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2 Upon completion of this course, participants will be able to: Learning Objectives Compare the differences between an oral and a written contract. Explain which types of documents must be in writing according to the statute of frauds. Summarize how a breach of contract may be remedied. Relate mutual assent to the consent of both parties to a contract being free and mutually communicated by each other. Break down the five key elements in creating a valid enforceable contract. Outline the impact of interpretation of a contract on its validity

3 Upon completion of this course, participants will be able to: Learning Objectives Identify the terms and conditions that must be contained in a contract as well as the variations from state to state Relate the legal implications of drawing up a contract Compare the different forms of notification Summarize provisions that may be found in a real estate contract Compile a list of the most commonly used addendum List the duties of a licensee

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5 Contract As a real estate practitioner, getting contracts signed is one of the most important things you do. You can spend all kinds of time, get along great with your clients, show just the right property at the right time, but it doesn’t mean a thing until you get their names on the dotted line. Even then, you had better make sure it is done in the right way and is enforceable.

6 Contract So what exactly is a contract?

7 Contract According to Nolo’s Legal Dictionary it is “A legally binding agreement involving two or more people or businesses (called parties) that sets forth what the parties will or will not do.”

8 Contract According to Nolo’s Legal Dictionary it is “A legally binding agreement involving two or more people or businesses (called parties) that sets forth what the parties will or will not do.” Duhaime’s Law Dictionary has a similar definition: “An agreement between persons which obliges each party to do or not to do a certain thing.”

9 Contract The Law.com Law dictionary chimes in with this definition: “An agreement with specific terms between two or more persons or entities in which there is a promise to do something.”

10 Contract The Law.com Law dictionary chimes in with this definition: “An agreement with specific terms between two or more persons or entities in which there is a promise to do something.” One definition uses the word “promise.” That goes beyond just saying “I promise!” In the Law.com Dictionary, promise is further defined as “a firm agreement to perform an act, refrain from acting or make a payment or delivery.” As in a promissory note, it is a written promise to repay something

11 Oral vs. Written  Do you think a contract needs to be in writing? What about the good old handshake? Miguel de Cervantes Saavedra (1547–1616) said, “An honest man’s word is as good as his bond.” Well, that's all well and good, until the other person decides to forget about the agreement.

12 Oral vs. Written  Do you think a contract needs to be in writing? What about the good old handshake? Miguel de Cervantes Saavedra (1547–1616) said, “An honest man’s word is as good as his bond.” Well, that's all well and good, until the other person decides to forget about the agreement.  There are some instances where an oral contract may be just as valid as a written agreement, but they are few and far between. The main problem with oral contracts is proving their existence and clarifying their terms. Samuel Goldwyn ( ) said, “a verbal contract isn't worth the paper it is written on.” We tend to agree.

13 Oral vs. Written  Do you think a contract needs to be in writing? What about the good old handshake? Miguel de Cervantes Saavedra (1547–1616) said, “An honest man’s word is as good as his bond.” Well, that's all well and good, until the other person decides to forget about the agreement.  There are some instances where an oral contract may be just as valid as a written agreement, but they are few and far between. The main problem with oral contracts is proving their existence and clarifying their terms. Samuel Goldwyn ( ) said, “a verbal contract isn't worth the paper it is written on.” We tend to agree.  An oral contract is sometimes provable by action taken by one or both parties. If you call an electrician to fix a short circuit and it is accomplished, you are obligated to pay for the services even though you have not signed a written contract. Same thing goes for ordering food or drinks at restaurants. By ordering food or drinks, you are agreeing to pay for them.

14 Oral vs. Written  An oral contract works just fine as long as both parties agree. However, if a dispute arises about the terms of payment, the quality of service or the timeline of the service provided, the details of an oral contract are hard to prove.

15 Oral vs. Written  An oral contract works just fine as long as both parties agree. However, if a dispute arises about the terms of payment, the quality of service or the timeline of the service provided, the details of an oral contract are hard to prove.  Another problem with oral contracts is that the statute of limitations for suing for breach of an oral contract is shorter than for written contracts. For example, in California it is two years for an oral contract versus four years for a written contract. In Connecticut it is three years versus six years, and Georgia has a big spread of four years for oral contracts versus twenty years for written contracts.

16 Oral vs. Written  An oral contract works just fine as long as both parties agree. However, if a dispute arises about the terms of payment, the quality of service or the timeline of the service provided, the details of an oral contract are hard to prove.  Another problem with oral contracts is that the statute of limitations for suing for breach of an oral contract is shorter than for written contracts. For example, in California it is two years for an oral contract versus four years for a written contract. In Connecticut it is three years versus six years, and Georgia has a big spread of four years for oral contracts versus twenty years for written contracts.  Most contracts that can be completed within one year can be written or oral. The major exceptions are contracts involving the ownership of real estate and commercial contracts for goods worth in excess of $500. These always need to be in writing to be enforceable.

17 Law.com Law Dictionary defines a(n) ________ as an agreement with specific terms between two or more persons or entities, in which there is a promise to do something. B C D A Disclosure statement Agreement Contract Deal

18 Law.com Law Dictionary defines a(n) ________ as an agreement with specific terms between two or more persons or entities, in which there is a promise to do something. B C D A Disclosure statement Agreement Contract Deal

19 Uniform Commercial Code The Uniform Commercial Code (UCC) was drafted in 1952 as a way to bring conformity to commercial law from state to state. The Uniform Commercial Code was able to bring a substantial amount of conformity to state commercial law by allowing states the flexibility to modify the Code in order to fit local laws.

20 Uniform Commercial Code The original Articles of the Uniform Commercial Code have been adopted in every state, except Louisiana. There are variations from state to state, but generally the Code covers the sale of any “goods” valued over $500. "Goods" are defined by the UCC as “all things (including specially manufactured goods) which are movable at the time of identification. The Uniform Commercial Code (UCC) was drafted in 1952 as a way to bring conformity to commercial law from state to state. The Uniform Commercial Code was able to bring a substantial amount of conformity to state commercial law by allowing states the flexibility to modify the Code in order to fit local laws.

21 Statute of Frauds A “statute of frauds” requires that certain types of contracts be in writing and be signed (acknowledged) by all of the parties that will be bound to the contract. Contracts involving the sale or transfer of real property, in most states, fall under the statute of frauds law, and therefore must be in writing. Contracts not in writing are not enforceable.

22 Statute of Frauds Why This is Important for Real Estate Contracts?  Historically, especially when a real estate transaction was conducted with a handshake, the opportunities to commit acts of fraud were abundant.

23 Statute of Frauds Why This is Important for Real Estate Contracts?  Historically, especially when a real estate transaction was conducted with a handshake, the opportunities to commit acts of fraud were abundant.  There are some basic reasons why all real estate contracts should fall under this statute.

24 Statute of Frauds Why This is Important for Real Estate Contracts?  Historically, especially when a real estate transaction was conducted with a handshake, the opportunities to commit acts of fraud were abundant.  There are some basic reasons why all real estate contracts should fall under this statute.  The purchase or transfer of real property often involves many terms and conditions as well as pricing. Because of this, the need to have these agreements in writing is great.

25 Statute of Frauds Why This is Important for Real Estate Contracts?  Historically, especially when a real estate transaction was conducted with a handshake, the opportunities to commit acts of fraud were abundant.  There are some basic reasons why all real estate contracts should fall under this statute.  The purchase or transfer of real property often involves many terms and conditions as well as pricing. Because of this, the need to have these agreements in writing is great.  There may be many contingencies in the contract which have deadlines for completion. If these deadlines are not met, there can be serious consequences for either party. Again, having these agreements in writing provides clarification for all of the parties.

26 According to the Uniform Commercial Code, which of the following would most likely NOT be considered “goods”? B C D A A tv valued at $300 A refrigerator valued at $900 Unborn cattle 300 acres of growing corn

27 According to the Uniform Commercial Code, which of the following would most likely NOT be considered “goods”? B C D A A tv valued at $300 A refrigerator valued at $900 Unborn cattle 300 acres of growing corn

28 Mutual Assent We said a contract is an agreement. This should be a mutual assent to the same terms. The consent of the parties to a contract should be free, mutual and communicated by each to the other. Usually this procedure of mutual assent is established by the process of offer and acceptance.

29 Mutual Assent Offer In the Restatement Second, offer is defined as “a manifestation of willingness to enter into a bargain, which creates in the offeree the power of acceptance.” The Law.com Dictionary defines offer as “a specific proposal to enter into an agreement with another.”

30 Mutual Assent Offer In the Restatement Second, offer is defined as “a manifestation of willingness to enter into a bargain, which creates in the offeree the power of acceptance.” The Law.com Dictionary defines offer as “a specific proposal to enter into an agreement with another.” When you ask someone to do something, you are making an offer. The middle step is when the other party accepts the deal. The final step is performance; both sides have to live up to their side of the bargain.

31 Mutual Assent Offer In the Restatement Second, offer is defined as “a manifestation of willingness to enter into a bargain, which creates in the offeree the power of acceptance.” The Law.com Dictionary defines offer as “a specific proposal to enter into an agreement with another.” When you ask someone to do something, you are making an offer. The middle step is when the other party accepts the deal. The final step is performance; both sides have to live up to their side of the bargain. An offer may be revoked at any time prior to the communication of acceptance of the offer. An offer may also be revoked by the maker of the offer by giving notice of revocation to the person to whom the offer was made. It could also be revoked by the lapse of time set forth in the offer. Perhaps it is stipulated that the offer is only good for 48 hours.

32 Mutual Assent Offer Offers remain open until they are:  Accepted  Rejected  Retracted prior to acceptance  Countered; or  Expired by their own terms Many times an offer is rejected, but a counter-offer is made by the other party. This creates a new or modified set of terms that are given in response to the original offer. Even a counter-offer can be withdrawn prior to the acceptance by the other side.

33 Mutual Assent Acceptance Acceptance is defined in the Restatement Second as “a manifestation of willingness to be bound by the terms of an offer made in a manner invited or required by the offer.” All of the terms of the offer must be accepted without change or condition.

