Contracts

An agent must have a working knowledge of contract law, because every aspect of the business deals with the contract.   A contract is an oral or written agreement to do or not to do a certain thing.


Many oral contracts are valid and enforceable. However, most contracts involving real estate must be in writing to be enforceable.


The statute of frauds determines the documents that must be in writing to be enforceable. In most states, real estate documents such as sale contracts, deeds and mortgages must be in writing.


Some states allow an oral listing for less than one year. But in order to be compensated, a brokerage firm needs an employment contract in writing to collect compensation. Therefore it is in an agent’s best financial interest to have a written listing agreement.


Many real estate contracts contain a time for performance.   For example, a listing contract contains an expiration date.   An offer contains a time period. And a sales contract contains a date at which time the buyer’s must inspect the property, secure a mortgage commitment and a closing date.   In the case where a time period is not specified, the law will give a reasonable time to complete the contract.


When the phrase “time is of the essence” is written in the contract, it means that everything must be done within a specific time. If the requirement is not met, the promisor will be held to have breached the contract and the rescission by the promisee would be justified.


An “as is clause” in a contract means the buyer is buying the property as he sees it, with all existing conditions. The seller is still bound to disclose property defects, but not to make repair.


An assignment is the transfer of contract rights from one party to another. This could be the transfer of a right, title or interest in a property.


A contract is assignable unless the contract or state law forbids it.


Personal service contracts are usually not assignable.


The party transferring the contract is called the assignor;  the party receiving the transferring contract is called the assignee.


For example, two years ago you entered into a five-year lease agreement and opened your business. Today, a party wants to buy your business.

If you sell your business, and assignment is permitted, you may assign your lease to the new owner.


If the lease is assigned, you are the assignor and the new owner is the assignee. The landlord would now expect the lease payment from the new owner.


An assignment does not relieve the assignor from liability unless novation has been granted.  Novation is the substitution of one contract for another and releases liability.

Just remember Nova is Latin for New, hence Novation, a new contract.


A liquidated damage clause is a contractual provision that determines in advance the measure of damages if a party breaches the agreement.


In a sales contract, the earnest money may be considered liquidated damages if the parties so agree. That is, if the buyer breaches the agreement, the seller may keep the earnest money.


Specific performance is court action to force the completion of a contract.


For example, if all the requirements of a contract have been met, and the seller refuses to sell the property, the buyer may sue for specific performance.  Brokers do not sue for specific performance.


The rescission of a contract occurs when there is an agreement between the contracting parties to waive all the remaining duties and to terminate the contract. In essence, it would be returning the parties to the same legal position they were in before entering into the contract.


Essentials of a valid contract


The essentials of a valid contract are

Capable parties

Lawful object

Consideration and

Offer and acceptance

   

Capable parties

To be a capable party, the person must have the legal capacity to contract. Typically, this means the person must be at least 18 years old and of sound mind.


Other competent parties would include

- Person given authority to enter into contracts on behalf of a corporation

- Person with a proper power of attorney

- Fiduciary given the authority to contract

- Emancipated minor.


Lawful object

A contract must be entered into for a legal purpose.   For example, when you see in the movies a contract to kill, that is really no contract at all because it is not lawful.

A contract like this with an illegal purpose is void.  A contract must also be entered into freely, without duress, threats, blackmail, misrepresentation or fraud.


Consideration

Consideration is anything of value. It is bargained for and received.   Valuable consideration is something of value given or promised by one party in exchange for the promise of the other.  Valuable consideration is usually the promise to pay money in exchange for an item that has monetary value.


Offer and acceptance

Offer and acceptance is also called mutual consent or a meeting of the minds.


An offer must contain the exact terms and conditions, and the offer must be accepted without changes.   The offer must be clear in character, the property must be accurately described to identify the subject matter, and you must have an exact price.  You can not offer to by a house for a whole lot of money, you must say one million dollars or what the exact amount is you are offering.


The offeror is the party giving the offer; and the offeree is the party receiving the offer. In real estate the offer is usually made by the buyer and received by the seller.  An offer must be accepted without change by the offeree or the offeree’s authorized agent. 


Prior to acceptance an offer or counteroffer can be revoked. Notice of revocation must be received by the offeree prior to the acceptance of the offer.


An offer will be terminated by death; or insanity of the offeror or offeree; destruction of the property; or a material change in circumstance.


A counteroffer occurs when the seller changes any of the terms made by the offeror.   This reverses the legal position of the parties and the offeror becomes the offeree, and the offoree becomes the offeror.


Types of Contracts


In law, a contract is a binding legal agreement that is enforceable in a court of law. That is to say, a contract is an exchange of promises for the breach of which the law will provide a remedy.


Now, let’s review the types of contracts.


Valid, Void & Voidable Contracts

A contract can be classified as valid, void, voidable.


A valid contract is one that meets the basic elements of contract law. For example, you sign to buy a red house, the house red, thus the contract is valid.


A voidable contract provides the option to rescind by either party. At the creation of the contract it is valid but it could be voided in the future. Most sales contracts are voidable contracts because they contain contingency clauses.


A contingency is the dependence upon a stated event that must occur before a contract is binding.


