Module 7 - Contracts, Leases and Deeds Flashcards
What are the five basic elements of a contract?
**1. Voluntary: ** This means that it is entered into as a freewill act by all participating parties. No one can be coerced or threatened into a contract. Their consent must be voluntary.
2. An agreement or promise: there is a meeting of the minds. One party has offered (or promised) to perform in a certain matter, and the other party has accepted that offer; this constitutes the agreement.
3. Legally competent parties: The parties involved in the contract must be of legal age and have sufficient mental capacity to know the consequences of their actions in carrying out the contract.
**4. Legal Consideration: ** something of value must be exchanged in order for the contract to be considered valid, and we call that “legal consideration.”
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5. Legal act: for a contract to be considered valid it must be for a legal purpose. In other words, a contract that involves a promise to perform an illegal or criminal act would be invalid.
What is an express contract?
An agreement put into words (written or spoken) is an express contract.
What is an implied contract?
An agreement that is presumed to exist because of the parties’ actions is
an implied contract. A meal ordered at a restaurant is a common example as
there is an implied agreement to pay at the conclusion of the service.
What is a unilateral contract?
Unilateral contract. Only one of the parties to the contract is legally obligated
to perform. An option agreement in real estate is a unilateral contract.
What is a bilateral contract?
Bilateral contract. This type of contract exists when each party makes a
binding agreement to perform according to the contract.
What is forbearance?
Forbearance: Forbearance is simply electing not to perform in a particular matter. In other words, I agree not to do this and I sign a contract stating what I will not do.
e.g., A lender’s agreement to postpone foreclosure proceedings,
allowing a debtor an opportunity to explore financing alternatives.
What are the three categories of a contract’s legal status?
Enforceability of contracts
The three categories of a contract’s legal status
1. Valid contract: is an agreement in which all the elements of a contract are present and, therefore, legally enforceable.
**2. Void contract: **has no legal effect and cannot be enforced in a court of law. This may be due to the absence of one or more specific contract elements.
3. Voidable contract: is technically valid but gives one or more parties the power to legally void the agreement and thus cancel performance
What is a sale contract? and what functions does it serve?
Sale contract. A written document signed by a buyer and a seller who agree
to the transfer of ownership of real property; also called agreement of sale or
earnest money contract.
The sale contract serves two functions:
1. It is a receipt for the buyer’s earnest money deposit that is made with the
offer to purchase.
2. It becomes the contract of sale once it is executed with the signatures of
the seller (vendor) and buyer (vendee).
“Contract of sale”: This is the official agreement that outlines the terms of the property sale.
“Executed”: This means signed and made official.
“Signatures of the seller (vendor) and buyer (vendee)”: Both parties involved in the transaction must sign the contract for it to be valid.
What are the essentials of a sale contract that are of interest to appraisers
The essentials of a sale contract that are of interest to appraisers.
* Sale price and terms
* Financing details and any seller concessions
* List of personal property included in the sale
* Contract date and potential closing date
* Legal description of the land
* Identification of title and form of deed to be conveyed
* Contingencies, if any
* Seller’s disclosure statement (listing known defects)
* Signature of all parties to ensure a valid contract
Identification of title: this is how the seller owns the property. Fee simple, life estate, etc.
**Form of deed: **This is the legal document that transfers ownership. Common types include:
* Warranty Deed: Offers the most protection to the buyer, guaranteeing the seller has clear title.
* Quitclaim Deed: Offers the least protection, simply transferring whatever interest the seller has, without guarantees.
Contingencies are conditions that must be met for the contract to be legally binding. If a contingency isn’t met, the buyer or seller may be able to back out of the deal.
Examples:
* Financing Contingency: The buyer must be able to secure a mortgage.
* Inspection Contingency: The buyer must be satisfied with the results of a property inspection.
* Appraisal Contingency: The property must appraise for at least the sales price.
* Sale of home contingency: the buyer must sell their current home.
What is an Option Contract?
Most often we see option contracts in connection to a lease where the tenant has an option to purchase
What is a Land Contract?
the seller is acting in the role of the lender. The title is retained in the seller’s name until the (seller-held) mortgage is paid. When interest rates are high, some sellers will offer a buyer an attractive interest rate to entice them to purchase their property.
