Contract
A voluntary agreement or promise between legally competent parties to perform (or not perform) some legal act.
A contract must be (5)
1. Voluntary - no one must be forced
2. An agreement or promise
3. Made by legally competent parties
4. Supported by lawful consideration - supported by something of value
5. For a legal act - contract is invalid if it has an illegal objective
Express Contract
Parties state the terms and show their intentions in words, either oral or written. Most real estate contracts are express contracts.
Implied Contract
The agreement of parties demonstrated by their acts and conduct.
Statute of frauds
State law that requires certain instruments, such as deeds, real estate sales contracts, and certain leases to be in writing to be legally enforceable.
Bilateral Contracts
Both partied promise to do something; one promise is given in exchange for another.
Real Estate Sales Contract is bilateral because the seller promised to sell a parcel of real estate and transfer title to the property buyer who promises to pay a certain
Unilateral Contract
One sided agreement. One party makes a promise in order to entice a second party to do something. The offer made in a unilateral contract is usually accepted by performance of the party to whom the offer i made. The second party is not legally obligated t
What is an example of a unilateral contract?
A broker lists a property with MLS. Any other broker who a part of MLS may or may not bring a buyer to the listing broker. The offer by the listing broker to share compensation with a cooperating broker is an offer for a unilateral contract. The briers wh
Executed Contract
One in which all parties have fulfilled their promises; the contract has been performed.
A sales contract, at closing, when contract terms have been met is an executed contract.
Executory Contract
Exists when one or both parties still have an act to perform.
A sales contract is an executory contract from the time it is signed until closing; ownership has not yet changed hands, and the seller has not received the sales price.
Minimum requirements for a contract to be legally valid (5)
1. Offer and Acceptance
2. Consideration
3. Consent
4. Legal Purpose
5. Legally Competent Parties
Requirements for a valid contract: Offer and Acceptance
In R.E. the sales contract sets out the offer by the buyer that is accepted by the seller. The person who makes the offer is the offerer. The person whom an offer is made is the offeree.
*Must have mutual assent between parties about the purpose and terms
Offer
A promise made by one party; requesting something in exchange for that promise.
Acceptance
A promise by the offeree to be bound by the exact terms proposed by the offeror.
Requirements for a valid contract: Consideration
Something of legal value offered by one party and accepted by another as an inducement to perform or refrain from performing some act.
Requirements for a valid contract: Consent
A contract must be entered into by consent as a free and voluntary act of each party. Each party must be able to make a prudent and knowledgable decision without undue influence.
Requirements for a valid contract: Legal Purpose
The contract must have a legal reason for existence. A contract for an illegal purpose or for an act against public policy is not a valid contract.
Requirements for a valid contract: Legally Competent Parties
All parties to the contract must have legal capacity, meaning they must be of legal age and have enough mental capacity to understand the nature or consequences of their actions in the contract.
The validity of a contract can be described as... (4)
1. Valid
2. Void
3. Voidable
4. Unenforceable
Valid Contract
Meets all the essential elements that make it legally sufficient, or enforceable and is binding in a court of law.
Void Contract
Has no legal force or effect because it lacks some or all essential elements of a contract. Was never a legal contract.
Voidable Contract
Appears on the surface to be valid, but it may be rescinded or disaffirmed but one or both parties based on some legal principal. Considered by the courts to be valid if the party who has the option to disaffirm the agreement does not o so within a specif
Enforceable Contract
Meets all elements of a valid contract, including compliance with any applicable statute of frauds or other law that requires it to be in wiring and signed by the parties.
Unenforceable Contract
May also appear on the surface to be valid; however, neither party can sue the other to force performance.
Time is of the essence
Each of the elements of a contract must be performed within a specified time. A party who fails to perform an obligation under the contract on time is liable for breach of contract.
Assignment
Refers to a transfer or rights or duties under a contract. Generally rights and obligations may be assigned to a third party as long as they do not involve a contract for personal services.
Novation
Substitution of a new contract.
May be between the same parties, or a new party may be substituted (novation of the parties).
Breach of Contract
A Violation of any of the terms or conditions of a contract.
Suit for specific performance
The buyer ask the court to force the seller to go through with the sale and transfer the property as previously agreed.
Liquidation Damages Clause
In a real estate purchase contract specifies the amount of money to which the seller is entitled if the buyer breaches contract. The liquidation damages in the event that the buyer defaults may be specified as the buyer's earnest money deposit. In some st
Statute of Limitations
Every state limits the time during which parties to a contract may bring a legal action, or lawsuit, to enforce their rights.
Reasons for termination: Partial performance of the terms, along with written acceptance
If the parties agree that the work performed is close enough to completion, they can agree that the contract is discharged, even if some minor elements remain unperformed.
