Real Estate Sales Contracts Mortgage and Note

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Real Estate Sales Contracts Purpose of Sales Contracts Parts of a Purchase Contract The Binder Letter of Intent Contracts

Purpose of Sales Contracts Gives the buyer time for research Provides legal consideration for terms of exchange Both parties are committed to the agreement

Parts of a Purchase Contract Provision for buyer’s earnest money deposit Buyer’s offer to purchase Acceptance of the offer by the seller Provisions for the payment of a brokerage commission

Earnest Money Deposit The price and means offered by the buyer Deposits are normally required as an example of commitment and security against the work performed prior to a final agreement In a court-ordered sale, the required deposit is usually 10%

Title and Closing The buyer can specify exactly what condition of title he/she will accept A projected closing date will be specified on the purchase contract Ongoing expenses are split between buyer and seller based on time (prorated) Date of possession is usually the same as the closing date Escrow expenses (split between buyer and seller) usually include a conveyance tax and a fee for having the deed recorded

More Info in the Contract If only a few items of personal property are included, they may be included in the contract, a bigger list will use a bill of sale Buyers can require an inspection before closing The buyer can cancel if damage is done to the property before possession changes

Buyer Default Seller options: –Release the buyer and return his deposit in full –Sue the buyer for specific performance –Sue the buyer for damages suffered Contract can have a clause for forfeit of deposit in the event of default Time limits –The seller has a certain amount of time to accept an offer –Usually 3 days if delivered in person –7-10 days if done through the mail

Signatures The buyer keeps a copy of the contract and duplicates are delivered to the seller Prevents any changes after the buyer signs the contract The Electronic Records in Global and National Commerce Act – October 1, 2000 –Allows for electronic signatures of many documents

Finalizing the Contract The seller must accept every aspect of the contract – any changes constitute a counter-offer When acceptance is made commissions are agreed upon as a part of closing costs If one party dies the heirs are usually required to fulfill the contract

Clauses – Not Santa Federal clauses for FHA/VA loans Lead-based paint Riders Negotiation

Federal Clauses An amendatory language clause must be included whenever a sales contract is signed by a purchaser prior to the receipt of an FHA Appraised Value or a VA Certificate of Reasonable Value on the property The Federal Trade Commission requires that builders and sellers of new homes include insulation disclosures in all purchase contracts

More Clauses Lead-Based Paint Disclosures –Sellers and landlords must fully disclose all information about lead- based paint on a property –Contracts must include certain language to ensure the disclosure takes place Riders – any addition to a document Negotiation – for a price, everything can be changed in contract terms

The Binder Temporarily holds a deal together until a more formal purchase contract is finalized Many details (inspections, etc.) are not included Courts may be involved in finalizing details if a stalemate develops regarding the binder

Intent, and Law Parties can express intentions without legal obligation with a letter of intent Much of the contract preparation is done by real estate firms with pre-written forms The forms must be approved by an attorney, and real estate firms may not make changes beyond filling in the blanks

Installment Contracts The big difference – deed is delivered at a date after closing If payments are not made on time, the property and all payments can be retained by the seller Easier than foreclosure Became popular again in the 1970’s as a way around high interest rates Now, installment contracts must be recorded Deed is usually placed in escrow

Transition During the period beginning with the buyer and seller signing the contract and the seller delivering the deed, the buyer is said to hold equitable title to the property –The buyer has full rights to the property –The seller holds the title in name only without ownership rights

Options An option contract gives the buyer the right to purchase a piece of property but not the obligation Corporate entities may take out options on multiple building sites

Lease With Option to Buy Also called a lease-option, for a given time period a renter can buy at a predetermined price All terms are set in writing at the time of the lease signing Provided an equitable return, a fee may be charged for a lease option Options longer than 1 year are usually for commercial properties

Basic Option Vocabulary Optioner – the party giving the option Optionee – the party receiving the option Call – another term for an option, often found in Finance

Final Items First right of refusal – a renter or other party gets the choice to match any offer made for purchase of a property Exchange agreements – allows for divestment and acquisition of properties with minimal tax payments Delayed exchanges – property is given before new property is accepted

