Kap Real Estate Chapter 10: Sales Contract Practices

Question 1

The Sales Contract

1) Common Name for it

2) Who approved of this contract?

Answer 1

1. In North Carolina the most common title is Offer to Purchase and Contract.
2. NCBA/NCAR 2-T Offer to Purchase and Contract (see Offer to Purchase) approved jointly by the North Carolina Bar Association and the North Carolina REALTORS®

Brokers are expected to know which standard form is appropriate for a given scenario and, when it is appropriate, to refer a consumer to an attorney to have a suitable contract drafted.

Question 2

1) What is the most important document in the sale of real estate and why?

2. What issues are addressed in a real estate sales contract?

Answer 2

1. The contract of sale is the most important document in the sale of real estate because it sets the parameters of the agreement between the buyer and the seller and establishes their legal rights and obligations. It is more important than the deed itself because the contract, in effect, dictates the contents of the deed.
2. Issues to be addressed in a real estate sales contract are price, terms, legal description of the property, kind and condition of the title, form of deed the seller will deliver, kind of title evidence required, who will provide title evidence, and how defects in the title, if any, are to be eliminated. The contract must state all the terms of the agreement and spell out all contingencies and/or conditions.

Question 3

Uniform Electronic Transactions Act (UETA)

Answer 3

A uniform state act providing a legal framework for electronic transactions giving electronic signatures and records the same validity and enforceability as manual signatures and paper-based transactions.

The statute defines an electronic signature as “an electronic sound, symbol, or process attached to, or logically associated with, a record and executed or adopted by a person with the intent to sign the record.”

Question 4

What is needed to form a valid real estate transaction?

Answer 4

-an offer made

-an acceptance of that offer

-communication of the acceptance to the other party (the offeror).

Question 5

What is an offer?

Answer 5

Anyone who makes an offer to purchase property is known as the offeror—the person making the offer. Anyone who receives an offer is known as the offeree

Question 6

What is contingency?

Answer 6

In other words, the offeror is saying to the offeree, “This is my offer, if the following conditions or contingencies can be met.”

Question 7

Acceptance

Answer 7

occurs when the offeree signs the offer without making any changes to it, thereby evidencing his acceptance and willingness to be bound by and perform all terms of the offer.

If no contract is ever formed, the full earnest money is returned to the offeror

Question 8

The Counteroffer

Answer 8

when the offeree receives the offer and makes any change to that offer, it constitutes a counteroffer, which is a rejection of the first offer. When the counteroffer takes place, the original offer cannot be revived. The offeree also cannot later reconsider and accept the original offer. It has been rejected; it no longer exists.

Question 9

Methods of Communicating Offers and Acceptance

Answer 9

most acceptable way is to communicate in writing. the offeror signs the written offer and communicates it to the offeree, and the offeree signs the written offer, denoting acceptance. When the acceptance is properly communicated back to the offeror, a contract is formed.

oral, by telephone, voicemail, in person, or by personal delivery of the written acceptance by the offeree or by another person on behalf of the offeree. Communication to either party’s agent is deemed communication to that party.

Question 10

Mailbox Rule

Answer 10

If an acceptance is placed into the mail service to the other party or that party’s agent, it is considered as having been delivered when mailed, not necessarily when actually received

The parties cannot revoke the offer once the acceptance is mailed because it is now a contract.

The mailbox rule is only effective to create a contract.

Question 11

Termination of Offers

Name 5 ways to terminate an offer

Answer 11

-if the offeree rejects the offer and/or creates a counteroffer;

-if the offeree fails to accept within the prescribed time stipulated in the offer;

-within a reasonable time, if a time of acceptance is not prescribed;

-prior to acceptance, if the offeror communicates a revocation of the offer; or

-by the death of the offeror or offeree.

**remember that an offer is not a contract, which is terminated in other ways

Question 12

Terms and Definitions

Answer 12

provides a dictionary of major terms in contract - Part of the North Carolina Association of REALTORS®/NCBA Standard Form 2-T and Various Addenda

Question 13

Names (sales contract)

Answer 13

It is essential to identify all the parties to the contract by their full individual names, which includes a full first and last name plus a middle initial if available and any suffix, such as Sr. or Jr.

If a party to the contract is a business entity, be sure to use the complete legal name versus a trade name

If the property to be sold is part of an estate sale, all heirs and spouses must be named individually as sellers unless one individual has the power to sell through an executed power of attorney.

