Real Estate Principles, 11th Edition By Charles F. Floyd and Marcus T. Allen

Chapter 6 Contracts and Title Closings 2

Contracts An exchange of promises between parties, conditioned on certain events and enforceable by law Necessary Elements of a Contract – Offer and acceptance – Consideration – Capacity of parties – Lawful purpose – Writing requirement (Statute of Frauds) 3

Offer, Acceptance, and Consideration Offer – statement that specifies the position of the offeror Acceptance – expression of satisfaction with terms of offer – Mirror image rule Consideration – anything that incurs a legal detriment or the foregoing of a legal benefit 4

Capacity of Parties and Lawful Purpose Mental competence Legal age – Contract by underage person is voidable except for necessities of life Contract must be for a lawful purpose 5

Writing Requirement Statute of Frauds in each state requires that real property transfers be evidenced in writing (some states make exceptions for leases with terms of less than one year) Partial performance can be an exception to the writing requirement See Legal Highlight “Validity of an Oral Contract” 6

Breach of Contract Failure to perform any required contractual obligation – Offended party may seek “specific performance” by court order – Also commonly referred to as “default” 7

Contingencies Language in a contract that may relieve a party of obligation to perform – Financing contingency – Title contingency – Inspection and repair contingency – Many more! 8

Real Estate Sales Contract Sets forth the rules governing the parties’ rights and obligations between time of agreement and transfer of title – Created through offer-acceptance process – Offer can be revoked anytime before acceptance, but not after 9

Sales Contract Example See Figure 6.1 Key Issues – Parties – Price – Closing date – Contingencies 10

Option-to-Buy Contracts Owner keeps offer to sell open for specified time period Buyer has right, but not the obligation, to purchase during the time period for the price and on the terms and conditions stated Often used by developers to “assemble” land from multiple owners for new projects 11

Contract for Deed Installment contract where buyer does not get legal title until the last payment is made Also called – Land contract – Agreement for deed 12

Negotiation Strategies Price is only one of many points that must be negotiated in real estate transactions Avoid “zero-sum” mentality Look for win-win situation 13

Title Closing The final step in the process of transferring title from grantor to grantee Buyer’s responsibilities before closing – Obtaining financing – Examining the title evidence – Having the property surveyed – Obtaining property insurance – Having the property inspected 14

Title Closing, cont. Seller’s responsibilities before closing – Prepare the deed – Remove encumbrances – Cooperate with inspectors 15

Closing Costs Costs generally paid by the buyer at the closing – Loan origination fee – Loan discount points – Appraisal fee – Credit report fee – Lender’s inspection fee – Mortgage insurance premium – Attorney fees – Hazard insurance premium – Recording fees for the mortgage 16

Closing Costs, cont. Costs generally paid by the seller at the closing – Real estate brokerage commission – Attorney fees – Documentary stamp taxes, where required – Recording fees for the satisfaction of the seller’s mortgage 17

Closing Costs, cont. Proration of property expenses Parties present at the closing Escrow closings 18