Chapter 8

Georgia Real Estate An Introduction to the Profession Eighth Edition Chapter 8 Real Estate Sales Contracts

Key Terms binder default earnest money deposit equitable title installment contract lease-option letter of intent option contract rider right of first refusal “time is of the essence” © 2015 OnCourse Learning

Purpose of Sales Contracts A buyer needs to time to be certain the seller is legally capable of conveying title. It also gives them time to arrange financing and an inspection. © 2015 OnCourse Learning

Purpose of Sales Contracts Once a sales contract is in writing and signed, sellers cannot change their mind and sell to another person. © 2015 OnCourse Learning

Purchase and Sale When using a contract form, any unused spaces that are part of the agreement should be nullified by placing a “N/A” in the space. © 2015 OnCourse Learning

Earnest Money Earnest money commonly accompanies and offer to purchase as evidence of good faith. The deposit can be cash, check or wire transfer. © 2015 OnCourse Learning

Earnest Money The contract will indicate if the broker is holding the earnest money as of the offer date or within a designated number of days after the offer date. © 2015 OnCourse Learning

Date of Closing and Transfer of Possession A unilateral extension of the closing date is allowed under very specific circumstances: title problems closing attorney unable to perform their obligations lender unable to perform their obligations © 2015 OnCourse Learning

Seller’s Contributions at Closing The seller may make a contribution to be used by the buyer as they see fit to offset the costs of closing the transaction. © 2015 OnCourse Learning

Closing Attorney The buyer has the right to choose the closing attorney. Unless the buyer is paying cash, the closing attorney represents the interests of the lender. © 2015 OnCourse Learning

Inspection Buyers have the right to inspect the property and the duty to inspect the neighborhood for any conditions that they would find objectionable. It is always prudent to suggest that the buyer order a termite inspection. © 2015 OnCourse Learning

Subject to Due Diligence or “As Is” Most sales are subject to a due diligence period, anywhere from 7 to 21 days. It can be any period agreed to by the parties to the contract. © 2015 OnCourse Learning

Subject to Due Diligence or “As Is” If anything comes up during the due diligence period that is not acceptable to the buyer, the buyer can terminate without penalty any time prior to the end of due diligence. © 2015 OnCourse Learning

Subject to Due Diligence or “As Is” Without a due diligence period, the buyer is buying the property “as is.” Even when buying property “as is,” the seller has a legal duty to disclose knowledge of any latent defect. © 2015 OnCourse Learning

Subject to Due Diligence or “As Is” A latent defect is a defect that is concealed, or one that a buyer would have to possess certain training or knowledge to recognize. A patent defect is one that is open to observation and would take no special training to recognize. © 2015 OnCourse Learning

Subject to Due Diligence or “As Is” Once the due diligence period passes, the buyer is accepting the property as is. The seller disclosure form should never be completed by the real estate agent, or should the agent assist in completing the form. © 2015 OnCourse Learning

Lead-Based Paint On properties built before 1978, buyers have the right to inspect for lead-based paints. This is covered under their right to inspect in the contract. © 2015 OnCourse Learning

Warranty The seller will warrant the property to have a marketable title and allow the buyer to examine it. © 2015 OnCourse Learning

Risk of Damage to Property The property will be delivered to the buyer at closing in substantially the same condition as at the time of contract, free of trash and debris. © 2015 OnCourse Learning

Entitlement to and Disbursement of Earnest Money This section entitles the buyer to the earnest money in the event that the seller defaults. The seller would be entitled to the earnest money in the event the buyer defaults. © 2015 OnCourse Learning

Entitlement to and Disbursement of Earnest Money Earnest money is treated as liquidated damages. © 2015 OnCourse Learning

Agency and Brokerage The broker working with the buyer is referred to as the selling broker. The broker working with the seller is known as the listing broker. © 2015 OnCourse Learning

Agency and Brokerage Compensation is typically negotiated in the brokerage engagement agreement, not in the purchase and sale. © 2015 OnCourse Learning

Disclaimer The disclaimer reminds the parties that the brokers are not experts in many topics. © 2015 OnCourse Learning

Notices A contract is not a contract unless it has been properly and effectively communicated between the parties. All notices must be in writing. © 2015 OnCourse Learning

Notices Notice is not effective until actual receipt, with the exception of a fax and . If the required notice is properly delivered to the agent, it is the same as delivery to the client. © 2015 OnCourse Learning

Other Provisions The seller agrees to transfer any warranties, bonds or contracts to the buyer at the buyer’s expense. Any repairs will be done in a workmanlike manner. © 2015 OnCourse Learning

Other Provisions This agreement is the entire agreement between the parties. Anything they deem important is included in the contract. The survival clause stipulates that obligations shall continue after closing if not completed at closing. © 2015 OnCourse Learning

Other Provisions Interpretation of agreement shall be based on Georgia law Time is of the essence. Times stipulated are obligations, not suggestions © 2015 OnCourse Learning

Other Provisions The binding agreement date is the date the acceptance is received by the offeror. All parties are required to cooperate in doing all things reasonably necessary to fulfill the agreement. © 2015 OnCourse Learning

Exhibits and Addenda Most purchase and sale agreements will provide for additional pages, called exhibits or its addendums, to complete the agreement. © 2015 OnCourse Learning

Federal Clauses Sellers and landlords must disclose known lead based paint and lead based paint hazards and provide available reports to buyers or tenants. © 2015 OnCourse Learning

Federal Clauses Buyers are entitled to a 10-day period to conduct a lead-based paint inspection or risk assessment at their own expense. © 2015 OnCourse Learning