34 Mutual Assent Acceptance Acceptance is defined in the Restatement Second as “a manifestation of willingness to be bound by the terms of an offer made in a manner invited or required by the offer.” All of the terms of the offer must be accepted without change or condition. Acceptance may occur as an express act or an implied act. An express act is one in which the contract and its terms are clear cut and stated in words or, more often, in writing. An implied act is one in which the existence of a contract and its terms are implied or inferred based on the actions of a party.

35 The consent of the parties to a contract should be: B C D A Free Mutual Communicated by each to the other All of the answers provided

36 Quiz The consent of the parties to a contract should be: B C D A Free Mutual Communicated by each to the other All of the answers provided

37 Types of Contracts Express Contract Implied Contract Bilateral Contract Unilateral Contract In an express contract, the existence of the contract and its terms are stated in words or the writings of the parties. An express contract may be either oral or written. Examples of express contracts include listing agreements, purchase offers, mortgages, leases, and installment contracts. Obviously, it is preferable to have them in writing, and most are.

38 Types of Contracts Express Contract Implied Contract Bilateral Contract Unilateral Contract In an implied contract, the existence of the contract and its terms are inferred or implied from the conduct of the parties. The contract is created by the actions of the parties who perform the terms of the contract. If you sit down in a restaurant and order a meal, you imply a promise to pay for the food. The restaurant serves it to you on the basis of that promise. The distinction between an express and implied contract is only in the manner in which agreement is shown. Both are based on the express or apparent intent of the parties. Contracts may also be categorized as bilateral or unilateral.

39 Types of Contracts Express Contract Implied Contract Bilateral Contract Unilateral Contract A bilateral contract is one in which both parties have made promises to each other. One promise is in exchange for another. A real estate sales contract is a bilateral agreement; A agrees to sell and B agrees to buy – under certain specified terms.

40 Types of Contracts Express Contract Implied Contract Bilateral Contract Unilateral Contract A unilateral contract is one in which one party makes a promise in order to induce another party to do something. The second party is not legally compelled to comply. However, if the second party accepts and performs, then the first party must keep the promise. A real estate option is a good example of a unilateral agreement. X agrees to sell his property to Z for $200,000, anytime within the next 6 months. Z is under no obligation to perform, but if he or she exercises the option, X must then sell. The distinction is more of an academic one. Most commercial contracts of any substance are bilateral.

41 A contract in which one party makes a promise in order to induce another party to do something is a __________ contract. B C D A Bilateral Unilateral Executed None of the answers provided

42 A contract in which one party makes a promise in order to induce another party to do something is a __________ contract. B C D A Bilateral Unilateral Executed None of the answers provided

43 Types of Contracts Executed Contract Executory Contract Valid Contract Void Contract An executed contract is one that has been fully performed. The promises have been fulfilled according to the terms of the contract, and there is nothing left to be done. An example would be a real offer to purchase after all contingencies have been met and the closing has occurred. File it away!

44 Types of Contracts An executory contract is one that has not been fully performed or completed; something is still left to be done. A good example of this is a listing contract. A real estate agent tries to sell the property during the term of the contract. A mortgage would also be considered an executory contract until it is finally paid off or satisfied Executory Contract Valid Contract Void Contract 5 Executed Contract

45 Types of Contracts A valid contract is one that is binding and enforceable on all parties. It contains all the valid elements of a contract and is still in force. That is akin to a real estate deal that has cleared all the contingencies but has not closed yet Executory Contract Valid Contract Void Contract 5 Executed Contract

46 Types of Contracts A void contract is one that has no legal force or effect even though it contains the elements of a valid contract. It would be “null and void” because it contains some illegal element that could not be enforced. For example, it could contain a clause that requires racial discrimination. Or, it could be for an illegal purpose such as to commit a crime or some act in violation of a legal use. It could also stem from an act of God that is beyond the control of the parties, such as a fire or flood that destroys a property Executory Contract Valid Contract Void Contract 5 Executed Contract

47 Types of Contracts A voidable contract is one that results from the failure of the parties to meet some legal requirement. For example, if a minor signs a contract to purchase real estate, it usually is voidable within a reasonable time after the minor reaches legal age. However, the parties are not required to void the contract. Most courts consider a voidable contract to become a valid contract if the eligible party does not act to disaffirm the agreement within a reasonable time. 10 Unenforceable Contract 9 Voidable Contract

48 Unenforceable Contract Types of Contracts An unenforceable contact is one that appears to be valid but would not be enforceable in court. For example, if one party tries to enforce an otherwise valid contract after the statute of limitations has expired, the contract would be considered unenforceable. Other examples would be contracts that are vague and poorly worded or verbal contracts where written ones are required, as in real estate. However, even though they may not be enforceable in court, unenforceable contracts may still be considered valid if both parties still wish to complete performance. 9 Voidable Contract

49 A contract that has been fully performed is called a(n): B C D A Unilateral Contract Bilateral Contract Executed Contract Functional Contract

50 A contract that has been fully performed is called a(n): B C D A Unilateral Contract Bilateral Contract Executed Contract Functional Contract

51 Assignment and Novation Assignment - An assignment of a contract happens when the interests of the original party (the assignor) are transferred to another party (the assignee). In general, an assignment will generally be permitted unless there is an express prohibition against assignment in the contract. The new party (the assignee) assumes primary responsibility for the performance of the contract, and the original party (the assignor) incurs secondary responsibility for the contract.

52 Assignment and Novation Novation – In the first instance, novation is the substitution of a new party into a contract. The original party is relieved of any obligation for the contract. Novation can also be the substitution of original contractual terms for new contractual terms if both parties agree to the new terms.

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54 Elements of Contracts Competent Parties The Law.com Law Dictionary defines competent as “in general, able to act in the circumstances, including the ability to perform a job or occupation, or to reason or make decisions.” The ‘Lectric Law Dictionary defines competency as “the mental ability to understand the general effect of a transaction or document.” For a contract to be valid, the parties have to have the capacity to enter into a contract. Minors, for example, do not have the capacity to contract. The legal age, or age of majority, varies in different states. Check your own state to determine the legal age. The general rule is that the contract of a minor is voidable at the minor’s option. The minor can hold an adult to a contract, but the adult cannot legally hold the minor to a contract.

55 Elements of Contracts Mutual Agreement For a contract to become binding, the parties must enter into it voluntarily and with a full understanding of the terms. There must be mutual assent and a “meeting of the minds.” Lack of mutual agreement could be evidenced by such things as:  Fraud  Misrepresentation  Mutual mistake  Undue influence  Duress

56 Elements of Contracts Consideration An agreement must be based on good and valuable consideration; something of value. This could be:  Money  Property  A promise of performance; promise to pay  Forbearance; promise to refrain from doing something The Law.com Law Dictionary defines consideration this way “1) payment or money 2) a vital element in the law of contracts, consideration is a benefit which must be bargained for between the parties, and is the essential reason for a party entering into a contract. Consideration must be of value (at least to the parties), and is exchanged for the performance or promise of performance by the other party (such performance itself is consideration). The Law.com Law Dictionary

57 Elements of Contracts Lawful Objective The object to be achieved must be lawful and not against any public policy. Any contract to be used for an illegal purpose becomes void. An example would be a contract in restraint of trade.

58 Elements of Contracts In writing and signed Obviously, there is a potential for misunderstanding in oral contracts. All states have adopted variations of the Statute of Frauds. Contracts for the sale of real estate and for leases of more than one year need to be in writing to be enforceable. The parol evidence rule states that written contracts take precedence over oral agreements. The Law.com Legal Dictionary defines the parol evidence rule this way: “if there is evidence in writing (such as a signed contract) the terms of the contract cannot be altered by evidence of oral (parol) agreements purporting to change, explain or contradict the written document.”

59 A competent party is one that: B C D A Is age 16 or older Is able to understand the terms of the contract act in the circumstances Has a witness present during the signing None of the answers shown

60 A competent party is one that: B C D A Is age 16 or older Is able to understand the terms of the contract act in the circumstances Has a witness present during the signing None of the answers shown

61 Discharge of Contracts Contracts can be terminated or discharged by:  Agreement of the parties  Performance of the contract  Impossibility of performance  Operation of law Contract

62 Discharge of Contracts Agreement of the Parties Contracts are created by the actions of parties and can be dissolved in like manner. Generally, this is called a release of contract.

63 Discharge of Contracts Agreement of the Parties Contracts are created by the actions of parties and can be dissolved in like manner. Generally, this is called a release of contract. Release is defined as:  “v. to give up a right as releasing one from his/her obligation to perform under a contract, or to relinquish a right to an interest in real property.  v. to give freedom, as letting out of prison.  n. the writing that grants a release.”

64 Discharge of Contracts Agreement of the Parties Contracts are created by the actions of parties and can be dissolved in like manner. Generally, this is called a release of contract. Release is defined as:  “v. to give up a right as releasing one from his/her obligation to perform under a contract, or to relinquish a right to an interest in real property.  v. to give freedom, as letting out of prison.  n. the writing that grants a release.” Another option is an assignment or novation of the contract. One party may wish to withdraw without actually ending the agreement.

65 Discharge of Contracts Performance of Contract The preferred and most common method of terminating contracts is full performance of all the terms. The contract is then said to be executed.

66 Discharge of Contracts Performance of Contract The preferred and most common method of terminating contracts is full performance of all the terms. The contract is then said to be executed. Execute is defined as:  “v. to finish, complete or perform as required, as in fulfilling one's obligations under a contract or a court order.  To sign and otherwise complete a document, such as acknowledging the signature if required to make the document valid.”

67 Discharge of Contracts Performance of Contract The preferred and most common method of terminating contracts is full performance of all the terms. The contract is then said to be executed. Execute is defined as:  “v. to finish, complete or perform as required, as in fulfilling one's obligations under a contract or a court order.  To sign and otherwise complete a document, such as acknowledging the signature if required to make the document valid.” A contract may call for a specific time by which agreements must be performed. There may be a “time is of the essence” clause. A time is of the essence clause is defined as “n. a phrase often used in contracts which in effect says: the specified time and dates in this agreement are vital and thus mandatory, and ‘we mean it.’ Therefore any delay- reasonable or not, slight or not-will be grounds for canceling the agreement.”

