©2011 Cengage Learning

Chapter 5 Real Estate Contracts and Mandated Disclosures California Real Estate Principles ©2011 Cengage Learning

Chapter 5 1. Discuss types of contracts and list the legal requirements for an enforceable contract. 2. Distinguish between the Statute of Frauds and Statute of Limitations. 3. Describe how contracts are terminated or discharged. 4. Explain the purpose and types of listing agreement. 5. Explain the purpose and main provisions of a purchase contract. 6. Describe when a counter offer form is used. 7. Discuss the purpose of an option contract. 8. Describe the major mandated disclosures required in a real estate transaction. ©2011 Cengage Learning

CONTRACT  An enforceable agreement between two or more legally competent persons.  A promise or mutual promise to do or not do specified acts.  For consideration Money Services Forbearance  Legal object “Honor Thy Contract” ©2011 Cengage Learning

TYPES OF CONTRACTS EXPRESS Written or Oral OR IMPLIED Acts of Parties BILATERAL Both Parties Obligated UNILATERAL One Party Obligated EXECUTORY Yet to be Performed More action required EXECUTED Fully Performed Contract complete ©2011 Cengage Learning

VOID No Contract No legal effect No one can enforce it An essential element is missing: Capacity or Mutual Consent or Lawful Object VOIDABLE Able to be Enforced or Voided only by the Injured Party; Other side can’t cancel Lack of Capacity Fraud, Undue Influence, Duress, Menace UNENFORCEABLE Not able to be enforced Was not put in writing Property does not Exist Statute of Limitations has run out VALID Fully Enforceable A binding contract All Essentials Included No Negative Influences ©2011 Cengage Learning

ESSENTIAL ELEMENTS OF A VALID CONTRACT 1.Capable parties (Emancipated minor or Age 18+) 2.Mutual Consent (Offer and Acceptance) 3.Lawful Object (Cannot break law) 4. Sufficient Consideration (Anything of value) -Money -Goods -Promises -Services 5. Must be in writing to be enforceable by a court of law as stipulated by the Statute of Frauds ©2011 Cengage Learning

BREACH OF CONTRACT Anticipation of/or actual legal action constituting default remedies 1. Action by the parties:  Cancel or Rescind 2. Legal remedies:  Liquidated Damages  Actual Money Damages  Specific Performance  (Statute of Limitations) ©2011 Cengage Learning

TERMINATION OF CONTRACT Mutual Agreement Destruction of the property Written release Substituting -- Novation Rejection of Contract Impossibility of performance Incapacity of Either Party Counter Offer Completed Performance ©2011 Cengage Learning

STATUTE OF LIMITATIONS Provides deadline for filing a court action Examples: Must file within: 1 Year Against Bank for Forged Check 2 Years Oral Contract Title Insurance Matter 3 Years Trespass Fraud or Mistake (3 years from discovery) 4 Years Written Contract 10 Years Judgment ©2011 Cengage Learning

RESIDENTIAL LISTING AGREEMENTS A contract between the Principal (Seller) and Agent (Broker) that: Authorizes agent to find buyer or tenant Establishes the commission (Note: Commissions are negotiable) Lists the a. delegated powers to broker, as agent b. terms and conditions that the seller will sell c. amount of the broker’s commission and when earned d. has a definite termination date ©2011 Cengage Learning

Open listing Owner has contract with several agents Commission paid only to lst agent with acceptable offer Owner may sell property without a commission No definite termination date required ©2011 Cengage Learning

Exclusive Agency Listing Only one agent is employed to represent the principal (seller) Listing broker may share commission with subagent who finds a buyer Seller reserves the right to sell the property without paying a commission Must contain a definite termination date ©2011 Cengage Learning

Exclusive Right-to-Sell Only one agent is employed to represent the principal (seller) Commission to agent regardless of who sells the property Owner liable for commission if owner withdraws or makes unmarketable MUST have a definite termination date Cooperating agents are often used via MLS Most common agency used in the industry ©2011 Cengage Learning

Net Listing Can be an open or an exclusive listing Seller and broker agree seller is to receive a fixed amount Broker earns everything over the net amount guaranteed to the seller Broker must reveal the exact selling price to buyer and seller before closing and the amount of commission earned Not frequently used in the industry ©2011 Cengage Learning

MULTIPLE LISTING SERVICE (MLS) A real estate organization. Pools agent listings with other agents. Shares market information on property features, price, terms of sale, availability. Written contract with membership rules. Commission split for cooperating broker. Usually a computerized database of information. Increases market exposure. Owner must five written permission to submit their property on the MLS. Controlled by local association members ©2011 Cengage Learning

THE REAL ESTATE PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS A. Commonly called the deposit receipt An agreement between principal and agent B. Functions of a Deposit Receipt: 1. Serves as a receipt of funds broker received 2. May create a binding purchase contract 3. Requires agency election 4. Reaffirms commission 5. Requires good faith consideration 6. Party must receive a copy of what they sign at the time they sign it. ©2011 Cengage Learning

Other important features: 1. An enforceable legal contract 2. Buyer’s offer to purchase 3. Buyer may withdraw the offer any time before seller’s acceptance communicated back to buyer. 4. Lists all terms and conditions (CLAP) 5. Specifies the time: A. Time buyer may disapprove B. Disclosure defects prior to contract 6. Agent must submit all offers after received ©2011 Cengage Learning

THE DEPOSIT RECEIPT (Important Features) ash oans greements ossession And Disclosure ©2011 Cengage Learning