Preprinted Clauses When making additions or changes to the GAR contracts, it is prudent to engage the assistance of your broker, at the very least, and the assistance of legal counsel at the very best. © 2015 OnCourse Learning

Riders A rider is any addition annexed to a document and made part of the document by reference. Riders are also known as addendums or attachments. © 2015 OnCourse Learning

Negotiation Nearly everything is negotiable and nearly everything has a price. © 2015 OnCourse Learning

Practicing Law Licensees in Georgia have the right to assist in the creation of contracts. It is important that licensees understand what they can do and cannot do, and assure that they never do anything that could be considered crossing the line and practicing law. © 2015 OnCourse Learning

Letter of Intent If two or more parties want to express their mutual intention to buy, sell, lease, develop or invest and wish to do so without creating any firm legal obligation, they may use a letter of intent. A letter of intent is neither a contract nor an agreement to enter into a contract. © 2015 OnCourse Learning

Practicing Law Georgia law allows a licensee to fill out pre- printed forms. A real estate licensee is not a license to practice law. © 2015 OnCourse Learning

Installment Contracts An installment contract is also known as a land contract or a contract for deed. © 2015 OnCourse Learning

Installment Contracts An installment contract contains most of the content from the purchase and sale agreement, plus wording similar to the warranty deed, plus many provisions of the mortgage. © 2015 OnCourse Learning

Installment Contracts The seller does not deliver a deed to the buyer at the closing. The seller promises to deliver the deed at some future date, while the purchaser is given the right to occupy the property and have the rights, obligations and privileges of ownership. © 2015 OnCourse Learning

Installment Contracts The use of the installment contract occurs when the buyer does not have the full purchase price in cash or is unable to borrow it from a lender. The seller must accept a down payment plus monthly payments. © 2015 OnCourse Learning

Vendor, Vendee When all the installments are made, the seller delivers a deed to the purchaser. The buyer is called the vendee. The seller is called the vendor. © 2015 OnCourse Learning

Public Criticism When interests rates rose in the 1970s, installment contracts were rediscovered. © 2015 OnCourse Learning

Public Criticism The seller kept the property and mortgage in the seller’s name and made the mortgage payments out of the buyer’s monthly payments. This continued until the buyer found alternate financing, at which time the seller delivered the deed. © 2015 OnCourse Learning

Protections If an installment contract is used for the purchase of real estate, it should be done with the help of legal counsel to make certain that it provides adequate safeguards for the buyer as well as the seller. © 2015 OnCourse Learning

Equitable Title During the period beginning with the buyer and seller signing the contract and the seller delivering the deed, the buyer holds equitable title to the property. Equitable title is the assured future interest in the legal title. © 2015 OnCourse Learning

Equitable Title A buyer has the exclusive right to purchase and can enforce specific performance of the contract to get title. The seller holds bare or naked title. © 2015 OnCourse Learning

Equitable Title Equitable title can be sold, given away, or mortgaged, and it passes to the purchaser’s heirs and devisees upon the purchaser’s death. © 2015 OnCourse Learning

Option Contracts The option contract is a unilateral contract. The buyer (optionee) has a right to purchase the property, with no obligation to do so. © 2015 OnCourse Learning

Option Contracts The buyer has the right to buy, the seller has the obligation to sell. © 2015 OnCourse Learning

Option Contracts The buyer must pay consideration to the seller (optionor) in order for the contract to be enforceable. This is a cash payment directly to the seller in lieu of earnest money. © 2015 OnCourse Learning

Option Contracts In return for the cash payment, the seller takes the property off the market for the term of the option agreement. Option contracts must be in writing. A verbal option would be void. © 2015 OnCourse Learning

Option Contracts Exercising the option converts the option contract to a purchase and sale. © 2015 OnCourse Learning

Option Contracts on Multiple Properties At the end of the option period, the contract terminates if the option has not been exercised by the optionee. © 2015 OnCourse Learning

Lease with Option to Buy A lease-option allows a tenant to buy the property at a present price and terms during the option period. The lease is typically for one year, and the option to buy must be exercised during that time. The tenant is under no obligation to buy. © 2015 OnCourse Learning

Lease with Option to Buy One cannot wait until the option is exercised to write the purchase contract. If a real estate agent puts a lease-option together, the agent is entitled to a leasing commission at the time the lease is signed. If the option is exercised, the agent is due a commission on the sales price. © 2015 OnCourse Learning

Lease with Option to Buy The option to buy should be recorded. An option is a unilateral contract. The ensuing purchase and sales agreement is bilateral. The lease portion of a lease-option is bilateral. © 2015 OnCourse Learning

Lease with Option to Buy The party giving the option is called the optionor. The party receiving the option is called the optionee. © 2015 OnCourse Learning

Right of First Refusal A right of first refusal is more common to a lease than a purchase. If someone presents the owner with a valid offer, the owner must show it to the tenant before accepting it. © 2015 OnCourse Learning

Right of First Refusal A right of first refusal protects a tenant from having the rental property sold when, if the tenant knew about the offer, the tenant would have been willing to match the offer. © 2015 OnCourse Learning

Review 1.A sales contract has an obligation at a definite price for definite terms for a definite period. 2.An option includes the right at a definite price for definite terms for a definite period. 3.A right of first refusal has a right at a price and terms to be determined. The parties don’t know if the opportunity will present itself. © 2015 OnCourse Learning

The E-Sign Act A signature, contract or other record relating to such transaction may not be denied legal effect, validity or enforceability solely because it is in electronic form. © 2015 OnCourse Learning

The E-Sign Act A contract relating to such transaction may not be denied legal effect, validity or enforceability solely because an electronic signature was used in its formation. © 2015 OnCourse Learning