Reasons for termination: Substantial Performance
In which one party has substantially performed on the contract but does not complete all the details exactly as the contract requires. Such performance may be enough to force payment, with certain adjustments for any damages suffered by the other party.
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Reasons for Termination: Impossibility of Performance
An unforeseen circumstance has made an act required by the contract impossible or impractical.
Ex: When a buyer is laid off and can no longer complete the purchase.
Reasons for Termination: Mutual Agreement (to cancel the contract)
Cancellation by one party will terminate a contract but does not automatically return the parties to their original position unless provided by law or by the terms of the agreement.
Reasons for Termination: Operation of Law
Such as voiding a contract by a minor, or as a result of fraud, or because the contract was altered without the written consent of all parties involve.d
Recession
Returns the parties to their original positions before the contract, so any monies or property exchanged must be returned. Recessions normally a contractual remedy for beach, but a contract may also be rescinded by the mutual agreement of both parties.
If a contract is ambiguous, who will the court normal rule against?
The party who prepared it.
What are the written agreements (contracts) most commonly used by real estate professionals? (7)
1. Client representation agreements
2. Real estate sales contracts
3. Options
4. Escrow Agreements
5. Property Management Agreements
6. Leases
7. Owner financing contracts, such as land contracts or contracts for deed
Real Estate Sales Contract
Contains the complete agreements between a buyer of a parcel of real estate and its seller.
In addition to essential elements of a contract, a real estate contract will include: (5)
1. The sales price and terms
2. An adequate description of the property and improvements
3. A statement of the kind and condition of the title and the form of deed to be delivered by the seller
4. The kind of title evidence required, who will provide it,
Offer (in purchasing real estate)
When the real estate sales agreement has been prepared, signed by the prospective buyer, and communicated to the seller.
Counteroffer
Any change by the seller to the terms proposed by the buyer. The original offer ceases to exist because the seller has rejected it.
Can a counteroffer be withdrawn?
A counteroffer can be withdrawn any time before it has been accepted.
Binder
AKA: Letter of Intent
Typically used when a transaction includes commercial or industrial property. The binder is typically shorter and it states the essential terms of the offer and acknowledges that the buyer;s representative has received the buyer's de
Earnest Money Deposits
It is customary, but not essential, for a purchaser to provide a deposit when making an offer to purchase real estate. It is evidence of the buyer's intention to carry out the terms of the contract in good faith.
What is the amount of an earnest money deposit sufficient to? (3)
1. Discourage the buyer from defaulting
2. Compensate the seller for taking the property off the market
3. Cover any expenses the seller might incur if the buyer defaults.
Equitable Title
The interest held by a buyer under a contract for deed or an installment contract in hiccup the title is not immediately transferred; the equitable right to obtain absolute ownership to the property when legal title is in another's name.
Equitable title i
The Uniform Vendor and Purchaser Risk Act
Adopted by some states, provides that the seller bear any loss that occurs before the title passes or the buyer takes possession.
Liquidation Damages
The parties agree on a certain amount of money that will compensate the non breaching parties.
Contingencies
Conditions that must be satisfied before a sales contract is fully enforceable.
The contract clause that provides a contingency will include the following 3 elements:
1. The action necessary to satisfy the contingency
2. The time frame within which the action must be performed
3. The party who is responsible for paying any costs involved.
Mortgage Contingency
Protects the buyer's earnest money in the event that the buyer is unable to secure a mortgage on the property.
Inspection Contingency
Provides that the buyer may obtain certain inspections of the property and many cancel the contract if the inspections indicate unsatisfactory or unsafe property condition.
Property Sale Contingency
Protects a buyer who ha to sell a come in order to buy the seller's property. The provision protects the buyer from owning two homes at the same time and also helps ensure that availability of cash for the purchase.
Amendment
A change or modification to the existing content of a contract. Can also be the change to the existing words or provisions in a preprinted contract form.
Must be separately initialed or signed by all parties proper to or at the time the contract is signed
Addendum
Any provision added to an existing contract that may change or be an addition to the content of the original. An addendum includes the original contract's provisions for reference, meaning the addendum mentions the original contract and must be signed by
Disclosure
Relevant information or facts that are known or should have been known presented to the buyer before an offer to purchase is made.
Option
A contract by which an optioned (generally an owner) gives and optionee (prospective purchaser or tenant) the right to by or lease the owner's property at a fixed price within a certain period of time.
*Common = a lease that includes an option for the ten
Owner Financing
The seller provides credit for all or part of the funds that will allow the buyer to move forward with the transaction.
Land Contract
AKA, contract for deed, contract of sale, bond for title, installment contract, land sales contract, or articles of agreement for warranty deed.
The owner/seller retains legal title. The buyer, takes possession and gets equitable title to the property. Th
Purchase Money Mortgage
A note secured by a mortgage or deed of trust given by a buyer, as a borrower, to a seller, as a lender, as part of the purchase price for real estate.