If a contingency provision cannot be met, the contract can be legally voided. Contracts entered into under duress, misrepresentation or fraud are voidable.


For example you sign to buy a red house and the house is blue, you have the option to rescind, or, if you do mind the color blue, you have the option to go through with the purchase.


A void contract has no legal force. It is missing an essential element, thus it is not a contract. For example a contract to kill would be void, because it has an illegal purpose.


Implied contract

An implied contract is created by the acts of the parties.  The old saying comes to mind of “if it walks like a duck, smells like a duck and sounds like a duck, then it must be a duck.”  Acting as something can mean you are that thing,


for example at a restaurant, once a patron sits down and orders it is implied he or she will eat, and he or she will pay for the food.


Bilateral & Unilateral contacts

A bilateral contract is one where there is a promise for promise. Sales contracts and listings are examples of bilateral contracts. In a listing contract the seller promises to pay if the agent promises to procure a purchaser.



A unilateral contract is a one-sided agreement, that is, only one party makes a promise to perform.


A lease option is a unilateral contract until the option is exercised. 


Another example of a unilateral contract is a lost dog sign, you find the dog, you get paid, but you are not promising to go and look for the dog.


Executed & Executory

An executed contract is when all parties have fulfilled their promises.


For example, a sales contract is complete when the transaction closes. Do not confuse an executed contract with the act of signing a document, which is execution of the document.


An executory contract is when one or both parties have obligations still to be performed. For example, a sales contract is an executory contract until the buyer has obtained financing, and the seller has confirmed a clear and marketable title.


Option contract

In an option contract, the seller is the optionor and the buyer is the optionee. It is a unilateral contract in that the seller is obligated to sell, but the buyer has the option to buy.


When created, an option contract is a unilateral contract. But when the buyer exercises the option, it becomes a bilateral contract. The option is assignable to another party unless the contract forbids it.


In a lease option, the lessee agrees to lease the property with an option to buy the property. 


The option is usually given for some type of consideration,

This can be money up front or added on to the rent amount to be aplied to the purchase.  The lessee would be the optionee and the lessor would be the optionor as they are giving the option to purchase at a designated time.

Land Contract

A land contract is a financial agreement between a vendor and a vendee. Generally, title is held by the seller until final payment is made. The land functions as the security device.  Unless agreed otherwise, the seller is responsible for paying taxes and insurance because the seller retains legal title to the property.


A land contract is also known as a contract for deed, an agreement to purchase and sell, or a land installment contract.


In a land contract, the seller is the vendor, and the buyer is the vendee. The buyer has an equitable interest, which indicates a beneficial interest in the property and gives the holder the right to acquire legal title in the future

Introduction

Bundle of Rights  

License   

Government Rights  

Police Power   

Eminent domain   

Taxation   

Escheat   

Real vs Personal Property

Annexation   

Appurtenances   

Fixtures   

Trade Fixture   

Emblements   

    OR-EE Rule   

Estates

Freehold Estate   

Fee simple absolute   

Fee simple Defeasible   

Life estate   

Less than freehold estate   

Estate for Years   

Periodic Tenancy   

Estate at will   

Estate in sufferance   

Types of Leases   

Gross lease   

Net lease   

Percentage lease   

Lease option   

Property management

Contracts

Essentials of a valid contract   

Capable parties  

Lawful object   

Consideration   

Offer and acceptance   

Types of Contracts   

Valid, Void & Voidable Contracts   

Implied contract   

Bilateral & Unilateral contacts   

Executed & Executory   

Option contract   

Land Contract   

Listings   

Types of Listings contracts   

Exclusive Listing   

Exclusive Authorization and right to sell Listing   

Exclusive Agency Listing   

Open Listing   

Net Listing   

Listings with an option   

Multiple listing service   

Agency   

Universal agent   

General agent   

Special agent   

Attorney in fact   

Principal and Client   

Transaction broker   

Dual or limited agency   

Practice and disclosure   

Stigmatized property   

Puffing   

Fraud   

Actual fraud   

Negative fraud   

Constructive fraud   

Negligence   

Federal Law   

Truth in Lending   

Fair Housing   

Steering   

Blockbusting   

Sherman antitrust laws   

Easement   

Easement in gross   

Implied easement   

Prescriptive easement   

Termination of Easement   

Encroachment   

Zoning

Property Transfer

    Deeds   

    Wills   

Title   

Title insurance   

Forms of ownership   

Tenancy in common   

Joint tenancy   

Community property   

Trust   

Subdivisions   

Condominium   

Cooperative   

Time Shares   

Cluster housing   

Liens   

Appraisal   

Appraisal Principles   

Principle of Highest and Best Use   

Principle of Substitution   

Principle of Conformity   

Principle of Contribution   

Principle of change   

Market Value   

Steps in the appraisal   

Appraisal methodology   

Market data approach   

Capitalization (income) Approach   

Cap Rate   

Cost (replacement) approach   

Gross Rent Multipliers   

Depreciation   

Physical Deterioration   

Functional Obsolescence   

Economic Obsolescence   

Financing   

Lenders   

Primary mortgage   

FHA   

VA   

Types of Loans   

Loans clauses   

Investing   

Construction Terms   

Test Taking Tips