Chapter 13 Contracts for Sale and Closing Real Estate FIN 331

The Most Important Document Contract for Sale Determines price and terms of the transaction Defines property interest being conveyed Determines the grantee Determines other conditions of the transaction Financing Date of occupancy Any repairs or other conditions of the sale

Requirements for a Contract for Sale A [written] contract for sale must contain the following elements Competent parties: parties must be of minimum legal age Legal objective: contract objective must be legal Offer and Acceptance: contract binds parties to specific actions in the future Consideration: the value given up by each party to the contract No defects to mutual assent: the contract may be broken if there are defects a proper legal description of the property Must be in writing (Statute of Frauds)

Statute of Frauds A legal concept that requires certain types of contracts to be executed in writing. The precise form of the Statute of Frauds varies between jurisdictions, but generally requires a writing for the following types of contracts: Contracts for the sale of land; Contracts for the sale of goods above a certain dollar amount; Contracts that cannot be completed in less than one year; and Contracts where one party is to pay the debt of another party. In a breach of contract case where the statute of frauds applies, the defendant may raise it as a defense. In this case, the burden of proof is on the plaintiff to establish that a valid contract was in existence. Plaintiff: the party that initiates a lawsuit seeking a legal remedy Defendant: the party against whom some type of civil relief is sought

form of the contract for sale Elements of a complete contract (see Exhibit 13 – 1) Parties to the contract Description of the property (includes legal description) Purchase price Time for acceptance of offer and counter offers Closing date Date of the contract Date and Place of closing Financing terms of any Prorating of costs and expenses Required inspections and disclosures relevant to the property Assurance of good and marketable title Remedies for breach of contract Responsibilities of the escrow agent and broker Earnest money deposit (consideration)

form of the contract for sale Forms of Title Legal title: ownership of a freehold estate Equitable title: grants the right to obtain legal title Buyer obtains equitable title when a contract for sale of real estate is fully signed Rationale for written contracts Reduce chances for fraud Avoid the possibility of promissory estoppel

Promissory Estoppel Estoppel occurs when a party "reasonably relies on the promise of another party, and because of the reliance is injured or damaged“ Promissory Estoppel is an alternative to consideration as a basis for enforcing a promise. Prevents one party from withdrawing a promise made to a second party if the latter has reasonably relied on that promise

Promissory Estoppel A promise made without consideration is generally not enforceable However, if even a one penny has been accepted – that makes the promise enforceable – consideration!

form of the contract for sale Contract Terminology Contingent contract: Obligation of a party to perform depends on one or more conditions being met Assignment: One party’s contractual rights and obligations are transferred to someone else Does not relieve assignor of liability Can be explicitly prohibited Escrow agent: Third party who holds moneys or documents on behalf of contract parties Distributes items in accordance with contract Can be attorney, financial institution, or title company

Standardized Form Contract Part I: Points particular to the deal Items to be negotiated (price, date of closing, distribution of expenses) Items that characterize the property (water source, zoning, flood zone status) Part II: Items that must be clear (the same for most transactions) Provisions for survey Proration procedure Disbursement of funds Recourses in case of default

Handling Funds Broker normally handles funds for a transaction Broker must put deposits in escrow Escrow account: An account holding funds dedicated for a particular purpose Must be with insured institution or title company At closing, money is disbursed in accordance with a closing statement

remedies for nonperformance Suit for damages: Always an option to both parties Rescission: both parties agree to return to pre-contract status Specific performance: Buyer can force seller to convey title Liquidated damages (seller): Seller can retain deposit if buyer backs out Rescission: Mutual agreement to cancel

real estate settlement procedures act Applies to virtually every home loan: Loans from federally chartered or insured institutions FHA and VA loans Loans to be sold to Fannie Mae or Freddie Mac

real estate settlement procedures act B. Requirements: Borrower to be provided information booklet Borrower receives good faith estimate of closing costs Closing statement must be HUD-1 form Closing statement available 24 hours before closing Kickbacks to closing-related vendors are prohibited Limit to lender escrow deposit requirement

real estate settlement procedures act Pre-closing requirements Good faith estimates the buyers closing costs Check property for encroachments Review zoning Property inspected; include termite inspection Verify seller’s required actions

real estate settlement procedures act D. Pre-closing actions of closing agent Prepare or obtain general warranty deed Prepare mortgage and note Prepare check from lender to the seller Prepare HUD-1 closing statement Obtain satisfaction of mortgage from sellers’ mortgagee confirming balance

real estate settlement procedures act Financial items in the closing Purchase price (what buyer pays) Earnest money deposit (buyer prepaid) Assumed mortgage (takes over payments) Purchase money mortgage (seller loans to buyer)

real estate settlement procedures act F. Prorated Items: Seller’s days, Buyers days Interest on assumed mortgage Existing insurance Property taxes

Preclosing Steps for Buyers Had property surveyed for encroachments Reviewed private restrictions for violations Reviewed zoning for neighborhood Examined estimated closing costs Ordered lenders title insurance Had property inspected Verified that seller has performed required tasks Arranged utility service transfers

Preclosing Steps for Sellers Order owner’s title policy Order termite inspection Order discontinuation of hazard insurance and utilities

Preclosing Steps for Lender Prepare or obtain general warranty deed Prepare mortgage and note Prepare check from lender to the seller Prepare HUD-1 closing statement Obtain satisfaction of mortgage from sellers’ mortgagee confirming balance

Financial Items at Closing Title insurance – owner’s Title insurance – lender’s Attorney – buyer Attorney – seller State doc. tax – Mtg. State doc. tax – Deed Intangibles tax – Mtg. Recording of new mtg. Recording of deed Brokerage commission Paid by seller Paid by buyer Generally paid by seller

real estate settlement procedures act Post closing actions Recording the new mortgage Record the deed Pay brokerage commissions

homework assignment Key terms: Assignment, Consideration, Earnest money, Equitable title, Escrow, Legal title, Rescission, Specific performance, estoppel, proration Study Questions: 6, 8 How is the pro rata of miscellaneous charges accomplished? Example: insurance premiums, water and sewer charges, property taxes: review study questions one through four