This type of contract only works if the seller doesn’t need to have his or her money out of the property for a certain period of time. The time span for this seller-held mortgage is about 5 or 10 years, but it could be longer.
The seller-held mortgage often affords the buyer to have low payments at a specified interest rate and the balance will be due with a balloon payment at the end.
The buyer will pay the taxes and the tax statement will list their name as the taxpayer, although the seller will be listed as the fee owner on that statement. All utilities will be transferred into the buyers name and everything will go along smoothly as long as the buyer makes their monthly payments to the seller.
Literally, it is a contract for deed.
If the seller wanted his money right away, he could sell the contract at a discount on the land contract market that is set up for such things. In that scenario, he would cash out and the buyer would make payments to the new contract holder. In most cases, the seller retains the contract for the full term because the interest rate return is reasonably attractive.
One of the dangers of a land contract from the buyer’s standpoint is if they default on the terms of the contract. If the buyer doesn’t make the monthly payments or can’t refinance the property when the balloon comes due, the seller may reacquire the property. The scary part for the buyer is that they may forfeit the money that they have invested in the property—including their down payment and all the monthly payments made to that point.
What is a contract for deed?
the seller is acting in the role of the lender. The title is retained in the seller’s name until the (seller-held) mortgage is paid. When interest rates are high, some sellers will offer a buyer an attractive interest rate to entice them to purchase their property.
This type of contract only works if the seller doesn’t need to have his or her money out of the property for a certain period of time. The time span for this seller-held mortgage is about 5 or 10 years, but it could be longer.
The seller-held mortgage often affords the buyer to have low payments at a specified interest rate and the balance will be due with a balloon payment at the end.
The buyer will pay the taxes and the tax statement will list their name as the taxpayer, although the seller will be listed as the fee owner on that statement. All utilities will be transferred into the buyers name and everything will go along smoothly as long as the buyer makes their monthly payments to the seller.
Literally, it is a contract for deed.
If the seller wanted his money right away, he could sell the contract at a discount on the land contract market that is set up for such things. In that scenario, he would cash out and the buyer would make payments to the new contract holder. In most cases, the seller retains the contract for the full term because the interest rate return is reasonably attractive.
One of the dangers of a land contract from the buyer’s standpoint is if they default on the terms of the contract. If the buyer doesn’t make the monthly payments or can’t refinance the property when the balloon comes due, the seller may reacquire the property. The scary part for the buyer is that they may forfeit the money that they have invested in the property—including their down payment and all the monthly payments made to that point.
What is an installment sale contract?
the seller is acting in the role of the lender. The title is retained in the seller’s name until the (seller-held) mortgage is paid. When interest rates are high, some sellers will offer a buyer an attractive interest rate to entice them to purchase their property.
This type of contract only works if the seller doesn’t need to have his or her money out of the property for a certain period of time. The time span for this seller-held mortgage is about 5 or 10 years, but it could be longer.
The seller-held mortgage often affords the buyer to have low payments at a specified interest rate and the balance will be due with a balloon payment at the end.
The buyer will pay the taxes and the tax statement will list their name as the taxpayer, although the seller will be listed as the fee owner on that statement. All utilities will be transferred into the buyers name and everything will go along smoothly as long as the buyer makes their monthly payments to the seller.
Literally, it is a contract for deed.
If the seller wanted his money right away, he could sell the contract at a discount on the land contract market that is set up for such things. In that scenario, he would cash out and the buyer would make payments to the new contract holder. In most cases, the seller retains the contract for the full term because the interest rate return is reasonably attractive.
One of the dangers of a land contract from the buyer’s standpoint is if they default on the terms of the contract. If the buyer doesn’t make the monthly payments or can’t refinance the property when the balloon comes due, the seller may reacquire the property. The scary part for the buyer is that they may forfeit the money that they have invested in the property—including their down payment and all the monthly payments made to that point.
What is a lease?
A lease is like any other contract and should have all five elements present in order to make it valid.
