Purchase Agreement - Part 2 - Chapters 54-55 Flashcards
Identify the differences and similarities between real estate exchanges and real estate sales
The hallmarks of an EXCHANGE TRANSACTION, in contrast to the common features of a sales transaction include:
- the EXCHANGE OF EQUITIES in real estate in lieu of a cash down payment, though some cash may be involved
- there is NO GOOD FAITH DEPOSIT since cash is rarely used in an exchange of equities
- a takeover of EXISTING FINANCING by the Assumption of the mortgages, rather than refinancing
- ADJUSTMENTS brought about by the differences in the value of the equities exchanged
- joint or TANDEM ESCROWS, interrelated due to the conveyance of one property as consideration for the conveyance of the other property
- TWO SETS of BROKER FEES, one for each property involved in the exchange, rather than the receipt of a single fee as occurs in a cash-out sale of property
- one owner simultaneously selling and buying, a COUPLING OF TWO PROPERTIES consisting of a sale of one and a purchase of the other
- TAX ADVISE from a real estate broker counseling on the profit tax avoidance by a coordinated reinvestment by selling one property and acquiring a replacement property.
Common features found in the acquisition of real estate by either a cash purchase or an exchange of properties include:
- A DISCLOSURE by the owner and their broker of conditions known to them about the property
- A DUE DILIGENCE INVESTIGATION by the buyer acquiring title concerning their ownership use an operation of the property.
Finally as in all real estate transactions, a form is used to prepare the offer and commence written negotiations.
Establish the value of the equity in an owner’s property for entering into an exchange and adjust for differences in each property’s equity
An exchange of properties is a multi property transaction structured as a barter agreement and entered into by the separate owners of two or more Parcels of real estate. By agreement, they transfer to one another the ownership of their properties, conveyed in consideration for the value of the equity in the property they receive from the other.
In an exchange of properties, the balance of the price after deducting the equity down payment and mortgage assumed needs to be paid in some form of consideration. Any balance remaining to be paid on the price in exchange is usually deferred, evidenced by a carryback note and Trust deed.
NOTE - A carryback promissory note and Personal Property is considered cash boot, and is given to the owner of the property with greater value, a consideration paid in a process called ‘Adjusting or Balancing the Equities.”
The equity adjustment occurs in an exchange when the equity and one owner’s property is used as a down payment for the purchase of another property with a larger equity.
As in all real estate transactions, a form is used to prepare the offer and commence written negotiations. The objective of a written agreement is to provide a comprehensive checklist of boilerplate provisions for the owners to consider in their offer, acceptance and counter-offer negotiations.
Solicit and locate suitable properties for exachange
The most productive environment for locating owners of qualifying properties who have an interest in acquiring the client’s property seems to exist at marketing sessions attended by licensed Brokers and agents. Multiple listing services (MLS) printouts, websites and large brokerage firms with income property sales sections also help in the process of locating qualifying properties. To locate such an exchange minded owner who is willing to consider owning the listed property, the owners broker is nearly always limited to those owners known to the broker to have acceptable replacement property or have listed their properties with other brokers.
Prepare and submit or receive an respond to an exchange agreement offer
A broker begins negotiations to set the dollar amount of equity each owner has in their property by preparing and exchange agreement offer. The offer is based on the owners and the Brokers analysis of valuations, including:
- the market value (price) of each property to be exchanged
- the mortgage amount encumbering each owner’s property, whether or not they are to remain of record and
- the equity valuations calculated as the market value of each property less the amount of existing mortgages.
Having stated the present value of the equity in each property, adjustments need to be entered in the offer to cover the difference between the equity valuations in each property. Thus the owner of the property with the larger amount of equity will receive one or more cash items as consideration for the adjustment, including: cash or carry back note or other property, either real or personal, with a dollar amount of value.
$1031 transaction
A 1031 TRANSACTION is a sales transaction in which sales proceeds are properly reinvested in a replacement property to qualify any profit realized on the sale as tax-exempt.
