1 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 22 TITLE Legal Title Equitable Title

2 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin RIGHTS AND OBLIGATIONS OF SELLERS AND BUYERS Seller: –obligated to deliver clear and marketable title –obligated to maintain the property until closing –obligated to allow inspection just prior to closing –obligated to pay commission –right to receive price in the contract Buyer –right to obtain clear and marketable title of property in the same condition as represented –obligated to pay price as specified by the contract

3 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CONTRACTS FOR SALE OF REAL ESTATE Real estate sale contracts must include the requirements of a valid contract: –competent parties –legal objective –offer and acceptance –consideration –no defects to mutual assent The contract for sale must also: –be in writing –properly describe the property

4 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Contracts for the Sale of Real Estate Standard form contracts are used in many states. –They address common issues. –They tend to treat both parties fairly. Standard form contracts do not fit all situations.

5 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Some Key Elements of the Form Contract Purchase Price and Deposit Mortgage Amount and Contingencies Date for Offer Acceptance Conveyance of Title and Title Assurance Property Condition, Date of Possession, and Seller Warranties Closing Costs and Expense Prorations

6 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Escrow The earnest-money deposit is held in an account until closing, or until the offer is invalid. The escrow agent must not be a party to the contract. Escrow agents will hold the funds and documents to the transaction and distribute them according to the contract.

7 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin REMEDIES FOR BUYER NONPERFORMANCE If buyer defaults, seller may: –rescind the contract, or sue for performance and/or damages, or –retain deposits as liquidated damages.

8 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin REMEDIES FOR SELLER NONPERFORMANCE If seller defaults, buyer may: –rescind the contract, or sue for performance and/or damages. Provisions for liquidated damages may be specified in the contract.

9 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CLOSING The title transfer is completed--documents delivered and signed. The financing transactions are completed. All costs associated with the transactions are settled (funds disbursed).

10 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Steps Before Closing The property is surveyed and inspected. The title is searched and a report completed. The deed, mortgage, note, and mortgage satisfaction documents prepared. Arrangements are made for hazard insurance, utilities, and other services.

11 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin REAL ESTATE SETTLEMENT AND PROCEDURES ACT Lender must provide the following: –“Settlement Costs and You” Booklet –Good Faith Estimate of Settlement Cost –Uniform Settlement Statement RESPA prohibits the use of “kickbacks” in the transaction.

12 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin THE CLOSING STATEMENT Purchase Price and Deposits Title Insurance and Assurance Charges Loan-Related Charges Tax and Recording Fees Brokerage Commissions Buyer/Seller Prorated Expenses

13 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Typical Buyer’s Expenses Documentary Stamps and Intangible Taxes on the Mortgage and Note Mortgage and Deed Recording The Appraisal, Credit Report, Survey, Inspection, and Lender’s Service Fees Prepaid Mortgage Interest and Discount Points Title Insurance and Buyer’s Attorney Fees

14 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Typical Seller’s Expenses Documentary Stamp Tax on the Deed Brokerage Commission Mortgage Satisfaction Fees Seller’s Attorney Fees

15 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Buyer and Seller Prorated Expenses If prepaid, the seller is due a credit and the buyer a debit for the portion of the expense period the property was held by the buyer. If accrued, the buyer is due a credit and the seller a debit for the portion of the expense period the property was held by the seller. The seller is typically responsible for the day of the closing.

16 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Prorated Accrued Expense Example: Assume property taxes of $500 are due on December 31 and the sale is closed on May 14 of a 365-day year. What is the expense prorated? Solution: The buyer is credited and seller debited. $ = (133 days/365 days) x $500

17 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Prorated Prepaid Expense Example: Assume homeowners association fees of $250 are paid on December 31 for the following 365-day year. The sale is closed on March 31. What is the expense proration? Solution: The seller is credited and the buyer debited. $ = (276 days/365 days) x $250