Leases involve two players: the landlord who is known as the lessor, and the tenant who is the lessee. The landlord has a leased fee interest in the property, which means that he or she will regain possession at a future time. The title is never transferred to the tenant; only the right of possession is transferred for a specified period of time.
Lease Bases:
Generally leases fall into two broad categories:
1. Gross Rental Lease - The lessor pays some or all of the operating expenses. When a landlord pays most, but not all, of the operating expenses, this may be referred to as a modified gross rental lease.
2. Net Rental Lease - The tenant pays all the operating expenses.
What is a Flat Rental?
A lease with a specified level of rent that continues throughout the lease term.
This type of rental agreement is typically associated with fixed-term leases, such as those for six months or a year. This contrasts with month-to-month agreements, where rent may be subject to change with proper notice.
What is a Graduated Rental?
also known as a stepped-up lease, is a type of lease agreement where the rent increases at predetermined intervals throughout the lease term. It’s designed to provide a predictable, but increasing, rental payment schedule.
The lease specifies exactly when and by how much the rent will increase. This could be annually, semi-annually, or at other agreed-upon intervals.
The rental amount in a graduated rental lease doesn’t necessarily have to go up; it can also go down. We call this a step-up or step-down lease.
What is a revaluation lease?
A lease that provides for periodic rent adjustments based on the market rental rate of the space. This is sometimes accomplished through appraisal or arbitration.
also known as a reappraisal lease or a percentage lease with a base rent and periodic reappraisal.
At predetermined intervals (e.g., every 3, 5, or 10 years), the property’s value is reappraised by an independent appraiser.
What is an Index lease?
A lease, usually for a long term, that provides for periodic rent adjustments based on the change in an economic index, e.g., a cost-of-living index.
This index is typically a measure of inflation or changes in the cost of living, such as the Consumer Price Index (CPI).
What is a percentage lease?
A lease in which the rent or some portion of the rent represents a specified percentage of the volume of business, productivity, or use achieved by the tenant. This type of lease is most frequently used for retail properties and typically specifies a guaranteed minimum rent with overage rent being possible.
Rents paid in shopping centers and malls are often percentage leases.
A percentage lease can be either a gross or net lease.
What is a sandwhich lease?
A lease in which an intermediate, or sandwich, leaseholder is the tenant of one party and the landlord of another.
What is Overage rent?
Overage rent is a subset of a percentage lease. The difference here is that there is still a flat rental amount and the lessor takes a percentage of the gross receipts over a certain dollar volume that is established in the contract. For example, I might pay the landlord at a shopping mall $5,000 per month and 3% of gross receipts over $100,000. The amount over $100,000 would be the overage rent.
What is a solar photovoltaic leases?
Solar photovoltaic leases or *power purchase agreements (PPAs) vary widely in terms but are generally for 20 years. The leases usually state that the solar photovoltaic system is personal property and the property owner is responsible for paying personal property tax (if any).
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The appraiser must verify ownership and seek a copy of the lease. Some lease terms may have a negative impact on the property’s market value.
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A solar power purchase agreement (SPPA) is a financial arrangement in which a third-party developer owns, operates, and maintains the photovoltaic (PV) system and a host customer agrees to site the system and purchases the system’s electric output from the solar services provider for a predetermined period. This financial arrangement allows the host customer to receive stable, and sometimes cheaper, electricity, while the solar services provider or another party acquires valuable financial benefits such as tax credits and income generated from the sale of electricity to the host customer.
Deeds
A deed is the instrument that is used to convey an estate or an interest in real property to someone else, assuming that the deed is executed and delivered.
If a person has title to real estate, it means he or she has the ownership
rights of the real estate.
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With the exception of registered land, a buyer receives a bundle of legal papers called an abstract that has been updated and is then turned over to the buyer as the new property owner. The document that allows this transfer is called a deed. It conveys the rights of the current property owner to the buyer taking title and receiving the abstract. These parties are called the grantor and grantee.
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In registered land the buyer actually receives a certificate rather than an abstract or bundle of legal papers. A certificate only shows the current owner of record.
7 elements of a typical deed
- Identification of the parties (i.e., grantor and grantee)
- Grantor who is legally competent
- Words of conveyance (i.e., a granting clause). indicates the grantor’s (seller’s) intent to transfer ownership of the property to the grantee (buyer).
