1. Chapter 13 Contracts for Sale and Closing
Real Estate
FIN 331

2. 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

3. 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)

4. 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:
(1) Contracts for the sale of land; (2) Contracts for the sale of goods above a certain dollar amount; (3) Contracts that cannot be completed in less than one year; and (4) 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

5. 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)

6. 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

7. 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

8. 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!

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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)

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

19. 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

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

21. 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

22. 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

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

24. 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