Real Estate Law The Basic Real Estate Contract

1. Real Estate Law The Basic Real Estate Contract

2. The Basic Real Estate Contract • Subjects Covered: • Common Contractual Terms • Special Types of Real Estate Contracts

3. Introduction to Contracts • DEFINITION A contract is a promise or set of promises which constitute a legally enforceable agreement between two or more people.

4. Types of Contracts • Unilateral or Bilateral • Unilateral Contract • "I offer to give you $100 if you cross the Brooklyn Bridge.“ • Offer calls for acceptance to occur by performance of an act. • The unilateral contract is accepted by actually performing duties requested by the offer. Bilateral Contract • "I promise to give you $100 if you promise to cross the Brooklyn Bridge“ • Form of contract when an offer requires acceptance in form of a promise to perform.

5. Types of Contracts (cont’d) • Express or Implied • Express - parties state the terms and show intentions in words, either orally or in writing. (i.e., most listing agreements) • Implied- Prior conduct - agreement formed by acts and conduct of parties in past. ALSO --partial performance

6. Elements of a Valid Contract • Competent Parties All parties entering into contract must have legal capacity to contract. • Mutual Assent All parties must be mutually willing to enter into contract and contract must be signed as the "free and voluntary" act of each party. (i.e., "meeting of minds")

7. Elements of a Valid Contract (cont’d) • Consideration Consideration is any promise or performance that is made in exchange for a promise or performance by the other party to a contract. • Real Estate Contracts -- promise by owner to convey title to B and promise by B to pay purchase price for property • Legality

8. Mutual Assent • Offer is accepted when offeree (Seller) signs agreement and communicates acceptance to offeror (Buyer). • Counter Offer - If any terms of original offer are changed, changes constitute total rejection, relieves original offeror of liability - Offeree has NOT accepted offer BUT MAKES NEW offer. • Contract Modification - Original contract stays once contract is signed by both parties unless both parties agree to modification, and modification is supported by separate consideration. • NO MUTUAL ASSENT IF: Misrepresentation. Fraud, Mistake, or Duress, Undue Influence or Menace.

9. Mutual Assent (cont’d) Misrepresentation - Innocent misstatement of material fact upon which someone relies and causes that person to suffer damages. Fraud - Misrepresentation of material fact knowing it to be false upon which another relies and causes that person to suffer damages. Silent Fraud - Broker must affirmatively disclose information regarding defects in property in whether or not Buyer inquires - Massachusetts Consumer Protection Act. “AS IS’ clause is sometimes used in purchase agreements. Buyer acknowledges in writing that Seller has made NO warranties re: condition of property. “As is” clause does not shield Seller from fraud or silent fraud. Mistake - Mutual misunderstanding in negotiations between parties

10. Contractual Requirements for the Sale of Land • Writing • Every state has a Statute of Frauds which requires contracts for the sale of land to be in writing - verbal contracts for sale of land are unenforceable. • The Statute of Frauds also requires that the “Rule of 4 Ps” be satisfied – contract must contain four essential terms: • Parties identified; • Property described; • Price stated; and • Date for Performance given

11. Contractual Requirements for the Sale of Land (cont’d) • Description of Parties Contract must contain the names of both Buyer and Seller. • Description of Real Estate Contract must contain a reasonably certain description of the land to be sold.

12. Contractual Requirements for the Sale of Land (cont’d) • Sale Price (i.e., Consideration) Contract must contain the purchase price and must state how it will be paid. The payment terms are broken down into: • Deposits; • Amount to be paid upon delivery of the deed (i.e., at closing); and • Total purchase price Contracts generally also identify the form of any financing (mortgage assumption, land contract, mortgage)

13. Contractual Requirements for the Sale of Land (cont’d) • Signature of Parties The Statute of Frauds provides that the contract can be enforced only against parties who sign. If a party does NOT sign, that party is NOT liable under contract.

14. Other Common Terms • Description of personal property to be transferred with premises. (i.e., contracts, franchises, permits, leases). • Possession • Condition and Inspection of Property • Real Estate Broker’s Fee • Closing time and place, responsibility for producing documents, closing expenses • Prorations– e.g., property taxes and assessments • Warranties

15. Seller’s Warranties Seller’s Warranties • Good and marketable title. • Premises and any personal property conveyed are sole property of Seller. • Seller knows of no claims or encumbrances upon property. • No alleged claims or litigation regarding property. • All taxes and assessments paid. • Seller will indemnify Purchaser as to warranties.

16. Seller’s Warranties (cont’d) Marketable Title • Seller must have good title, free from liens, encumbrances or defects other than those specified in contract. • Title is unmarketable if: • Seller lacks all or part of title alleged OR • Title subject to encumbrance OR • Reasonable possibility of 1 or 2. Title Held By Seller • Unless purchase agreement indicates otherwise, purchaser is entitled to undivided fee simple absolute to all property purchased.

17. Seller’s Warranties (cont’d) Title Free From Encumbrances • Unless purchase agreement provides otherwise, marketable title is free from all encumbrances. Types of encumbrances: • Easements • Zoning and Building Restrictions • Mortgages and Other Liens • Encroachments

18. Buyer’s Warranties • Authorized to enter into transactions. • Present proof of ability to complete transactions.

19. The Real Estate Contract Equitable Conversion • Once Purchaser gets interest in real estate by executing a purchase agreement -- Purchaser becomes equitable owner. • Seller retains legal title and this title is only held as security to receive money from Purchaser. Risk of Loss(After contract signed, before closing): • (Majority View) Buyer is regarded as equitable owner and therefore, real owner of property. Therefore, he or she bears risk of BOTH profit and loss during contract period. Buyer can not withdraw from contract because property damaged. • (Minority View) Risk of loss remains with Seller unless legal title conveyed to Purchaser or unless Purchaser causes loss -- Uniform Vendor and Purchaser Risk Act/Massachusetts Rule.

20. Quiz Multiple Choice • The most important property inspections to be made by the buyer are: • roof and termite inspections • termite and plumbing inspections • roof and electrical inspections • none of the above A

21. Quiz (cont’d) B • Prorated items include all of the following except: • real property taxes • attorneys’ fees • maintenance fees • none of the above • Option contracts are most often used in • single-family residence transactions • apartment complex transactions • land development transactions • none of the above C

22. Quiz (cont’d) D • In most states, contracts for the transfer of an interest in real property must be in writing to be legally enforceable, with the exception of • leases for a period of 6 months or longer • leases for a period of shorter than 2 years • leases for a period of more than 1 year • none of the above • Typically, the seller requires that the closing balance be paid by any of the following methods except: • cash • personal check • cashier’s check • none of the above B

23. Quiz (cont’d) True/False • If a seller is married and is selling property titled singly in his/her own name, the name of the seller’s spouse need not be included on the contract or closing documents. • In a contract for sale and purchase, only nominal consideration must be indicated. F F

24. Quiz (cont’d) • Earnest money deposits from several buyers may be placed in a single escrow account. • Purchase money mortgages typically are of shorter duration than institutional mortgages. • With an assumption of mortgage, the seller remains primarily liable for any deficiency judgments if the lending institution initiates foreclosure. T T F