What I Wish Everyone Knew About What Is The Basic Real Estate Contract.
THE BASIC REAL ESTATE CONTRACT
Subjects Covered: Common Contractual Terms Special Types of Real Estate Contracts
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DEFINITION A contract is a promise or set of promises which constitute a legally enforceable agreement between two or more people.
INTRODUCTION TO CONTRACTS
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.
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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.
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) - Prior conduct - agreement formed by acts and conduct of parties in past. ALSO --partial performance
➤ Implied
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1.
Competent Parties All parties entering into contract must have legal capacity to contract.
2. Mutual
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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")
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ELEMENTS OF A VALID CONTRACT
3.
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
4. Legality
ELEMENTS OF A VALID CONTRACT (CONT’D)
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NO MUTUAL ASSENT IF: Misrepresentation. Fraud, Mistake, or Duress, Undue In uence or Menace.
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Contract Modi cation - Original contract stays once contract is signed by both parties unless both parties agree to modi cation, and modi cation is supported by separate consideration.
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Counter O er - If any terms of original o er are changed, changes constitute total rejection, relieves original o eror of liability - O eree has NOT accepted o er BUT MAKES NEW o er.
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O er is accepted when o eree (Seller) signs agreement and communicates acceptance to o eror (Buyer).
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MUTUAL ASSENT
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
CONTRACTUAL REQUIREMENTS FOR THE SALE OF LAND Writing
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The Statute of Frauds also requires that the “Rule of 4 Ps” be satis ed – contract must contain four essential terms:
Price stated; and
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Date for Performance given
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Property described;
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Parties identi ed;
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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.
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1.
2.
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.
3.
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: a.
Deposits;
b.
Amount to be paid upon delivery of the deed (i.e., at closing); and
c.
Total purchase price
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Contracts generally also identify the form of any nancing (mortgage assumption, land contract, mortgage)
4.
CONTRACTUAL REQUIREMENTS FOR THE SALE OF LAND (CONT’D)
5.
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.
CONTRACTUAL REQUIREMENTS FOR THE SALE OF LAND (CONT’D)
OTHER COMMON TERMS
4.
Real Estate Broker’s Fee
5.
Closing time and place, responsibility for producing documents, closing expenses
6.
Prorations – e.g., property taxes and assessments
7.
Warranties
Condition and Inspection of Property
3.
Possession
2.
Description of personal property to be transferred with premises. (i.e., contracts, franchises, permits, leases).
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SELLER’S WARRANTIES Seller’s Warranties Good and marketable title.
2.
Premises and any personal property conveyed are sole property of Seller.
3.
Seller knows of no claims or encumbrances upon property.
4.
No alleged claims or litigation regarding property.
5.
All taxes and assessments paid.
6.
Seller will indemnify Purchaser as to warranties.
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SELLER’S WARRANTIES (CONT’D) Marketable Title ➤
Seller must have good title, free from liens, encumbrances or defects other than those speci ed in contract.
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Title is unmarketable if: 1.
Seller lacks all or part of title alleged OR
2.
Title subject to encumbrance OR
3.
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.
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SELLER’S WARRANTIES (CONT’D) Title Free From Encumbrances Unless purchase agreement provides otherwise, marketable title is free from all encumbrances. Types of encumbrances:
3.
Mortgages and Other Liens
4.
Encroachments
Zoning and Building Restrictions
2.
Easements
1.
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BUYER’S WARRANTIES 1.
Authorized to enter into transactions.
2.
Present proof of ability to complete transactions.
THE REAL ESTATE CONTRACT Equitable Conversion ➤
Once Purchaser gets interest in real estate by executing a purchase agreement -- Purchaser becomes equitable owner.
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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):
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(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.
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(Majority View) Buyer is regarded as equitable owner and therefore, real owner of property. Therefore, he or she bears risk of BOTH pro t and loss during contract period. Buyer can not withdraw from contract because property damaged.
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