the seller’s actual damages.
If a seller defaults
buyer may sue for specific performance, damages, or cancellation.
A financing contingency clause states
under what conditions the buyer can cancel the contract without default and receive a refund of the earnest money.
An earnest money deposit clause specifies
how the buyer will pay the earnest money
An escrow clause provides
for the custody and disbursement of the earnest money deposit, and releases the escrow agent from certain liabilities in the performance of escrow duties.
The contract states when title will
transfer, as well as when the buyer will take physical possession.
One or more provisions will state what type of deed the seller will use to
convey the property, and what conditions the deed will be subject to.
Secondary provisions: Inspections
The parties agree to inspections and remedial action based on findings
Secondary provisions: Owner’s association disclosure.
The seller discloses existence of an association and the obligations it imposes.
Secondary provisions: Survey
The parties agree to a survey to satisfy financing requirements
Secondary provisions: Environmental hazards.
The seller notifies the buyer that there may be hazards that could affect the use and value of the property.
Secondary provisions: Compliance with laws.
The seller warrants that there are no undisclosed building code or zoning violations
Secondary provisions: Due-on-sale clause.
The parties state their understanding that loans that survive the closing may be called due by the lender. Both parties agree to hold the other party harmless for the consequences of an acceleration
Secondary provisions: Seller financing disclosure.
The parties agree to comply with applicable state and local disclosure laws concerning seller financing.
Secondary provisions: Rental property; tenants rights.
The buyer acknowledges the rights of tenants following closing.
Secondary provisions: FHA or VA financing condition.
A contingency allows the buyer to cancel the contract if the price exceeds FHA or VA estimates of the property’s value
Secondary provisions: Flood plain; flood insurance.
Seller discloses that the property is in a flood plain and that it must carry flood insurance if the buyer uses certain lenders for financing.
Secondary provisions: Condominium assessments.
Seller discloses assessments the owner must pay
Secondary provisions: Foreign seller withholding.
The seller acknowledges that the buyer must withhold 15% of the purchase price at closing if the seller is a foreign person or entity and forward the withheld amount to the Internal Revenue Service.
Secondary provisions: Tax deferred exchange.
For income properties only, buyer and seller disclose their intentions to participate in an exchange and agree to cooperate in completing necessary procedures.
Secondary provisions: Merger of agreements.
Buyer and seller state that there are no other agreements
between the parties that are not expressed in the contract
Secondary provisions: Notices
The parties agree on how they will give notice to each other and what they will consider to be delivery of notice.
Secondary provisions: Time is of the essence.
The parties agree that they can amend dates and deadlines only if they both give written approval
Secondary provisions: Fax transmission.
The parties agree to accept facsimile transmission of the offer, provided receipt is acknowledged and original copies of the contract are subsequently deliver
Secondary provisions: Survival
The parties continue to be liable for the truthfulness of representations and warranties after the closing
Secondary provisions: Dispute resolution.
The parties agree to resolve disputes through arbitration as opposed to court proceedings
Secondary provisions: C.L.U.E. Report.
CLUE (Comprehensive Loss Underwriting Exchange) is a claims history database used by insurance companies in underwriting or rating insurance policies.
Addenda
Addenda to the sale contract become binding components of the overall agreement. The most common addendum is the seller’s property condition disclosure. Examples of other addenda are:
agency disclosure asbestos / hazardous materials
liquidated damages radon disclosure flood plain disclosure tenant’s lease