68 Discharge of Contracts Impossibility of Performance Generally speaking, even if a party is unable to perform the obligations of a contract, they are still liable. The only way to prevent this is to insert in the contract provisions for relief in the event of impossibility.

69 Discharge of Contracts Impossibility of Performance Generally speaking, even if a party is unable to perform the obligations of a contract, they are still liable. The only way to prevent this is to insert in the contract provisions for relief in the event of impossibility. An example of impossibility would be if a law changed after the contract was arranged but before the full performance of the contract. Suppose a contract was signed to drain lowland areas and since then it became declared as a protected wetland area. It would now be an illegal act, and the contract would be void.

70 Discharge of Contracts Impossibility of Performance Generally speaking, even if a party is unable to perform the obligations of a contract, they are still liable. The only way to prevent this is to insert in the contract provisions for relief in the event of impossibility. An example of impossibility would be if a law changed after the contract was arranged but before the full performance of the contract. Suppose a contract was signed to drain lowland areas and since then it became declared as a protected wetland area. It would now be an illegal act, and the contract would be void. In contracts in which the performance depends on the continued existence of a given person or thing, an implied condition is that the perishing of the person or thing shall excuse performance. [Taylor v. Caldwell 122 Eng. Rep. 309 (1862).] Therefore, if a party dies or a property is destroyed this could be considered impossibility to perform.

71 Discharge of Contracts Operation of Law The application of law may change the rights and liabilities of the parties, without their consent. Contracts can be terminated by operation of law under:  Bankruptcy  Statute of limitations  Alteration of contract A filing of a petition for bankruptcy under federal law terminates any contracts in existence as of that date. If a party to a contract fails to bring action against a defaulting party within a specific time frame under the Statute of Limitations, the right of remedy is lost. Check your own particular state for the time periods under the Statute.

72 If a party to a contract is under the influence of alcohol or drugs during the signing of the agreement, a case could be made to make the contract voidable due to: B C D A Undue influence or duress Mutual mistake Fraud Misrepresentation

73 If a party to a contract is under the influence of alcohol or drugs during the signing of the agreement, a case could be made to make the contract voidable due to: B C D A Undue influence or duress Mutual mistake Fraud Misrepresentation

74 Interpretation Many occasions arise when there are different interpretations of terms in the contract. Communication is a difficult skill, even in a one on one situation. One party says something and the other party may hear, or choose to hear, something different. Sometimes a meaning or spelling is misunderstood. At least in verbal communication perhaps a meaning can be clarified through body language, or there is an opportunity to question a meaning.

75 Interpretation Many occasions arise when there are different interpretations of terms in the contract. Communication is a difficult skill, even in a one on one situation. One party says something and the other party may hear, or choose to hear, something different. Sometimes a meaning or spelling is misunderstood. At least in verbal communication perhaps a meaning can be clarified through body language, or there is an opportunity to question a meaning. In written communication, the only evidence is the written word. Certain words have different meanings to different people. Legal terms may be clear to lawyers and judges but may lead to misunderstandings among lay people.

76 Breach of Contract Breach of contract is defined as “n. failing to perform any term of a contract, written or oral, without a legitimate legal excuse. This may include not completing a job, not paying in full or on time, failure to deliver all the goods, substituting inferior or significantly different goods, not providing a bond when required, being late without excuse, or any act which shows the party will not complete the work ("anticipatory breach"). Breach of contract is one of the most common causes of law suits for damages and/or court-ordered ‘specific performance’ of the contract.”

77 Breach of Contract Rescission Remedies

78 Breach of Contract Reformation Rescission Remedies

79 Breach of Contract Injunction Reformation Rescission Remedies

80 Breach of Contract Specific Performance Injunction Reformation Rescission Remedies

81 Rescission is defined as: B C D A The cancellation of a contract by a third party The cancellation of a contract due to a “time is of the essence” clause The cancellation of a contract by one of the parties The cancellation of a contract by mutual agreement of the parties

82 Rescission is defined as: B C D A The cancellation of a contract by a third party The cancellation of a contract due to a “time is of the essence” clause The cancellation of a contract by one of the parties The cancellation of a contract by mutual agreement of the parties

83 Breach of Contract Specific Performance Injunction Reformation Compensatory Damages Rescission Remedies

84 Breach of Contract Specific Performance Injunction Reformation Compensatory Damages Consequential Damages Rescission Remedies

85 Breach of Contract Attorney Fees and Costs Specific Performance Injunction Reformation Compensatory Damages Consequential Damages Rescission Remedies

86 Breach of Contract Attorney Fees and Costs Liquidated Damages Specific Performance Injunction Reformation Compensatory Damages Consequential Damages Rescission Remedies

87 Breach of Contract Attorney Fees and Costs Liquidated Damages Specific Performance Injunction Punitive Damages Reformation Compensatory Damages Consequential Damages Rescission Remedies

88 Reformation is defined as: B C D A The correction or change of an existing document by court order upon petition by one of the parties to the document The development of a new document by court order upon petition by one of the parties to the document The nullification of the existing document by court order upon petition by one of the parties to the document None of the answers provided

89 Reformation is defined as: B C D A The correction or change of an existing document by court order upon petition by one of the parties to the document The development of a new document by court order upon petition by one of the parties to the document The nullification of the existing document by court order upon petition by one of the parties to the document None of the answers provided

90 Real Estate Contract Breach All of these remedies for breach of contract apply to any kind of contract. Let’s investigate one more definition first. Earnest money is defined in the Mirriam Webster Dictionary of Law as “something of value given by a buyer to a seller to bind a bargain.”

91 Real Estate Contract Breach Now that we understand the terminology, let’s look at specific applications to real estate contracts. If a seller defaults, a buyer may  Rescind the contract and recover the earnest money deposit  File a suit calling for specific performance, to force the seller to sell the property; or  Sue the seller for compensatory damages

92 Real Estate Contract Breach Now that we understand the terminology, let’s look at specific applications to real estate contracts. If a seller defaults, a buyer may  Rescind the contract and recover the earnest money deposit  File a suit calling for specific performance, to force the seller to sell the property; or  Sue the seller for compensatory damages If a buyer defaults, a seller may  Declare the contract forfeited. The right to forfeit is usually provided in the terms of the contract, and the seller generally is entitled to retain the earnest money and any payments received from the buyer.  Rescind the contract  Sue for specific performance (this may require the seller to offer a valid deed to show readiness to perform; or  Sue for compensatory damage

93 Importance of Communication with All Parties in a Transaction In a typical transaction, there may be many professionals involved. Let’s take a look at some of the most common:  Seller and his or her broker  Buyer and his or her broker  The closing company (escrow)  The lender  The appraiser  The title insurance company  A structural or pest inspector  The management company of a homeowners’ association

94 Importance of Communication with All Parties in a Transaction  As a real estate professional, your role is to play “ring leader” to all of the professionals involved and ensure that there is clear communication among all. This communication may be in the form of phone calls, facsimiles, s, mail, or in person.

95 Importance of Communication with All Parties in a Transaction  As a real estate professional, your role is to play “ring leader” to all of the professionals involved and ensure that there is clear communication among all. This communication may be in the form of phone calls, facsimiles, s, mail, or in person.  There are usually many terms and conditions in a contract, and many of them have very specific timelines in which they must be accomplished. Because of the many terms, events, and the number of professionals that are involved, clear communication is essential.

96 Importance of Communication with All Parties in a Transaction  As a real estate professional, your role is to play “ring leader” to all of the professionals involved and ensure that there is clear communication among all. This communication may be in the form of phone calls, facsimiles, s, mail, or in person.  There are usually many terms and conditions in a contract, and many of them have very specific timelines in which they must be accomplished. Because of the many terms, events, and the number of professionals that are involved, clear communication is essential.  Very often, certain events must happen in a sequential manner, so that one event must happen before another can take place. This is where communication is of key importance. Oftentimes, a party must be notified that a prior event has taken place so that they can then perform their role in the transaction.

97 Importance of Communication with All Parties in a Transaction Example #1 The lender, Jane, feels that it is wise to hold off on ordering the appraisal until after the buyer has performed a structural inspection and a pest inspection (even though there is a substantial lead time for ordering the appraisal). Her reasoning is that, if the property fails the structural inspection and the buyers choose not to purchase, they will not have to pay for an appraisal. In this situation, it would be crucial for the buyer’s broker to inform the lender, in a very timely manner, that the structural inspection was completed, and there were no issues so that the lender could order an appraisal. Let’s take a look at a few examples:

98 Importance of Communication with All Parties in a Transaction Example #2 A wind storm causes a tree to fall on a property that is under contract and in escrow. The tree causes major damage to the house, the detached garage, the roof, the fence, and the cement retaining wall. The sellers are insured against the damage. The fallen tree damage requires workmanship from the following persons: a carpenter, an electrician, a drywall contractor, and a retaining wall specialist. Because of the coordination with all of the different contractors, the process will take a lot of time and closing of the transaction will be delayed. The sellers tell their broker about the accident. Their broker, the listing broker, fails to inform the buyer’s broker of this incident. In this circumstance, it was crucial for the listing broker to communicate the status of the repairs with the buyer’s broker in a timely manner. Let’s take a look at a few examples:

99 If a seller breaches contract, then the buyer can: B C D A Sue the seller for compensatory damages Sue the seller for punitive damages Declare the contract forfeited None of the answers shown

100 If a seller breaches contract, then the buyer can: B C D A Sue the seller for compensatory damages Sue the seller for punitive damages Declare the contract forfeited None of the answers shown

101 “Common Pitfalls” That May be Encountered by Licensees Mistakes do happen. Let’s explore some of the more common mistakes made by real estate licensees, and then discuss resources that are available to help you avoid these mistakes.  Unfamiliarity with forms  Not establishing a system  Handling of earnest money  Paperwork or contracts which either are not filled out correctly or cause a conflict within the contractual agreement

102 “Common Pitfalls” That May be Encountered by Licensees Unfamiliarity with Forms Forms are one of the most important aspects of real estate. These forms, when filled out and signed by both the buyer(s) and seller(s), represent a legally binding contract between the parties. The statute of frauds states that all real estate contracts, in most states, must be in writing. Should a dispute arise between the parties, a court of law will place more weight on the written contract than on parol (oral) evidence.

