L11: Real Estate Contracts Flashcards
Contract, Consideration & Forbearance
Contract = a legally enforceable & binding agreement between parties to (not) do something in exchange for consideration
Consideration = something of value for what’s offered in an exchange (ie. promise, money, property, forbearance or services)
—> can be a good consideration (= goodwill) & valuable consideration (= price tag)
Forbearance = promise to not do something
Addendum VS. Amendment
Addendum = addition of new information
Amendment = change of information
4 Essential elements of a valid contract
1) legally competent parties (18+ and mentally competent)
2) offer and acceptance (Meeting of minds = mutual agreement; Reality of consent = agreement was voluntary)
3) lawful objective (contract cannot require illegal activities/outcome)
4) consideration (something of value that is exchanged, can be good consideration or valuable consideration)
Supervining illegality
Related to contracts
When changes in law renders the offer or contract legally impossible to complete
4 legal status of signed contract
1) Valid (legally binding and enforceable)
2) Void (no legal effect, usually are missing an essential element by mistake or can’t be completed)
3) Voidable Contract (potentially valid & parties have the option to rescind or terminate, ie. party is incapable of legally entering contract, entered it under duress or there’s fraud)
—> ratify a contract: victimized party performs their contractual obligation.
4) Unenforceable (potential to be valid but can’t be enforced)
Restrictions of unenforceable contract (3)
A) Statute of frauds (state law that requires some contracts to be in writing. Focus is on enforceability)
B) statute of limitations (state and federal laws that establish time limits for bringing forth some legal actions)
C) Doctrine of laches (unreasonable delay or negligence in a certain or defending a right. Depends on court’s decision)
Valid contract classifications (8)
1) FORMAL (contains signature, written)
2) INFORMAL (oral)
3) EXPRESS (written or oral, explicit intentions and expectations)
4) IMPLIED
5) UNILATERAL (two parties, one promise, offeror is bound by promise, but offeree is not. Principle of mutuality)
6) BILATERAL (Both parties make a promise to perform. Principle of reciprocity)
7) EXECUTORY contract (has not yet been fully performed)
8) EXECUTED contract (all terms have been fulfilled by all parties, no longer exists for legal purposes)
4 Responses to an offer
A. Acceptance
B. Counter offer (previous offer becomes Nolan void, any changes)
C. Ignore
- Rejection
What is a DISCHARGE OF CONTRACTS, the requirements and the two primary classifications of such?
Discharge of contracts = termination of contract
Requirements:
A) contract is executory
B) contract is valid (or thought to be)
Primary classifications:
A) operation of law (due to law, focus is enforceability, normally)
B) acts of the parties
(4) legal remedies for breach of contract
Breach of contract = non-performance according to terms and conditions
- Specific performance (ie. Sue to sell)
- Rescission (ie. Annulment)
- Forfeiture (terminate with compensatory recognition to injured party, ie. keep earnest money as compensation)
- Suit for damages (sue for compensatory and punitive damages, rare)
(4) types of Listing Agreement
- Open listings
- Exclusive right of sale
- Exclusive agency Listing
- Net listing
NB. All listing agreements must have a definite expiration date
Open listings
Type of listing agreement 1/4
Type of listing agreement
Non-exclusive, multiple brokers can sell the property
Broker that fulfills procuring clause (finds/gets the buyer) gets the commission
Unilateral agreement
Rare in residential sales
Exclusive right of sale
Type of listing agreement 2/4
Type of listing agreement
Brokerage is the one and only allowed to sell the property and earns commission from it.
Commission split between representing brokers is common
Preferred agreement by brokers
Exclusive agency listing
Type of listing agreement 3/4
Type of listing agreement
One brokerage only has the right to sell the property, but if owner finds the buyer, brokerage is not entitled to commission
Net listing
Type of listing agreement 4/4
Type of listing agreement
Seller predetermines specific amount they wish to net on the sale and remaining amount goes to listing brokerage
Can be exclusive or non-exclusive
Commission
Compensation the broker/listing agent gets for selling/buying/leasing a property
Often due at closing
Protection Period = Limited timeframe after the end of an agency agreement in which the agent can be owed compensation
Buyer brokerage agreement commission
When representing the buyer, compensation can be as:
– retainer fee
– contingency upon completion of a cell
– indirectly (seller pays the commission as Split)
– directly (one seller is not paying commission or if it is too low)
NB: Broker must notify buyer in cases in which the property doesn’t offer commission to the buyer’s agent (cost must be added to the final sales price)
Net sheet
Given to seller upon offer/signing contract
Shows how much money client is expected to walk away with after closing costs
Offers/counter offers and negotiations
Dash all offers must be presented to seller
– offers do not need to be presented in the order they are received
– agent can negotiate with other buyers when there is a pending offer for the purpose of securing a back up contract
– multiple offers and bidding war is OK
Escalation of clause = when buyer automatically increases their offer price by a certain amount if the seller receives a better offer
Novation
When a new contract is signed substitute in the obligations of the original contract
The replacement of one of the parties in an agreement between two parties with the agreement of all three parties involved
Equitable title to the property
When buyer signs a binding sales contract, they receive an equitable title to the property (= non-ownership right) that becomes legal title after closing
2 Types of residential sales contract
1) “AS IS“ residential contract for sales and purchase
* seller doesn’t have to do any mandatory repairs
* buyer has a 15 day inspection window to cancel
2) residential contract for sale and purchase
* seller is bound to address repairs needed under the established repair cost threshold
* buyer is found by the contract if seller makes the repairs
Option contract
Unilateral contract that gives optionally a window of opportunity to exercise an exclusive right to buy or lease a property
Usually requires a fee (5 to 10% of market value), nonrefundable, that is used towards the purchase price if exercised
Seller can still sell the property to someone else, as long as the option contract remains valid under new ownership
Installment sales contract
Seller is the lender = they except down payment + scheduled installment payments
Buyer gets equitable title (possess & enjoy) and upon full payment legal title is gained
“purchase money mortgage”
Particularly useful for buyers who cannot qualify for traditional financing