Although ill-advised due to potential legal liability, a buyer’s agent can be named as agent for an undisclosed principal if the buyer wishes to remain anonymous.

Question 14

Property

Answer 14

A legal description of the property that would distinguish it from all other property is necessary to create an enforceable contract for sale.

Street address is helpful but usually not adequate for a binding legal description.

Brokers should complete all possible blanks in this section to maximize the ability to identify the property without question.

the most reliable source for the best legal description is the seller’s deed that is public record.

Question 15

Purchase price (in the sales contract)

Answer 15

-The total purchase price may be comprised of several smaller amounts paid prior to settlement, such as due diligence fee, initial or additional earnest money, assumption of seller’s loan, seller financing, or building deposit

-Any outstanding balance is to be paid in cash at settlement.

-If any of the funds paid by the buyer are dishonored, the buyer will have one banking day after written request from the seller to provide cash or immediately available funds or the seller has the unilateral right to terminate the contract. Brokers are cautioned to make sure that the total of the amounts entered equal the offered contract amount.

Question 16

An argument for a substantial deposit is that earnest money will be _______ toward the purchase price if the buyer goes forward with the purchase, and it is the seller’s sole and exclusive remedy for a ______ by the buyer after the expiration of the due diligence period.

Answer 16

-credited

-breach

Question 17

While initial earnest money may be paid in several ways including personal bank check, earnest money that comes at a later date must be immediately ________ such as official bank check or wire transfer by a time is of the essence date.

Answer 17

-available funds

Question 18

If the parties insist on suing each other for the earnest money, the party that loses the lawsuit will have to pay the attorney fees and legal costs of the ________ party as well as the party’s own expense of the suit.

Answer 18

-winning

Question 19

The escrow agent identified by name to hold the earnest money in trust is usually a ________ firm, a title company, or an attorney.

Answer 19

-real estate

Question 20

The _________ name should be entered as escrow agent, not the name of the individual broker within the firm. If earnest money is paid by check, the check should be made payable to firm serving as escrow agent with a note on the check’s memo line as to the purpose of the funds. Escrow agents can sign for receipt of initial earnest money on the NCBA/NCAR 2-T OPC.

Answer 20

-real estate firms

Question 21

The handling of trust money, such as earnest money, is strictly regulated by North Carolina License Law and NCREC Rule 58A.0107. Earnest money must be deposited in a ______ account held in an insured bank or savings and loan association legally conducting business in North Carolina within ______ banking days of contract formation.

Answer 21

-trust

-three

Question 22

The account can be interest-bearing according to the language in this paragraph. If the offer never matures into a contract, earnest money must be returned to the _________.

Answer 22

-buyer

Question 23

Once a contract is achieved, the disbursement of the earnest money is clearly determined by the terms of the NCBA/NCAR 2-T OPC. If parties dispute how the funds should be disbursed, the escrow agent is ________ from making an independent decision on who is to receive the funds.

Answer 23

-prohibited

Question 24

The only ways to resolve the disputed funds issues are parties agree in writing on how to disburse funds, court rules in lawsuit, or with written _________ notice to the parties by the escrow agent, funds can be transferred to Clerk of Superior Court of the county in which the property is located.

Answer 24

-90 day

Question 25

Effective date (in the sales contract)

Answer 25

-the date that contract was formed, is defined as when the last offeree to sign the offer or initial the last change communicates this action to the last offeror.

Question 26

Effective date (in the sales contract)

A signed offer is still not a contract until notice of acceptance by the last party is communicated to the opposite party. Oral negotiations and/or agreements are not binding because the __________ requires written contracts for the enforceable transfer of any interest in real property

Answer 26

-statute of fraud

Question 27

Because the effective date frequently serves as the _______ of certain time periods in the contract, it is critical that all brokers can identify effective date accurately.

Answer 27

-initiation

Question 28

Special assessments (in the contract)

Answer 28

Special assessments are charges that may become a lien against the property by a governmental authority for something other than taxes or by an owners’ association for something other than dues

In Paragraph 6b, the buyer agrees to take the property subject to proposed special assessments which are under formal consideration but not approved by settlement. The seller agrees to pay all confirmed special assessments that the amount can be determined by settlement.

Question 29

Fixtures (in the contract)

Answer 29

Items identified as fixtures in an ever-growing list automatically convey with the property if present on the property and owned by the seller unless they are exempted in this section.

The seller is responsible for repairing any damage to the property caused by the removal of an exempted item.