103 “Common Pitfalls” That May be Encountered by Licensees Unfamiliarity with Forms Forms are one of the most important aspects of real estate. These forms, when filled out and signed by both the buyer(s) and seller(s), represent a legally binding contract between the parties. The statute of frauds states that all real estate contracts, in most states, must be in writing. Should a dispute arise between the parties, a court of law will place more weight on the written contract than on parol (oral) evidence. Use only standard forms in the exercise of your duties. Such forms must be reviewed and approved by real estate attorneys. Use extreme caution in adding anything to these standard forms.

104 “Common Pitfalls” That May be Encountered by Licensees Resources that are Available if You are Unfamiliar with the Forms:  Your broker or manager can be an important resource for assistance with filling out forms. Some brokerages offer in-house training for their licensees.

105 “Common Pitfalls” That May be Encountered by Licensees Resources that are Available if You are Unfamiliar with the Forms:  Your broker or manager can be an important resource for assistance with filling out forms. Some brokerages offer in-house training for their licensees.  Also, some multiple listing associations offer courses for filling out forms, for changes to existing forms, and for new forms.

106 “Common Pitfalls” That May be Encountered by Licensees Resources that are Available if You are Unfamiliar with the Forms:  Your broker or manager can be an important resource for assistance with filling out forms. Some brokerages offer in-house training for their licensees.  Also, some multiple listing associations offer courses for filling out forms, for changes to existing forms, and for new forms.  Some real estate schools also offer courses, both on-line and live lecture, on filling out forms.

107 “Common Pitfalls” That May be Encountered by Licensees Resources that are Available if You are Unfamiliar with the Forms:  Your broker or manager can be an important resource for assistance with filling out forms. Some brokerages offer in-house training for their licensees.  Also, some multiple listing associations offer courses for filling out forms, for changes to existing forms, and for new forms.  Some real estate schools also offer courses, both on-line and live lecture, on filling out forms.  One of the best ways to familiarize yourself with forms is to simply practice filling out the common real estate forms before you have a real buyer or seller. Your clients will depend on you, as their real estate professional, to not only fill out the forms correctly but have the ability to explain all clauses in these forms should they have questions before signing.

108 In a real estate transaction, if the buyer defaults, the seller may do which of the following: B C D A Recover the earnest money deposit Declare the contract forfeited Sue for punitive damages All of the answers shown

109 In a real estate transaction, if the buyer defaults, the seller may do which of the following: B C D A Recover the earnest money deposit Declare the contract forfeited Sue for punitive damages All of the answers shown

110 Contract

111 Contract Terminology Life would be so easy if there was a standard form for a real estate sales contract. We don’t even have a common name or terminology. In various parts of the country they are called:  Purchase agreement  Sales agreement  Offer to purchase  Contract of purchase and sale  Purchase and sale contract  Binder  Earnest money agreement  Memorandum of sale

112 Contract Terminology The real estate sales contract is a bilateral express contract for the purchase of specifically identified real property rights. The transaction is presumed to be “arms length” where the parties are presumed to have equal bargaining power, equal knowledge of the facts, and neither party has taken undue advantage of the other.

113 Contract Terminology The real estate sales contract is a bilateral express contract for the purchase of specifically identified real property rights. The transaction is presumed to be “arms length” where the parties are presumed to have equal bargaining power, equal knowledge of the facts, and neither party has taken undue advantage of the other. The typical agreement starts with an offer to purchase a property at a specific price and terms. If a real estate agent is involved in the transaction, the offer is submitted through them to the seller. Remember, the offer may be withdrawn at any time prior to the seller’s acceptance and notification of the acceptance reaches the one who made the offer. If all terms are accepted, the agreement becomes binding to all parties.

114 Contract Terminology If the accepted offer varies in any degree from the original offer, it is not an acceptance but a counteroffer. If the seller makes a counteroffer, then the original contract is terminated, as if it were a rejection of the initial offer. The buyer and the seller have now changed roles, and the seller is offering a deal to the buyer.

115 Contract Terminology If the accepted offer varies in any degree from the original offer, it is not an acceptance but a counteroffer. If the seller makes a counteroffer, then the original contract is terminated, as if it were a rejection of the initial offer. The buyer and the seller have now changed roles, and the seller is offering a deal to the buyer. This can be played back and forth many times with counteroffer after counteroffer. If they never reach an agreement, there is no contract and no liability on either party. If there is ultimately an agreement to ALL terms then the contract springs to life and becomes an enforceable instrument.

116 Contract Terminology All terms and conditions of the sale of the property need to be contained in the contract. These would include, but are not limited to:  Sales price  Type of financing, if any  Method of payment  Required inspections  Personal property included in the sale  Proration of taxes and insurance  Risk of loss from fire, flood, etc. prior to closing  Time of possession  Time of closing  Type of deed  Type of title acceptable to buyer  Any contingencies  Time period for acceptance or rejection

117 Which of these terms and conditions of the sale of property must be in the contract? B C D A Sales price Any contingencies Type of deed All of the answers shown

118 Which of these terms and conditions of the sale of property must be in the contract? B C D A Sales price Any contingencies Type of deed All of the answers shown

119 Format  As we said earlier, there is no standard format for a real estate sales contract. It may vary from state to state, depending on the requirements of that state. Even within states, there are likely to be regional variations dependent on state regulations, relationships with local Bar Associations, etc.

120 Format  As we said earlier, there is no standard format for a real estate sales contract. It may vary from state to state, depending on the requirements of that state. Even within states, there are likely to be regional variations dependent on state regulations, relationships with local Bar Associations, etc.  There are many generic contract forms available in bookstores, stationery stores, business supply stores, or through the internet. You can go to Staples, Office Depot, or Office Max and pick up pads of these forms.

121 Format  As we said earlier, there is no standard format for a real estate sales contract. It may vary from state to state, depending on the requirements of that state. Even within states, there are likely to be regional variations dependent on state regulations, relationships with local Bar Associations, etc.  There are many generic contract forms available in bookstores, stationery stores, business supply stores, or through the internet. You can go to Staples, Office Depot, or Office Max and pick up pads of these forms.  Homeowners may buy kits with do it yourself materials to sell your own house and draw up your own contract, along with draw your own will, declare bankruptcy or get a divorce

122 Format Besides the complexities of contract law, there are local, state and federal regulations that may have oversight. Real estate contracts may have to reflect the current policies of these regulatory agencies. Federal laws that may apply include:  Lead-based paint disclosure, if properties were built prior to 1978  FHA/VA financing requiring certain contract language  The Civil Rights Act of 1964 prohibiting discrimination, and the 1988 Fair Housing Amendments Act outlining procedures and penalties for enforcement  Environmental hazards addressed under the EPA and CERCLA legislation  Federal laws controlling wetlands, wildlife and endangered species  RESPA requiring closing statements be done on the HUD-1 form  Federal tax laws controlling aspects of depreciation, tax-free exchanges, capitol gains treatment, once in a lifetime relief for the sale of a residence and passive income losses.

123 Format State laws may require:  Certain forms to be used  Certain language or clauses to be used in contracts  Disclosure of environmental hazards  Property condition disclosure forms  Testing for hazards such as underground storage tanks or radon  Consumer protection booklets  Disclosure of agency relationships  Lead paint disclosure forms or booklets  Warranties in new construction  Disclosure of stigmatized properties

124 To attain contract status, the process of __________ and _________ must have occurred: B C D A Offer and Acceptance Application and Acceptance Offer and Application Application and Agreement

125 To attain contract status, the process of __________ and _________ must have occurred: B C D A Offer and Acceptance Application and Acceptance Offer and Application Application and Agreement

126 The Usual Suspects There are numerous forms used throughout the country in real estate transactions, but the reason for each is, for the most part, the same. Let's spend some time looking at the most common forms used in real estate transactions.

127 The Usual Suspects Purchase and Sale Agreement (PSA) A Purchase and Sale Agreement is used when a buyer (the offeror) intends to make an offer to the seller (the offeree). Since the Statute of Frauds requires all real estate offers to be in writing, in most states, the PSA is used for this purpose. Included in the PSA are all of the terms and conditions of the purchase and the timeframes in which certain actions must be performed. Purchase Sale Agreement

128 The Usual Suspects  Purchase price  Closing date  Date of the contract  The multiple listing number, if it has one  The full names of all the purchasers  The common address and county where the property is located  A legal description The PSA will typically specify some of the following:  Included items, such as appliances, wood stoves, security systems  Earnest money and default  Information about disclosures  Contingencies  Information about the title company  Information about the closing or escrow agent  Closing date and date of possession

129 The Usual Suspects  Offer expiration date  Service of closing agent for payment of utilities  Charges and assessments due after closing  Agency disclosure  Addenda attached to the contract  Buyer’s address, phone, fax, address and signature  Seller’s address, phone, fax, address and signature The PSA will typically specify some of the following:

130 The Usual Suspects The type of Purchase and Sale Agreement (PSA) that will be used will depend on the property. The various types most commonly used by residential agents are:  PSA for Single-Family Homes  PSA for Multi-Family Homes  PSA for Vacant Land (Unimproved Property)  PSA for Condominiums The PSA is usually completed by the broker working with the buyers, then signed by the buyers, and presented to the sellers.