- Legal description of the real estate
- Consideration (usually in dollars) received by the grantor
- Executed by means of a written document signed by the grantor
- Delivery by the grantor and acceptance by the grantee
What is a general warranty deed?
A covenant of warranty inserted in a deed that binds the grantor and heirs to defend the title conveyed to the grantee and his or her heirs against the lawful claims of all persons.
What is a special warranty deed?
A deed of lands containing a covenant whereby the grantor agrees to protect the grantee against legal claims arising during the grantor’s period of ownership. If the warranty is against the claims of all persons, it is a general warranty.
What is a bargain and sale deed?
A bargain and sale deed is a way of transferring property ownership with limited guarantees. It’s kind of like saying, “I’m selling you this property, and I promise I have the right to sell it, but I’m not making any other promises about whether someone else might have a claim against it.”
This type of deed are most often used for:
* Estate Sales: When someone inherits property, they might not know its full history. A bargain and sale deed allows them to transfer it without making promises they can’t keep.
* Foreclosures: Banks selling foreclosed properties often use this deed because they don’t have detailed knowledge of the property’s past.
* Tax Sales: Government entities selling properties due to unpaid taxes might use this deed for similar reasons.
A bargain and sale deed is less risky than a quitclaim deed because it provides a basic level of assurance to the buyer that the seller actually owns the property and has the right to sell it.
What is a quitclaim deed?
A quitclaim deed is a way of transferring ownership of a property without any guarantees about the quality of that ownership.
* No warranties: The grantor doesn’t guarantee a clear title.
* Risky for the buyer: The buyer (grantee) takes the property “as is” and could end up with nothing, or with a property that has hidden problems.
* Limited use: Quitclaim deeds are typically used in specific situations, such as transferring property within a family or clearing up a minor title issue.
Examples of how these deeds are used:
* Adding/Removing a Spouse: Adding a spouse to the title after marriage or removing a spouse after divorce.
* Gifts: Donating property to a charity or non-profit organization.
* Transferring Property to a Trust: Moving property into a living trust as part of estate planning.
What is Adverse Possession?
This involuntary transfer of property takes place when a party makes a property claim by taking possession over a period of years, and the owner fails to contest the possession. This type of transfer is allowed because the law recognizes that possession and use of the land is an essential component of ownership. The time required to obtain title legally by this process varies from state to state.
Adverse possession is a way someone can become the owner of someone else’s property without buying it. Here’s how it works:
Someone lives on or uses a piece of land that doesn’t belong to them.
They do this openly and without permission for a certain number of years.
The real owner doesn’t do anything to stop them.
After the set amount of time (different in each state), the person living on the land can legally claim ownership.
This is like saying, “If you don’t use your stuff for a long time, and someone else starts using it like it’s theirs, they might be able to keep it eventually.”
What is Prescriptive Easement?
A prescriptive easement is a legal right to use someone else’s land for a specific purpose, even though you don’t own it.
It’s created through your actions, not through an agreement with the landowner.
Imagine you use your neighbor’s driveway to get to your house for many years without their permission. If you keep doing this openly and continuously for a long enough time (the exact time depends on where you live), you might be able to claim the right to keep using their driveway, even if they don’t want you to.
This is called a prescriptive easement. It means you gain the right to use someone else’s land for a specific purpose (like driving on their driveway), but you don’t become the owner of that land.
Basically, it’s like getting permission to use part of someone else’s property without actually asking them for permission.
These situations are always interesting and each state generally has a set number of years that must pass before a claim of adverse possession can be filed. Always remember that possession is nine tenths of a law. Therefore a property owner should always defend their real estate against any encroachments and contest anything placed on their land by a neighboring owner. It’s kind of like squatters rights.
Prescriptive easements work in the same manner as adverse possession. But in this case the issue is an easement that is claimed. For example, if my neighbor openly trespasses over my land in order to access the river that fronts my property, he may claim a prescriptive easement after a certain period of time has elapsed.
This use must be obvious, continuous, and against your rights as the property owner. It’s similar to how someone can claim ownership of your land (adverse possession) if they use it without your permission for a long enough time.