Tax-wise, a client made an offer to exchange like-kind real estate usually plans to complete a fully qualified 1031 transaction, a reinvestment plan. Thus they will acquire real estate with greater debt and greater Equity than exists in the property I own, a trade-up arrangement for estate building. When the exchange is a fully qualified 1031 reinvestment, all the profit in the property sold or exchange is tax exempt.
exchange
An EXCHANGE is a means of trading equities in two or more real estate properties, treated as a single transaction through a single escrow. The Exchange transaction, often called a trade, is in fact two separate sales of properties owned by different persons and the simultaneous purchase of the properties by the other owner.
equity
EQUITY is the value of an owner’s interest in real estate over and above the liens against it.
Understand the nature and function of an option form as a method to purchase property
An option to buy contains the sellers irrevocable offer to sell the property on the terms stated in the option agreement. The buyer only agrees to become obligated to buy the property when they timely accept the sellers irrevocable offer to sell, and acceptance called exercising the option.
If the buyer decides to buy the property, they will exercise the option within the time period set for agreeing to buy the property, called the option period. In exchange for the sellers grant of an option to buy the property, the syndicator pays the seller option money.
In an option agreement, the owner is referred to as the optionor and the potential buyer is referred to as the optionee. They become the seller and the buyer respectively on the optionee’s exercise of the option.
Explain the pros and cons of using an option to purchase for both a buyer and a seller
A buyer considers acquiring an option to buy when they:
- do not yet want to commit themselves to buy
- are speculating in a depressed market and believe values will soon rise
- need time to investigate and determine whether the property will operate profitably
- need time for promotional work, or to complete a 1031 reinvestment or
- are a tenant and may want to own the leased premises in the future.
A seller considers granting an option to buy when they:
- want to retain ownership rights to the property for a fixed period into the future (for tax purposes)
- aim to sell at a price based on higher future market values
- need to provide an incentive to induce a prospective tenant to lease the property or
- want to give a promoter or developer incentive to work up a marketing or use plan and by the property.
Advise on the exercise of an option to purchase real estate
An option agreement is not enforceable unless the owner receives some sort of consideration. Without the owner’s receipt of consideration, the agreement is merely an offer to sell which may be withdrawn at any time by the owner.
An option agreement need only identify the parties involved, the property in question and the price to be paid. When the option does not state the method for payment of the price or the length of the escrow period, the method for payment of the price is implied to be cash through escrow and the escrow period to be a reasonable amount of time (60 days).
When a purchase option or memorandum of the option is recorded, it becomes part of the properties chain of title, imparting constructive notice of the outstanding option rights to any one later obtaining an interest in the property.
A buyer, lender or tenant acquiring an interest in the property with actual or constructive notice of the existence of an option to purchase the property takes their interest in the property subject to the buyer’s option rights.
NOTE - Unless a particular “manner for exercising” an option is specified in the option agreement, any communication from a buyer to an owner of their intention to exercise the option is sufficient.
consideration
CONSIDERATION is anything of value given or promise by a person to induce another to enter into a contract. It may be a benefit conferred upon one person or a detriment suffered by the other.
An option agreement is not enforceable unless the owner receives some sort of consideration. Without the owner’s receipt of consideration, the agreement is merely an offer to sell which may be withdrawn at any time by the owner.
constructive notice
CONSTRUCTIVE NOTICE is to be charged with the knowledge of conditions existing on the property by recorded documents or an occupancy of the property at the time of a transaction.
A recorded option ceases to constitute constructive notice of a buyer’s options rights when:
- six months have run after the expiration date stated in the recorded option agreement or memorandum without the prior recording of an exercise or extension of the option or
- six months have run after the option or memorandum was recorded if the expiration date of the option cannot be determined from the recorded instrument or memorandum.
option money
OPTION MONEY is consideration given by a buyer to a seller for granting the buyer an option to purchase the property.
The amount of option money is the price the syndicator pays to buy the option and “tie up” the property by effectively removing it from the market.
option period
OPTION PERIOD is the time period during which an option/buyer may exercise their right to buy under an option agreement.
option to buy
An OPTION TO BUY is an agreement granting an irrevocable right to buy property within a specific time period.
A lease with an option to purchase needs to be distinguished from the pre-emptive rights to acquire property held by a tenant under a right-of-first-refusal agreement or the purchase rights of a buyer under a lease option sales arrangement.
An option granted to a buyer is to be distinguished from an exclusive right to sell employing a broker. On entering into a listing, the seller incurs no obligation to sell the property to anyone. The property only employs the broker as their agent to find a buyer and represent the seller in negotiations.