131 If the accepted offer varies from the original offer, it is known as a: B C D A Reformation Counteroffer Earnest money deposit Rescission

132 If the accepted offer varies from the original offer, it is known as a: B C D A Reformation Counteroffer Earnest money deposit Rescission

133 The Usual Suspects Listing Agreements When a licensee lists a property for sale, a listing agreement acts as a contract between the seller and the licensee (in actuality, between the seller and the brokerage). It is like an employment contract in some ways, but it is between a seller and an independent contractor (the licensee). Listing Agreement

134 The Usual Suspects  The common address for the property  The legal description  The length of time of the listing  The licensee and the brokerage company  The rate of commission  What will happen in the event the seller sells the property  Disclaimer on Distressed Homes  Authorization to install a key box The listing agreement will normally specify the following items:  Seller’s warranties and representations in regard to the right to sell and encroachments  Seller’s indemnification to hold agent harmless if his or her representations are incorrect  Brief information on closing costs  Permission from the seller to be listed in MLS and that his or her agent may cooperate with other members of the MLS

135 The Usual Suspects  Disclaimer regarding insurance  Broker’s right to market the property  Brief information on the seller’s disclosure statement  Consequences and damages in the event of a buyer’s breach  Attorney’s fees The listing agreement will normally specify the following items:

136 The Usual Suspects There are two types of listing agreements, depending on the state that you are in: Exclusive Sale and Listing Agreement Allows the broker to earn the listing portion of the commission, no matter who sells the property. Exclusive Agency Sale and Listing Agreement The broker does not earn the listing portion of the commission if the seller produces a sale.

137 The Usual Suspects Conditional Release of Listing The Conditional Release of Listing is another common contract that residential brokers use. In essence, it rescinds the listing agreement with the condition that the seller will still pay the broker a commission if a future buyer purchases the property, having identified the property through the means of the broker’s advertising or showing within six months. Note: When a listing is rescinded, each party is put back to his or her original position.

138 The Usual Suspects Buyer’s Agreement Commonly used by residential brokers in most states is the Buyer’s Agreement. There are two types: Buyer’s Agency Agreement and Buyer’s Agreement No Agency.

139 The Usual Suspects Buyer’s Agreement Commonly used by residential brokers in most states is the Buyer’s Agreement. There are two types: Buyer’s Agency Agreement and Buyer’s Agreement No Agency. Buyer’s Agency Agreement States that the licensee represents the buyer and that the buyer has an obligation to that licensee for commission during the term of the agreement. This agreement is unilaterally cancellable by either party and must be done in writing. If two brokers are ever in a dispute over commission, a buyer agency agreement can be the proof that a particular licensee would be entitled to earn a commission.

140 The Usual Suspects Buyer’s Agreement Commonly used by residential brokers in most states is the Buyer’s Agreement. There are two types: Buyer’s Agency Agreement and Buyer’s Agreement No Agency. Buyer’s Agency Agreement States that the licensee represents the buyer and that the buyer has an obligation to that licensee for commission during the term of the agreement. This agreement is unilaterally cancellable by either party and must be done in writing. If two brokers are ever in a dispute over commission, a buyer agency agreement can be the proof that a particular licensee would be entitled to earn a commission. Buyer’s Agreement No Agency This contract states that the licensee does not represent the buyer, even though he or she may be performing brokerage services for the buyer.

141 The Usual Suspects Legal Descriptions When taking a listing, it is of extreme importance to obtain a full legal description from the last deed and have it initialed by the seller(s). A street or common address is not sufficient, and the listing agreement could be voidable. For a Purchase and Sale Agreement, the same holds true, and the full legal description must be initialed by both the buyer and the seller. Legal Description

142 The Usual Suspects Here’s an example of a correct full legal description: Exhibit “A” Legal Description The Grantor Paul S. Post and Mary B. Post, husband and wife For and in consideration of TEN DOLLARS AND OTHER GOOD AND VALUABLE CONSIDERATION in hand paid, conveys, and warrants to Peter D. Sanders and Kim H. Sanders The following described real estate situated in the county of SNOHOMISH, State of Washington LOT 14, HAYWOOD HILLS, ACCORDING TO THE PLAT THEREOF RECORDED ON VOLUME 32 OF PLATS, PAGES(S) , INCLUSIVE RECORDS OF SNOHOMISH COUNTY, WASHINGTON. SITUATED IN THE COUNTY OF SNOHOMISH, STATE OF WASHINGTON.

143 Miscellaneous Provisions FHA FHA/VA requires a rider that the contract may be voided if the property is appraised for less than the selling price. FHA also requires that before signing an agreement, the buyer acknowledge receiving a notice entitled “For your Protection, Get a Home Inspection.”

144 Miscellaneous Provisions Final Walk Through FHA Sometimes the purchasers request an opportunity to do a final inspection of the property just prior to the closing.

145 Miscellaneous Provisions Final Walk Through Certificate of Occupancy FHA In some locations, a Certificate of Occupancy must be obtained prior to passing of title. It needs to be established as to which party is responsible.

146 Miscellaneous Provisions Final Walk Through Certificate of Occupancy Cooperative Apartments FHA Purchase of a cooperative apartment is different from other real estate transactions. Ownership of a cooperative entails ownership of shares of stock in the corporation that owns the whole building. A cooperative is classified as personal property, not real property. Ownership of the stock does not constitute a fee simple interest.

147 Miscellaneous Provisions Condominiums Final Walk Through Certificate of Occupancy Cooperative Apartments FHA Ownership of a condominium includes fee simple title to some described three dimensional space plus rights to common areas jointly owned by other owners in the project. However, they may require special contract provisions.

148 Miscellaneous Provisions Option Agreements Condominiums Final Walk Through Certificate of Occupancy Cooperative Apartments FHA Option is defined as “n. a right to purchase property or require another to perform upon agreed-upon terms. An option is paid for as part of a contract, but must be ‘exercised’ in order for the property to be purchased or the performance of the other party to be required. ‘Exercise’ of an option normally requires notice and payment of the contract price.

149 Miscellaneous Provisions Option Agreements Right of First Refusal Condominiums Final Walk Through Certificate of Occupancy Cooperative Apartments FHA A right of first refusal means that a party has the right to purchase or lease a property if another purchaser comes along. They have a chance to “match the offer.” If they fail to match another legitimate offer, the claim is forfeited.

150 Miscellaneous Provisions Option Agreements Right of First Refusal Installment Sales Contract Condominiums Final Walk Through Certificate of Occupancy Cooperative Apartments FHA This is sometimes called Installment Sale or Land Contract. It is defined as “n. an agreement in which payments of money, delivery of goods or performance of services are to be made in a series of payments, deliveries or performances, usually on specific dates or upon certain happenings.

151 If the buyer makes an offer, he may withdraw the offer at any time before: B C D A Notification of the seller's acceptance reaches him Completion of the sale/contract The day of closing The buyer may withdraw the offer at any time

152 If the buyer makes an offer, he may withdraw the offer at any time before: B C D A Notification of the seller's acceptance reaches him Completion of the sale/contract The day of closing The buyer may withdraw the offer at any time

153 When to Ask for Help You should seek the advice or assistance of your broker any time you feel that you or the brokerage may be at risk. If you are at risk, then most likely your brokerage will be at risk as well. Designated brokers and managing brokers are responsible for the supervision and actions of their licensees. The term is referred to as vicarious liability which means that a party (the brokerage) is responsible for the actions of another party (the licensee). L E H P

154 When to Ask for Help While this list is certainly not exhaustive, the following are some key circumstances when you should consider seeking assistance:  Unfamiliarity with a specific form  Not knowing which form to use in which circumstance  Unfamiliarity with new or existing real estate laws or legislation  Problems revolving around communications with the purchaser  If you are a new licensee  If the purchaser is requesting contingencies which are unique or ambiguous  If there is not a preprinted form available to cover a particular circumstance (we will be covering this in greater detail later in this chapter)

155 When to Ask for Help While this list is certainly not exhaustive, the following are some key circumstances when you should consider seeking assistance:  If there is confusion with agency and who you should represent  Unique circumstances and unique properties  Not knowing which addenda should be used in conjunction with a particular offer and particular circumstances  If you have questions about the handling of the earnest money  If you are unsure about the computation of time as it relates to the contingencies in the contract  If the potential purchasers have questions about the Purchase and Sale Agreement (PSA) that you cannot answer

156 Which of the following must be included in a real estate contract for sale of property? B C D A Type of deed Type of title acceptable to the buyer Date of closing All of the answers provided

157 Which of the following must be included in a real estate contract for sale of property? B C D A Type of deed Type of title acceptable to the buyer Date of closing All of the answers provided

158 Unauthorized Practice of Law  A broker should avoid drafting contracts, contract provisions, or legal documents that could be construed as the product of an unlicensed practice of law.

159 Unauthorized Practice of Law  A broker should avoid drafting contracts, contract provisions, or legal documents that could be construed as the product of an unlicensed practice of law.  Your job is to assist your clients in completing the standard contract forms.

160 Unauthorized Practice of Law  A broker should avoid drafting contracts, contract provisions, or legal documents that could be construed as the product of an unlicensed practice of law.  Your job is to assist your clients in completing the standard contract forms.  Guide your clients by educating them on each of the clauses in the contract and how they might best draft the agreements.

161 Unauthorized Practice of Law  A broker should avoid drafting contracts, contract provisions, or legal documents that could be construed as the product of an unlicensed practice of law.  Your job is to assist your clients in completing the standard contract forms.  Guide your clients by educating them on each of the clauses in the contract and how they might best draft the agreements.  Advise your clients to seek proper legal counsel if the contract should extend beyond the standard form or should your client wish to have a custom agreement drafted.

162 Unauthorized Practice of Law  A broker should avoid drafting contracts, contract provisions, or legal documents that could be construed as the product of an unlicensed practice of law.  Your job is to assist your clients in completing the standard contract forms.  Guide your clients by educating them on each of the clauses in the contract and how they might best draft the agreements.  Advise your clients to seek proper legal counsel if the contract should extend beyond the standard form or should your client wish to have a custom agreement drafted.  Use only standard forms in the exercise of your duties. Such forms must be reviewed and approved by real estate attorneys. Use extreme caution in adding anything to these standard forms.