Question 30

Personal property ( in the sales contract)

Answer 30

No personal property, even if advertised with the property, should ever be presumed to convey as part of the sales contract unless clearly identified in this paragraph

Even though this paragraph states that any personal property will convey at no value, most lenders will not finance a contract with any entry in this paragraph. The buyer is strongly encouraged to consult his lender before including any personal property in the NCBA/NCAR 2-T OPC.

Question 31

Buyer’s due diligence process

Answer 31

An extensive, but not necessarily exhaustive, list of activities that should be performed during the due diligence period is outlined to guide the buyer in their investigation of the property.

-Like financing and appraisal conditions during this time

-If buyer cant satisfy all questions or concerns, buyer can request an extension but the seller is not obligated

-Any repair agreement should be in writing and be considered an addition to the contract.

-It should be noted that this contract form does not have a separate financing contingency. A contingency is a provision in a contract that requires a certain act to be done or a certain event to occur before the contract becomes binding; it is a condition of the contract.

-Written notice of termination required from the buyer to the seller prior to extermination period

The buyer should heed the approved notice information that specifies what is considered an acceptable method of communication of notice.

• The mailbox rule does not apply for the delivery of termination of contract; the mailbox rule is only applicable to the creation of a contract. Although not required by the contract, a prudent real estate broker would obtain and retain proof of delivery of the notice.

Question 32

Buyer representations (in the sales contract)

Answer 32

-In this section, the buyer discloses his transactional plans and needs to the seller. The seller should be able to rely on these representations when making decisions about the offer. These representations do not automatically become conditions of the contract unless appropriate addenda are made part of the NCBA/NCAR 2-T OPC.

Question 33

Buyer obligations (in the sales contract)

Answer 33

-The expenses and fees for which the buyer is obligated to pay are enumerated here: proposed special assessments, loan expenses, and certain closing costs.

Question 34

Seller representations (in the sales contract)

Answer 34

-Seller disclosures, such as ownership, assessments and homeowners association obligations, that are required by law or are needed to satisfy buyer financing guidelines are shared in this paragraph.

Question 35

Seller obligations (in the sales contract)

If the seller omits a material _______ to the contract and the buyer decides to terminate the contract, the seller must ______ all earnest money and the due diligence fee and reimburse the buyer for reasonable costs incurred in good faith during the due diligence period.

Answer 35

-breach

-refund

Question 36

Seller obligations (in the sales contract)

If the possibility exists that the contract terms will result in a short sale situation, the seller is strongly encouraged to make the lienholder’s approval a _________ of the contract by attaching a completed Short Sale Addendum.

Answer 36

-condition

Question 37

Prorations and adjustments (in the sales contract)

Answer 37

Proration of listed items are established unless there is written agreement for different treatment.

Question 38

Delay in settlement/closing (in the sales contract)

-NCBA/NCAR 2-T OPC has limited the time parameters for a reasonable time after the stated Settlement Date to a _______ grace period that the nondelaying party agrees to wait for the delaying party to close the transaction

-On the 15th day after the stated contract settlement date, the nondelaying party has the ___________ right to terminate the contract and enforce any legal remedies for the breach of the contract by the delaying party.

Answer 38

-14-day

-unilateral

Question 39

Possession (in the sales contract)

Answer 39

-Possession of the property is to be delivered at closing (after recordation of the deed) due to reasons that include insurability issues. If the buyer will take possession prior to closing or the seller will retain possession after closing, the execution and attachment of the appropriate named addendum to the NCBA/NCAR 2-T OPC is strongly recommended.

Question 40

-Because brokers are __________ from drafting legal contract clauses or addenda, the use of other NCBA/NCAR addenda is highly recommended.

Answer 40

-prohibited

Question 41

FHA/VA Financing Addendum (2A4-T) (in the sales contract)

Answer 41

-The addendum allows the borrower to terminate the NCBA/NCAR 2-T OPC without forfeiture of any monies if the property does not appraise for at least the purchase price specified in the NCBA/NCAR 2-T OPC.

-If the buyer will be using either FHA-insured or VA-guaranteed mortgage loans to purchase the property, this addendum is required

Question 42

Buyer Possession Before Closing Agreement Addendum (2A7-T) (in the sales contract)

-Among other things, the provisions of this agreement address rent, pets, insurance, and responsibility for payment of expenses, utilities, repairs, and maintenance. This agreement is not to be used for possession for longer than _______ days nor in connection with a lease purchase or lease option contract.