Mortgage and Note Promissory Notes Mortgage Instruments Foreclosure

Promissory Note Also called a real estate lien note Establishes amount, repayment, and interest rate on the debt

Parts of a Promissory Note Validity: –In writing –Between a borrower and lender both of whom have contractual capacity –State the borrower’s promise to pay a certain sum of money –Show the terms of payment –Be signed by the borrower –Be voluntarily delivered by the borrower and accepted by the lender

Details in a Note Principal – amount of the note Prepayment privilege – buyer can pay off the note early without penalty Acceleration clause – missing payment may result in immediate balloon payment Signature – like all contracts, a note must be signed by both parties

Mortgages Provides collateral against non-payment Hypothecation – the borrower retains the right to possess and use the property while it serves as collateral Pledging – to give up possession of the property to the lender while it serves as collateral

Mortgage Covenants Covenant to pay taxes Covenant against removal Covenant of insurance Covenant of good repair (or preservation and maintenance)

Clauses Alienation – (due-on- sale) – gives the lender the right to call the entire loan balance due if the mortgaged property is sold or otherwise conveyed by the borrower Condemnation – if all or part of the property is taken by action of eminent domain, any money so received is used to reduce the balance owing on the note

Mortgage Satisfaction When a note is paid in full a document is issued reflecting that Called a satisfaction of mortgage or release or mortgage This is also recorded to assist in title searchers – called a marginal release

Transfer of Payments If a loan lacks a due-on-sale clause, a seller can simply pass the payments on to a buyer to take advantage of a favorable rate The buyer makes payments but the seller is still liable If the buyer defaults, the seller can be required to pay the balance due plus interest

Assumption This is a safer way to transfer payment responsibility The buyer enters into a written agreement with the seller The seller is still liable, but has a document for legal proceedings in the event of default

Loan Details Certificate of reduction – prepared by the lender to show how much of the loan remains to be paid Estoppel certificate – the borrower is asked to verify the amount still owed and the rate of interest

Pecking Order First lender records a first mortgage Subsequent lenders record second mortgage, etc. Sometimes a lender will use subordination – voluntary acceptance of a lower position in the repayment structure Chattel liens – secured by personal property

Foreclosure Delinquent loan – the borrower is behind on payments Foreclosures are a lose-lose proposition, they are avoided when possible

Types of Foreclosure Judicial – lawsuit is filed –The defendant’s interests be cut off in order to return the property to the seller –The property be sold at a public auction –The lender(s)’ claim be paid from proceeds Nonjudicial – there is no lawsuit and no action by a judge

Foreclosure Options Surplus money action – filed by a junior mortgage holder – hopes the sale of the property will provide excess funds to pay them Notice of lis pendens – informs the public that a legal action is pending Public auction – property is repossessed and sold to cover the mortgage

At the Auction Up to the minute the property is sold the borrower can redeem the property with payment – this is called equity of redemption Failing this, an auction usually requires a 10% deposit on a successful bid Delinquent property taxes follow the property

More Auction Details If the property sells for more than is owed, the borrower gets the excess Many states allow for a deficiency judgement – if the property sells too low, other assets of the borrower can be pursued Some states give the borrower from 1 month to 1 year to regain property – this is called statutory redemption

More Types of Foreclosure Strict foreclosure – ordered and executed by the court with no statutory redemption period Power of sale – a mortgage clause that allows for foreclosure without going to court – cannot award a deficiency judgment Junior mortgage holders will use a request for notice of default so they are notified in the event of default

Foreclosures, Cont. Entry and possession – the lender gives notice to the borrower that the lender wants possession of the property Deed in lieu of foreclosure – a borrower voluntarily deeds the property to the lender in exchange for a cancellation of the debt Trust deed – the borrower, lender, and a neutral third party reach agreement on dispensation of the property and debt

The Last of Chapter 9 Equitable mortgage – a written agreement considered by the courts to be a mortgage in spite of some differences If a borrower can prove that a deed was security for a loan, the lender must foreclose like a regular mortgage if the borrower fails to pay