163 When Your Client Should Seek Legal Advice The following is a list, not exhaustive, of some circumstances when you may suggest that your client seek legal advice:  When your managing broker or designated broker suggests that it is necessary  When there are serious misunderstandings or issues between buyer and seller  When any party to the transaction is threatening a lawsuit  When the issue involves serious legal ramifications  When either party breaches the contract  If fraud, negligence, misrepresentation, or concealment is involved  When any serious complications arise which are beyond your scope of knowledge

164 When Your Client Should Seek Legal Advice The following is a list, not exhaustive, of some circumstances when you may suggest that your client seek legal advice:  Unusual circumstance where a buyer may want to include certain verbiage in a contract  When your client is at serious legal risk  When you and your brokerage are legally at risk  When an important major mistake has been made and needs to be rectified  When a client breaches a contract  When major complications arise from the title of a property  When the offer requires additional written language which is beyond the framework of the preprinted forms

165 Contingency and "Subject To" Clauses In some states, the terms “contingent” and “subject to” are often used interchangeably in a Purchase and Sale Agreement. The more precise definitions are explained below:

166 Contingency and "Subject To" Clauses In some states, the terms “contingent” and “subject to” are often used interchangeably in a Purchase and Sale Agreement. The more precise definitions are explained below: Definition of “Subject To”: “Subject to” can refer to something that goes along with or “runs with” a property when it is purchased. Examples of this would be the purchase of a property subject to an existing easement or subject to an encroachment. It usually refers to a pre-existing condition.

167 Contingency and "Subject To" Clauses In some states, the terms “contingent” and “subject to” are often used interchangeably in a Purchase and Sale Agreement. The more precise definitions are explained below: Definition of “Subject To”: “Subject to” can refer to something that goes along with or “runs with” a property when it is purchased. Examples of this would be the purchase of a property subject to an existing easement or subject to an encroachment. It usually refers to a pre-existing condition. Example of a written clause using “Subject To”: “Buyer agrees to purchase this property subject to the existing easement in favor of the property to the north.”

168 Contingency and "Subject To" Clauses In some states, the terms “contingent” and “subject to” are often used interchangeably in a Purchase and Sale Agreement. The more precise definitions are explained below:

169 Contingency and "Subject To" Clauses In some states, the terms “contingent” and “subject to” are often used interchangeably in a Purchase and Sale Agreement. The more precise definitions are explained below: Definition of Contingency A contingency or “subject to” clause in a contract states that an event must occur for the contract to continue. If the event does not happen, the contract is not continued, and the buyer’s earnest money is usually refunded.

170 Contingency and "Subject To" Clauses In some states, the terms “contingent” and “subject to” are often used interchangeably in a Purchase and Sale Agreement. The more precise definitions are explained below: Definition of Contingency A contingency or “subject to” clause in a contract states that an event must occur for the contract to continue. If the event does not happen, the contract is not continued, and the buyer’s earnest money is usually refunded. Example of a written clause with a contingency: “This offer is contingent upon Aunt Sue’s approval of this contract, within three business days after mutual acceptance of this offer. If purchaser does not give notice to the seller or the seller’s agent of approval within three business days after mutual acceptance, then this offer shall become void.” It must be in writing.

171 Which of the following is true of earnest money deposits? B C D A They show sincerity of the buyer They demonstrate financial ability They can serve as liquidated damages to the seller if there is a breach of contract All of the answers shown

172 Which of the following is true of earnest money deposits? B C D A They show sincerity of the buyer They demonstrate financial ability They can serve as liquidated damages to the seller if there is a breach of contract All of the answers shown

173 Practice of Law Real estate agents should be wary about the unauthorized practice of law. In New York State, for example, the Department of State has long considered the unlawful practice of law by a real estate broker or salesperson as grounds for disciplinary action. Its interpretation of what constitutes unlawful practice has been guided by relevant provisions of the Judiciary Law and by the seminal case of Duncan & Hill Realty, Inc. v. Department of State.

174 Practice of Law Judiciary Law §478 prohibits the practice of law by non-attorneys, the purpose of which is to protect the public from the dangers of legal representation and advice given by persons not trained, examined, and licensed for such work. In Duncan & Hill, the court upheld the Department of State's determination that a real estate broker who was not a licensed attorney demonstrated untrustworthiness and incompetence in violation of Real Property Law §441-c; finding that, when he prepared documents that included detailed mortgage terms he had devised, he engaged in the unauthorized practice of law.

175 Practice of Law Here are some warnings to the public from the American Bar Association. Q. When should I see an attorney about buying or selling a home?

176 Practice of Law Here are some warnings to the public from the American Bar Association. Q. When should I see an attorney about buying or selling a home? A. It probably isn't necessary to consult a lawyer when you begin your search for a home. If you are a buyer, you probably will want your attorney to enter the process when you are ready to make an offer and, certainly, before you sign an offer to purchase. If you are a seller, you probably will want to consult an attorney early in the process and before signing a listing agreement with a real estate agent. Buying and selling real estate almost always entails a contract. So, keep in mind that a typed or handwritten "letter or agreement" or "letter of understanding" signed by the parties will be binding if it meets the legal requirements of a contract. Don't sign something assuming it's not a contract and, therefore, not important. If something goes wrong, you don't want to discover too late that you've signed away important rights, failed to include important protections, or failed to receive what you expected. Legal advice will be much more helpful and less expensive before rather than after signing a purchase contract.

177 Practice of Law Here are some warnings to the public from the American Bar Association. Q. What is the purchase contract?

178 Practice of Law Here are some warnings to the public from the American Bar Association. Q. What is the purchase contract? A. The purchase contract may be called a sales contract, real estate contract, purchase agreement, sales agreement, or purchase and sale agreement. Whatever it is called, it is a legal document that, when signed by both parties, is a legal contract that will govern the entire transaction. Before signing such a contract, you will want to review it carefully and have your attorney review it. Remember, once signed, you are obligated to fulfill your part of the contract. So find out what your local practitioners are doing. Check with the local REALTOR organization and/or Multiple Listing Service. Check with the local and state Bar Association. Know your state license law thoroughly so that you are performing in the correct manner.

179 A _______________ means that a party has the right to purchase or lease a property if another purchaser comes along. B C D A Certificate of Occupancy Right of First Refusal Installment Sale Final Walkthrough

180 A _______________ means that a party has the right to purchase or lease a property if another purchaser comes along. B C D A Certificate of Occupancy Right of First Refusal Installment Sale Final Walkthrough

181

182 Amendments and Modifications Amendments Amendments are additions to the main Purchase and Sale Agreement which cover specific or unique circumstances. They are commonly referred to as addenda. Many of these addenda become contingencies to the contract.

183 An inspection addendum usually covers an inspection of the property and deals with structural issues, some pest infestations, underground residential heating oil tanks, and on-site sewage disposal systems. As a result of this inspection, the buyer can approve of the inspection, terminate the transaction, request additional inspections, or ask the seller to perform repairs or modifications. The seller may agree to perform the requested repairs/modifications or refuse. The buyer retains the right to proceed or terminate the contract. Amendments and Modifications Inspection Addendum

184 When an offer is contingent upon the buyer obtaining financing, certain items may be specified, such as:  Type of loan that the buyer will acquire  Percentage of down payment  Timeframe to make application if he or she has not already done so  Timeframe for a loan commitment  Consequence of an appraisal being less than the sale price  Closing costs that the seller will pay for the buyer  Homeowner insurance contingency Amendments and Modifications Financing Addendum

185 An optional clause addendum addresses such items as:  Square footage, lot size, and encroachments  Title insurance  Grounds maintenance  Item left by the seller  Utilities  Insulation for new construction  Leased property  Homeowner’s association review board  Other Amendments and Modifications Optional Clauses Addendum

186 Amendments are additions to the main Purchase and Sale Agreement (PSA) which cover specific or unique circumstances. They are commonly referred to as ________. B C D A Side agreements Recognition agreements Addenda Highest and best use agreements

187 Amendments are additions to the main Purchase and Sale Agreement (PSA) which cover specific or unique circumstances. They are commonly referred to as ________. B C D A Side agreements Recognition agreements Addenda Highest and best use agreements

188 A feasibility addendum will often accompany an offer to purchase vacant land or commercial property. The buyer will be given a certain number of days to perform an independent study of the property which might include: Amendments and Modifications Feasibility Contingency Addendum  Building or development moratoria  Flood zones  Wetlands and shore lands  Roads  Water  Sewer  Other utilities  Capacity Charges  Assessments

189 Homeowner’s (hazard) insurance is important for almost all residential properties. Not only is it good risk management for the homeowner, but most lenders require it as a means of reducing their own risk. There can be times when a buyer may be refused insurance on a particular property. This may be due to an unsatisfactory CLUE report. CLUE is an acronym for Comprehensive Loss Underwriting Exchange. It is a compilation of all insurance claims. The CLUE may be a report on a particular person or on a property. Amendments and Modifications Homeowner (Hazard) Insurance Addendum

190 All personal property and trade fixtures which are included in the sale should be clearly specified in the purchase and sale agreement. There are a number of ways to do this. Amendments and Modifications An Addendum Which Would Address What Personal Property or Fixtures Were Included in the Sale

191 A financing addendum and a structural inspection addendum are common addenda to a ______________________. B C D A Seller’s property disclosure statement Lease agreement Purchase and sale agreement (PSA) Promissory note

192 A financing addendum and a structural inspection addendum are common addenda to a ______________________. B C D A Seller’s property disclosure statement Lease agreement Purchase and sale agreement (PSA) Promissory note

193 In many circumstances, the date of possession is not the closing date. Usually this is because the seller will need to close his or her current home and receive the net proceeds from that home before he or she can purchase his or her next home. Even in an ideal situation where both homes close concurrently, the homeowner will need time to move to the next home. There are also circumstances where the seller will need extra time to move for various other reasons. Amendments and Modifications Possession Addendum (if possession is not at the time of closing)