-The agreement wisely suggests that possession not be granted until the due diligence period has expired.

Answer 42

14

Question 43

Lead-Based Paint or Lead-Based Paint Hazard Addendum (2A9-T) (in the sales contract)

Answer 43

-Under the federal disclosure requirements of the Residential Lead-Based Paint Hazard Reduction Act of 1992, a residential seller must disclose what he/she knows about the presence of lead-based paint in the property and must provide any known reports about lead-based paint hazards in the property.

-The listing agent must initial on the second page that the seller has been advised of her obligations to comply with the act. The buyer may utilize or waiver a 10-day risk assessment period to determine the buyer’s willingness to proceed with the purchase of the property.

Question 44

Additional Provisions Addendum (2A11-T) (in the sales contract)

Probably one of the most-used addenda, this form addresses five separate contract concerns.

Answer 44

-One provision allows the offeror to implement an automatic expiration date and time for the attached NCBA/NCAR 2-T Offer to Purchase and Contract.

-Another provision allows the buyer to secure the seller’s assistance in testing the property to determine if an adequate septic system can be installed or modified for the buyer’s specific needs.

-If the property is currently subject to leases, the third provision requires all lease-related documentation to be given to the buyer for review during the due diligence period.

-The fourth provision would request repair or improvement projects that are known prior to contract formation

-The fifth provision asks for the identifying information for any manufactured housing that will be included in the transaction.

Question 45

Short Sale Addendum (2A14-T) (in the sales contract)

Answer 45

-If the transaction is subject to a short sale approval by the seller’s lienholder, this very informative addendum should be used. This form allows both parties to terminate the NCBA/NCAR 2-T OPC under certain circumstances.

-The due diligence period and settlement dates are automatically tied to the seller’s notice of the lienholder’s approval for the transaction.

-The form also addresses whether the property owner has known bankruptcy or foreclosure issues.

Question 46

Back-Up Contract Addendum (2A1-T) (in the sales contract)

Answer 46

-Consequently, the seller may wish to continue to market the property and encourage backup offers until the primary contract actually closes. A subsequent buyer may be interested in waiting in a secondary contract position to see what transpires during the due diligence period in the primary contract. The Back-Up Contract Addendum language automatically makes the secondary contract null and void if the primary contract closes or upon reaching a named date, whichever occurs first.

-The secondary contract moves to primary position upon notification to the secondary buyer that the primary contract is terminated; written proof of primary contract termination is required.

-The back-up buyer must close on the property within a specified number of days after notification of primary position or the settlement date noted in the back-up contract, whichever is later. Any time prior to being notified of being in primary position, the secondary buyer may terminate the back-up contract by delivering written notice to the seller.

Question 47

All Known offers must be _________

Answer 47

-presented

Question 48

can work with one offer or the seller may ask some or all buyers to submit their ___________ offer.

Answer 48

-highest and best

Question 49

contrary to belief, there is no ________ on multiple offer siituations.

Answer 49

-priority

Question 50

A listing agent can assist the seller in reviewing the different terms in order to choose the best offer for that particular seller. Once an offer is accepted, the seller may consider a ________ offer.

Answer 50

-backup

Question 51

In a multiple-bid situation, buyer brokers often inquire about the terms of other offers. However, ____________, a practice in which a homeseller’s real estate agent discloses prices and terms of an offer to competing buyers in an effort to get higher bids, is strictly prohibited. Commission Rule A.0115 prohibits brokers from sharing the price or other material terms in offers with competing parties without the express authority of the offering party (the buyer). Generally, there is no advantage to a buyer in sharing their offer’s terms with competing buyers.

Answer 51

-shopping offers

Question 52

Occasionally, a buyer agent asks to be present when an offer is presented. A listing agent should discuss such a request with the seller and allow the seller to make that _________.

Answer 52

-decision

Question 53

A ________ is not required to disclose a multiple offer situation. However, in accordance with the REALTORS® Code of Ethics, REALTOR® members will obtain a seller’s consent in response to inquiries from buyers or cooperating brokers before disclosing the existence of other offers.

Answer 53

-broker

Question 54

The fact that there are multiple offers on a property is not considered a material fact that must be disclosed. However, if one of the offering parties is notified of the existence of a competing offer, then ____ offering parties must receive the same notification. This maintains a level playing field for all offerors.