Summary of Major Mandated Disclosures Real Estate Agency Relationship Real Estate Transfer Disclosure Statement Residential Environmental & Earthquake Hazards Disclosure Natural Hazard Disclosure Statement Common Interest Development General Information Seller Financing Addendum & Disclosure Statement OTHER: - Megan’s Law - Military Ordinance Location - Home Inspection Notice - Water Heater Bracing/Smoke Detector Notice ©2011 Cengage Learning

DISCLOSURE Environmental hazards Earthquake disclosure (Priolo-Almquist) Asbestos Formaldehyde Lead-based paint Radon gas Hazardous waste Household hazardous waste Affirmative duty to disclose ANY known environmental hazard affecting property ©2011 Cengage Learning

Residential Earthquake Hazards Report Disclose known weaknesses Built prior to 1960 = seller must provide buyer booklet “The Homeowners Guide to Earthquake Safety Seller required to disclose weaknesses Seller’s agent required to provide booklet Report: seller to fill in and give to buyer Seller signs one and gives it to the agent Buyer signs one and gives it to seller. ©2011 Cengage Learning

Easton v. Strassburger The broker has an affirmative duty to:  CONDUCT a reasonably, competent and diligent INSPECTION of residential (1-4) property, and to  DISCLOSE to prospective purchasers  ALL FACTS revealed by the inspection that MATERIALLY affect the  VALUE or DESIRABILITY of the property ©2011 Cengage Learning

REAL ESTATE TRANSFER DISCLOSURE (TDS) Material facts affecting value or desirability of the property relevant to a person making an informed decision Seller and real estate agents are required to disclose defects ( Easton v Strassburger ) that affect the value Agents has affirmative duty to inspect, inquire, disclose, recommend, document. ©2011 Cengage Learning

THE NEGOTIATING PROCESS When buyer (offeror) makes an offer, the offer may Be withdrawn Expire Be changed Be accepted The seller (offeree) may Accept Reject Counter When seller counters, the buyer may Accept Reject Counter the counter ARC ©2011 Cengage Learning

THE DEPOSIT RECEIPT Steps to Bind the Parties: Offer Acceptance Communication of acceptance ©2011 Cengage Learning

COUNTER OFFER When the Seller changes terms of buyer’s offer in ANY WAY. Counter REJECTS the original offer. If buyer accepts the counter, this must be communicated in writing to the seller. ©2011 Cengage Learning

Other Contracts:  Option: Right to buy in the future. Optionee = buyer Optionor = seller  Exchange contract 1031 IRC Trade one property for another under specific tax guidelines allowable by statute. ©2011 Cengage Learning

Review Quiz Chapter 5 1. Buyer makes a written bonafide offer to purchase, and seller signs the acceptance. A contract is first created: a. When buyer receives proper communication of seller’s acceptance b. Immediately upon seller’s acceptance c. When the buyer and seller sign escrow instructions d. When the broker presents the offer to the seller ©2011 Cengage Learning

Review Quiz Chapter 5 2. The law that states real estate contracts must be in writing to be enforceable is called the statute of: a. Frauds b. Time contracts c. Limitations 3. All of the following are essential for a valid real estate contract, except: a. Lawful object b. Mutual consent c. Capable parties d. Parole evidence ©2011 Cengage Learning

Review Quiz Chapter 5 4. An executed contract is a contract that is: a. Signed b. In writing c. Completed d. Recorded 5. An owner gives Ace Realty an exclusive right to sell listing for 90 days. Thirty days later the owner finds a buyer and seller the property with the services of Ace Realty. The: a. Owner owes Ace Realty a commission b. Owner does not owe a commission c. Sale is voidable d. Two of he answers are correct ©2011 Cengage Learning

Review Quiz Chapter 5 6. When the owner of a piece of leased property gives the lessee an option to buy, the option: a. Requires the optionee to complete the sale b. Is a lien on the seller’s title c. Requires no consideration or fee d. Is not a purchase contract until exercised ©2011 Cengage Learning

Review Quiz Chapter 5 7. If the seller refuses to sell after signing a valid purchase contract and the buyer wants the property instead of money damages, the buyer will sue for: a. Specific performance b. Reversion of title c. Damages d. recission ©2011 Cengage Learning

Review Quiz Chapter 5 8.If the property in question is intended to be the home of the buyer, the CAR deposit receipt liquidated damage clause limits the buyer’s liability upon default. The maximum liability for the buyer is the amount of the deposit or what percentage of the sales price, whichever is the lesser? a. 3% b. 5% c. 10% d. There is no limit ©2011 Cengage Learning

Review Quiz Chapter 5 9. A real estate agent may legally refuse to show property available for sale to a person of a minority race if the: a. Agent feels the home was not suited for the people b. Owners were out of town and had left instructions that the home was not to be shown to anyone during their absence c. Owners had given specific instructions against showing the home to minority buyers d. Agent felt the buyers would not like the location ©2011 Cengage Learning

Review Quiz Chapter Four separate co-buyers of a parcel of land signed a deposit receipt contract at different times and places. A copy must be: a. Given to the first signer only b. Given to each at the time they sign c. Given to the first and last signers only d. Sent to each one after the last one signed ©2011 Cengage Learning

Answers Review Quiz Chapter 5 Real Estate Contracts 1.A6. D 2.A7. A 3.D8. A 4.C9. B 5.A 10. B ©2011 Cengage Learning