194 An addendum should be drawn up and attached to the Purchase and Sale Agreement which addresses all of the following:  Length of the possession period by the seller  Which party will insure the home during the “possession” period (this is usually the buyer through his or her homeowner’s insurance)  What charge, if any, will be paid by the seller for this “possession” period TIP: Insurance liability is important. All parties should make sure that the property is insured during this time. Amendments and Modifications Possession Addendum (if possession is not at the time of closing)

195 A contract is said to be fully acknowledged once it has been signed by both parties (the purchaser and the seller). This constitutes a legally binding contract and is also known as mutual acceptance. Changes to the contract after mutual acceptance can only be made if both the buyer and the seller agree to the changes. Both parties must either sign or initial and date the changes. Amendments and Modifications Modifications

196 When changes are made, it is important to notify and re-copy those parties who may already have a copy of the contract. These parties may include:  The buyer  The seller  The listing broker’s transaction file and his or her brokerage’s transaction file  The buyer’s broker’s transaction file and his or her brokerage’s transaction file  The closing agent (escrow)  The lender Amendments and Modifications Modifications

197 There are circumstances that arise where something changes during a transaction. The need for additional paperwork may be desired. Again, it must be remembered that any additions to the contract after mutual acceptance can only be made if both parties agree. If changes, additions, or deletions are made, both parties must initial or sign and date the item or clause that has been changed, added, or deleted. It is illegal to make any change to a contract without the agreement and initials of both parties. Amendments and Modifications Attaching Additional Pages and Addenda to the Contract

198 A ___________is a provision in a real estate contract that specifies the contract would cease to exist upon the occurrence or non-occurrence of a certain event. B C D A Contingency Cease and desist order Vesting agreement Disclosure agreement

199 A ___________is a provision in a real estate contract that specifies the contract would cease to exist upon the occurrence or non-occurrence of a certain event. B C D A Contingency Cease and desist order Vesting agreement Disclosure agreement

200 Importance of Notifications  An offer  A counter-offer  A rejection of an offer  An acceptance of an offer  A removal of a contingency in the contract  Addenda to the contract  Resale or public offering statements  Homeowners’ association documents  Disclosures  Title reports  Forms which were agreed to be supplied by the buyer, seller, or third parties  Etc. A notification may be sent in order to make someone aware of any of the following:

201 Importance of Notifications  All notices must be in writing. At least one of the buyers must sign a notice given to a seller. At least one seller must sign a notice given to the buyer. Exceptions to this may be certain notices obtained through third parties and original offers.

202 Importance of Notifications  All notices must be in writing. At least one of the buyers must sign a notice given to a seller. At least one seller must sign a notice given to the buyer. Exceptions to this may be certain notices obtained through third parties and original offers.  Notices delivered to the broker of either party are deemed notices accepted by his or her client.

203 Importance of Notifications  All notices must be in writing. At least one of the buyers must sign a notice given to a seller. At least one seller must sign a notice given to the buyer. Exceptions to this may be certain notices obtained through third parties and original offers.  Notices delivered to the broker of either party are deemed notices accepted by his or her client.  Notices are important because throughout the statewide form for the Purchase and Sale Agreement, many time limits are specified for when notices must be delivered. “Time is of the Essence.”

204 Importance of Notifications  All notices must be in writing. At least one of the buyers must sign a notice given to a seller. At least one seller must sign a notice given to the buyer. Exceptions to this may be certain notices obtained through third parties and original offers.  Notices delivered to the broker of either party are deemed notices accepted by his or her client.  Notices are important because throughout the statewide form for the Purchase and Sale Agreement, many time limits are specified for when notices must be delivered. “Time is of the Essence.”  You, as the real estate professional, are responsible for making sure that these time deadlines are met by both of the parties to the transaction and also that of third party providers.

205 Original Copies and Facsimiles Presenting Offers and Counteroffers - There are three basic methods by which offers and counteroffers are presented: in person

206 Original Copies and Facsimiles Presenting Offers and Counteroffers - There are three basic methods by which offers and counteroffers are presented: in person by fax

207 Original Copies and Facsimiles Presenting Offers and Counteroffers - There are three basic methods by which offers and counteroffers are presented: in person by faxby

208 Original Copies and Facsimiles Presenting Offers and Counteroffers - There are three basic methods by which offers and counteroffers are presented: in person by faxby It is important to note that permission to fax or must be stated in the contract and agreed to by all of the parties.

209 Original Copies and Facsimiles by faxby Here is an example of verbiage in a Purchase and Sale Agreement contract excluding e- mail transmission: “Facsimile and Transmission: Facsimile transmission of any signed document, and re-transmission of signed facsimile transmission, shall be the same as delivery of an original. At the request of either party, the parties will confirm facsimile transmitted signatures by signing an original document. transmission of any document or notice shall not be effective unless the parties to this Agreement otherwise agreed to that in writing.”

210 All notices must: B C D A Be verbal or in writing Be in writing Neither verbally nor in writing Be published in the local newspaper

211 All notices must: B C D A Be verbal or in writing Be in writing Neither verbally nor in writing Be published in the local newspaper

212 Original Copies and Facsimiles Presenting Offers and Counteroffers in Person with Original Copies Presenting offers in person has some major advantages. First, a broker can get a feel for the reaction of the other party, to whom he or she is presenting, through the observation of body language. Secondly, a broker will also have the opportunity to provide clarifications or answer any questions that the other party may have. Thirdly, a broker will have the opportunity to show his or her enthusiasm and sincerity and communicate the strengths of his or her clients. Fourthly, a broker will have the advantage of working with clean original documents.

213 Original Copies and Facsimiles Presenting Offers and Counteroffers in Person with Original Copies Presenting offers in person has some major advantages. First, a broker can get a feel for the reaction of the other party, to whom he or she is presenting, through the observation of body language. Secondly, a broker will also have the opportunity to provide clarifications or answer any questions that the other party may have. Thirdly, a broker will have the opportunity to show his or her enthusiasm and sincerity and communicate the strengths of his or her clients. Fourthly, a broker will have the advantage of working with clean original documents. The disadvantage is that all parties (buyer’s broker, listing broker, and sellers) will have to schedule a common time to meet. With busy schedules, out-of-town sellers, or sellers who travel for business, this can be quite challenging. Also, the cost of fuel can be a disadvantage for a meeting, especially if any of the brokers or the sellers must travel a long distance to meet.

214 Original Copies and Facsimiles Presenting Offers and Counteroffers via Facsimile (fax) Presenting offers via fax has some advantages since fax machines are in almost every office and in most homes. Transmission is fast and an offer can be received by the listing broker within minutes.

215 Original Copies and Facsimiles Presenting Offers and Counteroffers via Facsimile (fax) Presenting offers via fax has some advantages since fax machines are in almost every office and in most homes. Transmission is fast and an offer can be received by the listing broker within minutes. The disadvantage of fax transmittal is that after a few generations of faxing, the document can be of very poor quality and difficult to read.

216 Original Copies and Facsimiles Presenting Offers and Counteroffers via Facsimile (fax) Presenting offers via fax has some advantages since fax machines are in almost every office and in most homes. Transmission is fast and an offer can be received by the listing broker within minutes. The disadvantage of fax transmittal is that after a few generations of faxing, the document can be of very poor quality and difficult to read. Most fax machines can be programmed so that a fax journal is produced after each transmittal. This journal will show the time, the number of pages that have been successfully transmitted, and the receiving fax number. It will not serve as proof as to the contents of the transmittal. If your fax machine is not set up for individual journals after each transmittal, look into the possibility of programming it to do so. This journal should be kept with each transmittal in the real estate transaction file.

217 Original Copies and Facsimiles Presenting Offers and Counteroffers via Presenting offers via has a major advantage. Each shows the date and contents of the entire transmittal. It does not show, however, if the was received.

218 Original Copies and Facsimiles Presenting Offers and Counteroffers via Presenting offers via has a major advantage. Each shows the date and contents of the entire transmittal. It does not show, however, if the was received. Disadvantages of transmission involve signatures. Until electronic signatures are more commonly used, a contract that has been ed must first be printed out, then signed, and then scanned to allow for the re-transmittal. As with faxes, multiple generations of this type of transmittal may lessen the quality of the document and cause it to be illegible. As discussed earlier, s do not show proof of receipt.

219 A disadvantage of fax transmittal is that: B C D A Multiple generations of faxing can cause the document to be illegible It is more time-consuming than delivery of the original It is more expensive than delivery of the original The escrow company will not accept fax copies

220 A disadvantage of fax transmittal is that: B C D A Multiple generations of faxing can cause the document to be illegible It is more time-consuming than delivery of the original It is more expensive than delivery of the original The escrow company will not accept fax copies

221 Completion, Rescission, Termination & Discharge How a Contract Can Be Discharged or Terminated? Agreement between the Parties – In this situation, both parties may agree to discharge the contract because of:  Cancellation - When both parties to the contract decide to terminate the agreement.

222 Completion, Rescission, Termination & Discharge How a Contract Can Be Discharged or Terminated? Agreement between the Parties – In this situation, both parties may agree to discharge the contract because of:  Cancellation - When both parties to the contract decide to terminate the agreement.  Rescission - When a contract is cancelled and both parties are returned to their original positions.

223 Completion, Rescission, Termination & Discharge How a Contract Can Be Discharged or Terminated? Agreement between the Parties – In this situation, both parties may agree to discharge the contract because of:  Cancellation - When both parties to the contract decide to terminate the agreement.  Rescission - When a contract is cancelled and both parties are returned to their original positions.  Novation - When the contract has been substituted for a new contract.

224 Completion, Rescission, Termination & Discharge How a Contract Can Be Discharged or Terminated? Agreement between the Parties – In this situation, both parties may agree to discharge the contract because of:  Cancellation - When both parties to the contract decide to terminate the agreement.  Rescission - When a contract is cancelled and both parties are returned to their original positions.  Novation - When the contract has been substituted for a new contract.  Full Performance - When all of the parties have performed their obligations under a contract, then a contract is discharged. This is known as full performance or completion.