Answer 54

all

Question 55

NCREC Rule A.0115 prohibits any broker from disclosing the price or any other material term in any offer to purchase, sell, lease, rent, or option real property to a competing party without the express authority of the _______. Shopping the offer by brokers has long been considered unethical and is now also illegal in North Carolina. Of course, unlicensed principals in the transaction are not bound by this NCREC rule.

Answer 55

-offeror

Question 56

An offer becomes a binding contract when the offeree accepts the exact terms and conditions of the offer and the acceptance is properly communicated back to the offeror.

True Or False?

Answer 56

True

**Acceptance occurs when the offeree signs the offer without making any changes to it. If the acceptance is properly communicated back to the offeror, a binding contract is formed.

Question 57

Installment Land Contract

Answer 57

A contract for the sale of real estate financed by the seller whereby the purchase price is paid in periodic installments by the purchaser, who is in possession of the property even though legal title is retained by the seller until a future date, which may not be until final payment. Also called a contract for deed or land contract.

Question 58

Installment Land Contract Advantages and Disadvantages

1) Advantage for Seller

2) Advantage for the Buyer

Answer 58

1) Adv. For the Seller:

-income tax benefit from receiving the sales price in installments over several years instead of in a lump sum

-Seller retains title

-If buyer defaults you can forfeit the deal. Forfeiture means that all the monthly payments the buyer has made are forfeited as well as all rights in the property.

-Finally, the land contract may be the only way to make property desirable and/or attainable to buyers when interest rates are high or institutional loans are hard to obtain.

2) Adv. for The Buyers

-If the buyer has a poor credit rating, a history of foreclosures or bankruptcies, or marginal income

-The down payment and the closing costs are usually lower than in institutional financing arrangements

-The purchaser also has the tax advantages that come with ownership of real estate

There is no standard approved form for an installment land contract, and it is never appropriate to use the Standard Form 2T for an installment land contract;

Question 59

Option to Purchase Real Estate

1) What are the two considerations?

Answer 59

• the option fee when the option is given and
• the agreed-on sales price when the option is exercised. The option fee is normally nonrefundable if the option is not exercised.

Question 60

An option is enforceable by only one party—the optionee—making it a ________ contract. Because the seller is _________ from selling the property to anyone else during the option period, it would probably be in the optionor’s best interest to clearly terminate the optionee’s rights by using the term time is of the essence regarding the option date.

Answer 60

-unilateral

-prohibited

Question 61

The option fee is normally ________ if the option is not exercised. The optionee must decide, within the specified time, either to exercise the option right (to buy or lease the property) or to allow the option right to expire.

Answer 61

-nonrefundable

Question 62

Requirements of North Carolina Options

All options for real property are required to be in _______ under the statute of frauds. Under the Connor Act, an option must be recorded to be enforceable against the claims of third parties.

Answer 62

-writing

Question 63

Requirements of North Carolina Options

The consideration for the option (option fee) also must be stated clearly. Furthermore, the option should explain whether the option fee will be _______ toward the purchase price.

Answer 63

-applied

Question 64

preemptive right

Answer 64

-gives a party the first right to purchase real property

Question 65

The major difference between an option and a preemptive right is which _________ has the ________ to initiate the sale or lease: the buyer/tenant initiates an option, while the seller/landlord initiates an agreement for a preemptive right.

Answer 65

party

power

Question 66

There are several forms of preemptive rights, but the two most common versions are the

Answer 66

right of first refusal and the right of first opportunity to purchase.

Question 67

Right of first refusal

Answer 67

is created when a property owner promises to give the contracting party the first chance to buy the property or to match the bona fide offer of a third party, should the owner decide to sell sometime in the future. Rights of first refusal are commonly found in leases.

Note that with a right of first refusal, the property owner does not promise to sell the property at all—merely promises that should the decision be made to sell, the other party will get the first opportunity to buy. This is different from the option, where the owner promises to sell should the optionee choose to buy.

Question 68

Right of first opportunity to purchase

Answer 68

is a preemptive right agreement that endeavors to avoid some of the vague legalities of the right of first refusal. If the property owner decides to sell the property, the seller must offer to sell the property to the party with the right of first opportunity to purchase for a designated price.

If the offer is declined, the seller may now sell the property for a specified period of time to a third party for the designated price.

Question 69

Right of first opportunity to purchase

The agreement may allow the owner to sell for a percentage of the designated price (e.g., 90% or higher of the designated price). If the owner ______ sell to a third party during the specified time, the process begins anew with owner offering to sell the property to the right holder for a designated price.

Answer 69

-does not