225 Issues with Cancelling a Contract  As stated earlier, a contract is legally binding. If the buyer or the seller chooses to cancel a contract, he or she could be found guilty of a breach of contract which is also known as a default.

226 Issues with Cancelling a Contract  As stated earlier, a contract is legally binding. If the buyer or the seller chooses to cancel a contract, he or she could be found guilty of a breach of contract which is also known as a default.  If a buyer defaults, he or she could lose his or her earnest money or be sued by the seller for non-performance or damages.

227 Issues with Cancelling a Contract  As stated earlier, a contract is legally binding. If the buyer or the seller chooses to cancel a contract, he or she could be found guilty of a breach of contract which is also known as a default.  If a buyer defaults, he or she could lose his or her earnest money or be sued by the seller for non-performance or damages.  The remedy that is available is usually defined in the Purchase and Sale Agreement. If the seller defaults, there is a possibility that the buyer could sue for damages.

228 When considering the strength of an offer, one should consider: B C D A The buyer’s purchasing power The price offered The terms of the contract All of the above

229 When considering the strength of an offer, one should consider: B C D A The buyer’s purchasing power The price offered The terms of the contract All of the above

230 Default (Breach) and the Rights of Both Parties A breach of contract is when one or both of the parties fail to perform according to the terms and conditions of the contract. If there has been a material breach (meaning that the breach was important to one of the parties), then the other party may be able to take court action.

231 Default (Breach) and the Rights of Both Parties Specific Performance Liqudated Damages Compensatory Damages Rescission A legal action where the court orders the party who breached the contract to perform according to the contract. In the circumstance of a Purchase and Sale Agreement, the seller would be obligated to sell the property as promised and deliver the deed to the buyer, and the buyer would be obligated to purchase the property as promised. Specific performance, as a remedy, may not always be possible. There are four legal remedies for a breach of contract which include:

232 Contract Specific Performance Liqudated Damages Compensatory Damages Rescission When both parties to a contract agree in advance to a dollar amount that will compensate the other party in the event of a breach, this is considered liquidated damages. This amount must be set forth in writing. There are two important points to remember about liquidated damages; first, it limits the amount that the non-breaching party can recover. Secondly, it makes it easier for the non- breaching party to recover these damages since they were agreed to in writing in advance. There are four legal remedies for a breach of contract which include:

233 Contract Specific Performance Liqudated Damages Compensatory Damages Rescission The most common remedy for a breach of contract, given that there was not a liquidated damages clause, is compensatory damages. This compensates the other party for the financial loss that he or she incurred because of the breach of contract. The amount awarded is usually intended to place the non-breaching party in the same financial position that he or she would have been placed if the breaching party had performed as per the terms of the contract. There are four legal remedies for a breach of contract which include:

234 Contract Specific Performance Liqudated Damages Compensatory Damages Rescission A rescission takes place when a contract has been cancelled and each party is returned to his or her original position. If a Purchase and Sale Agreement were to be rescinded, then the buyer would forfeit the right to purchase the property and the seller would refund the earnest money to the buyer. A rescission could result from the agreement of the parties or by court order. There are four legal remedies for a breach of contract which include:

235 The most common remedy for a breach of contract, given that there was not a liquidated damages clause, is __________________. B C D A Compensatory damages Specific performance Special assessments Residual damages

236 The most common remedy for a breach of contract, given that there was not a liquidated damages clause, is __________________. B C D A Compensatory damages Specific performance Special assessments Residual damages

237 Earnest Money and Proper Handling When a buyer extends an offer to purchase property, the buyer will make a good faith deposit, called an earnest money deposit. This demonstrates that he or she is serious about the purchase of the home and his or her offer is bona fide. Also, some buyers will make larger earnest money deposits in order to make their offer more attractive and desirable to the seller.

238 Earnest Money and Proper Handling After the offer is accepted, the earnest money deposit becomes part of the contract and is deposited into an escrow account at the selling licensee’s brokerage or into a trust account held by the closing agent (escrow). If the buyer defaults on any portion of the Purchase and Sale Agreement, the buyer may have to forfeit the deposit to pay for damages incurred by the seller (such as having the property off the market and the fact that the seller may have had other potential buyers who are no longer interested).

239 Earnest Money and Proper Handling Duties of Licensee  To exercise reasonable skill and care  To deal honestly and in good faith

240 When a buyer extends an offer to purchase property, the buyer will make a good faith deposit. This is known as a(n): B C D A Contract to Purchase Fully acknowledged contract Counter-offer Earnest Money

241 When a buyer extends an offer to purchase property, the buyer will make a good faith deposit. This is known as a(n): B C D A Contract to Purchase Fully acknowledged contract Counter-offer Earnest Money

242 Earnest Money and Proper Handling Earnest money may be in many different forms, but let’s take a look at three which are acceptable: Personal Checks - This is usually the most common form of earnest money deposit since most people carry checkbooks with them, and there is no need to make a visit to a financial institution to obtain a money order or cashier’s check.

243 Earnest Money and Proper Handling Earnest money may be in many different forms, but let’s take a look at three which are acceptable: Personal Checks - This is usually the most common form of earnest money deposit since most people carry checkbooks with them, and there is no need to make a visit to a financial institution to obtain a money order or cashier’s check. Cashier’s Check or Money Order – Again, the disadvantage is that a financial institution must be open when the earnest money is being remitted. Most financial institutions have limits on the amount allowed for money orders.

244 Earnest Money and Proper Handling Earnest money may be in many different forms, but let’s take a look at three which are acceptable: Personal Checks - This is usually the most common form of earnest money deposit since most people carry checkbooks with them, and there is no need to make a visit to a financial institution to obtain a money order or cashier’s check. Cashier’s Check or Money Order – Again, the disadvantage is that a financial institution must be open when the earnest money is being remitted. Most financial institutions have limits on the amount allowed for money orders. Promissory Note - This is a note signed by the buyer guaranteeing that he or she will deposit the earnest money at some specified future date. This form of earnest money might be used when a buyer expects to receive some net proceeds from the sale of a property soon, but does not have the cash on hand at the moment.

245 Proper Handling of Earnest Money  Both the listing broker and the selling broker are required to adhere to strict policies and procedures surrounding the handling of funds held for others.

246 Proper Handling of Earnest Money  Both the listing broker and the selling broker are required to adhere to strict policies and procedures surrounding the handling of funds held for others.  Violations and mishandling of these funds may result in civil suits, criminal proceedings, and disciplinary action by the State.

247 Proper Handling of Earnest Money  Both the listing broker and the selling broker are required to adhere to strict policies and procedures surrounding the handling of funds held for others.  Violations and mishandling of these funds may result in civil suits, criminal proceedings, and disciplinary action by the State.  The result could be a monetary fine and/or suspension or revocation of the brokerage or broker’s real estate license.

248 Proper Handling of Earnest Money  Both the listing broker and the selling broker are required to adhere to strict policies and procedures surrounding the handling of funds held for others.  Violations and mishandling of these funds may result in civil suits, criminal proceedings, and disciplinary action by the State.  The result could be a monetary fine and/or suspension or revocation of the brokerage or broker’s real estate license.  Usually, the selling broker representing the buyer will be responsible for collecting the earnest money. This is not set in stone though. In some states it is acceptable, with the use of a clause in the purchase agreement, for the buyer and seller to decide who holds the deposit.

249 Which of the following is an acceptable form of Earnest Money? B C D A Personal Check Cashier’s Check Promissory Note All of the above

250 Which of the following is an acceptable form of Earnest Money? B C D A Personal Check Cashier’s Check Promissory Note All of the above

251 Proper Handling of Earnest Money  This deposit must be collected and deposited according to the terms of the Purchase and Sale Agreement.

252 Proper Handling of Earnest Money  This deposit must be collected and deposited according to the terms of the Purchase and Sale Agreement.  The funds must be deposited in the broker’s trust account or in a trust account held by the closing agent (escrow).

253 Proper Handling of Earnest Money  This deposit must be collected and deposited according to the terms of the Purchase and Sale Agreement.  The funds must be deposited in the broker’s trust account or in a trust account held by the closing agent (escrow).  A receipt for the deposit is usually required by state law and should be placed in the transaction folder.

254 Proper Handling of Earnest Money  This deposit must be collected and deposited according to the terms of the Purchase and Sale Agreement.  The funds must be deposited in the broker’s trust account or in a trust account held by the closing agent (escrow).  A receipt for the deposit is usually required by state law and should be placed in the transaction folder.  These deposits must be kept in a separate trust account and are not allowed to be commingled with any other funds.

255 Proper Handling of Earnest Money Let’s look at some examples of earnest money being handled improperly, and the adverse or detrimental impact that it could have on a buyer or a seller in a real estate transaction. The buyer’s broker does not collect the earnest money or does not collect the full amount -- In this scenario, the seller may not have all or any compensation, should the buyer default. And the buyer may be in default if the Purchase and Sale Agreement contract stated that a specified amount was to be deposited to a trust account on a certain date. Buyer’s broker collected the funds but did not deposit them -- The same holds true as in the above scenario. In addition, when a broker “holds” earnest money, the chances of the check becoming lost or stolen increase exponentially.

256 Who normally holds the earnest money during a transaction? B C D A The seller The buyer A trust account of the selling broker, closing agent The seller’s broker

257 Who normally holds the earnest money during a transaction? B C D A The seller The buyer A trust account of the selling broker, closing agent The seller’s broker

258 Communicating the Status of Earnest Money  As we stated earlier, a licensee has the duty to properly handle all earnest monies.  Many sellers might assume that the earnest money has been collected and deposited as specified in the contract.  Care should be taken by the buyer’s broker to collect and deposit the monies as agreed upon.  Proper documentation to prove that the funds have been handled properly is essential.  Communicating the status of funds to the seller’s broker is a sound practice. The  seller’s broker should also require documentation as to the status of these funds.

259 Thank you for being a McKissock customer! Please fill out the evaluation form. We value your input! We hope you enjoyed the course, and if you have any questions, please don’t hesitate to call us at


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