Real Estate Contracts

Contracts

Contracts – an exchange of promises by two or more persons to do or refrain from doing a particular act (agree to do/or not do something, promise’s that a court could enforce (law will enforce binding)

Types of Contracts:

Express – contracts in which the terms are stated in words, orally or written

Implied – contracts in which both its existence and terms are shown by the party’s acts or conduct

Bilateral – contracts that are a promise for a promise and must be signed by both parties, once the promise is made by both parties it is binding

Unilateral – contracts that are a promise by one party, which will induce another party to act, once the promise (act) is performed then the promise is binding

Executory – a contract in which something remains to be done, it is not finished

Executed – a finished contract, all terms have been fulfilled (could be the contract has been fully performed or has been signed)

Parol – contract that is not entirely in writing, either all or part of the contract was agreed to orally **Oral testimony is prohibited in court to establish the meaning of a real estate contract.

Written – contract is entirely in writing

Legal – contract is required or permitted by law

Illegal – not permitted by law

Enforceable – contract that meets all the essential element and compels performance

Unenforceable – contract even though valid in its inception, is not able to be enforced

Valid – contract binding and enforceable on all parties, everyone is bound, can be subject to Breech of Contract

Void – contract neither binding nor enforceable on any party, lacking at least one of the elements of a valid contract, never any legal existence, no contract, can not be made valid

Unenforceable – contract could be made valid by the acts of one of the parties (it can be fixed), currently not valid but could be rendered valid by the acts of one or more of the parties

Voidable – contract appears to be valid but one party has the right to void it, only one party is bound, considered a valid contract until the ‘wronged’ party takes action to make the contract void (example: enter into a contract with a minor – the minor can not be made enforceable, however the other side could be enforced or contract under duress, fraud, undue influence, etc.

Listing Contract – service employment contract

Possible Test Questions:1. Who must sign a contract? Only the person making the promise must sign a contract. (Not all parties need to sign)2. Give an example of a unilateral contract. A unilateral contract is a promise made by one party, which will induce another party to act. For example: a reward poster. The poster promises another party a reward but there is no promise from the other party (side) to locate the missing. 3. What one promise is in every listing contract? Commission (compensation of services) is in every listing contract. 4. If an individual enters into a contract, signs the contract, and is in escrow. Is the contract executory or executed? The contract is executory because the contract is not completed. The close of escrow would make the contract executed. 5. Is a lease executory or executed? A lease would be executory because you are still paying. The contract is on-going. 6. Is a void contract enforceable? No, a void contract is not enforceable because it is not a contract. tblr of parties are bound, so the contract can not be enforceable. 7. If a contract to sell community real estate is signed by one spouse only. What is the status of the contract? The status of the contract is an unenforceable contract. This means that at the present time the contract is not valid or enforceable, but it can be changed by one party to be made valid and enforceable by having the missing spouse’s signature added to the contract.

Essential Elements of a Valid Contract:

Competent Parties

Must be legally able to enter into a contract

Incompetent Parties: minor (under the age of 18, not beyond the age of majority), declared mentally incompetent (court/psychologist), under the influence of drugs or alcohol, under duress (forced), undue influence (stress), or unauthorized corporate officer or partner (if working with a corporation or partnership)

Offer and Acceptance

Meeting of the minds, mutual consent, both parties must show a willingness to be bound by the terms of the agreement

This must include the following: a verbal communication of asigned acceptance which is binding. Any offer can be withdrawn prior to the Seller’s acceptance.

If mutual consent is obtained by fraud, misrepresentation,

duress or mistake there is no real consent. To prevent fraud

through perjury, the Statue of Frauds requires mutual consent in

A lease for more than a year or contract of sale of land or

interest in land be evidence in writing by the signatures of the

parties.

Lawful Object

Must be lawful when the contract is made and possible by time for the

contract to be performed

Valid Consideration

Anything of value that is used to induce another individual into a

contract, that thing that induced the party to enter into a contract

(purpose), evidence, a reason for doing something (example: money,

property, services)

Description of Property

Reference information on the property, it does not necessarily need to

be a legal description, as long as a competent surveyor is able to

locate the boundaries of the property with certainty

Possible Test Questions:1. Is being an alcoholic, make a person incompetent? No, being an alcoholic does not make a person incompetent. An alcoholic could be in rehabilitation or not drinking at the time. 2. Is being illiterate, make a person incompetent? No, being illiterate does not make a person incompetent. In Arizona, a contract can be signed with an X, as long as it is witnessed, and it considered a valid signature. 3. What makes a contract binding? The Seller’s acceptance which is communicated back to the Buyer makes a contract binding. 4. When can a Buyer withdraw an offer? A Buyer can withdraw an offer anytime prior to the Seller’s acceptance. 5. Does every real estate sales contract have consideration?Yes, every real estate sales contract has consideration. Consideration is a reason for entering into a contract. 6. Is consideration in a sales contract always money?No, money is not always consideration in a sales contract. The consideration of love and affection is another consideration (reason for entering into a contract) that is valid. 7. Is earnest money considered to be consideration?Yes, earnest money is consideration. It is a reason for entering into a contract. 8. Does every seller’s contract have to have earnest money?No, you do not need to have earnest money. The consideration (reason for entering into the contract) of a contract without earnest money would the promise to pay the price indicated in the contract for the property.

Six Reasons for Terminating an Offer:1. An offer can be withdrawn by the offeror at any time before the offeree accepts, unless an option contract exists. An option contract is

contract to keep an offer open for a specified amount of time set in the

contract. 2. If a specified length of time in an offer ends, the offer ends upon expiration of that time. If no time is specified, the offer ends upon reasonable time, determined by the court.

3. Rejection of offeree4. Counter Offer – a rejection of the first offer, once a counter offer is extended the first offer (any previous offer) is no longer valid, other offer is off the table

5. Death or insanity of either party

6. Supervening illegality (a law was changed after the offer was made) three Points in an Acceptance:1. Must be expressed and unqualified – terms can not change2. Must be within the stated time limits3. Must be communicated to the offeror, according to local customs

Contingency – dependent upon, a contract could be dependent upon

(Example: dependent upon financing or selling of home)

Earnest Money – money to show that the Buyer’s intentions are serious, intent on buying the property, like a deposit

Licensees have the right to draft/fill out/ complete without charge any and all instruments incident to the sale, exchange, trade, renting or leasing of property – according to Arizona Constitution, Article XXVI, Section 1

When taking earnest money, you must do the following:

Must state the amount of earnest money being taken

Must state the form (check, cashier’s check, etc. ) of money

Must state where you will deposit the earnest money

Breech of Contract – when the contract is not fulfilled, failure and without legal excuse to perform any promise contained in the contract

Ways to Handle a Breech of Contract:
·Recision (all parties released from obligations and return to same position prior to the contract) This can be made mutual (both parties agree to set aside) or unilateral (induced by duress, fraud, etc. )

·Damages (sue the other party for damages and receive money)

·Liquidated Damages (contract cancelled and consideration already paid is forfeited to the injured party)

·Sue the other party for specific performance (require the other party to follow through with their part of the contract promise)

Earnest money can be forfeited if there is a Breech in Contract. An unfulfilled contract is a Breech in Contract. When one party does not follow through with their promise in the contract, it is a Breech in Contract. Novation – when an existing contract is replaced with a new one

Five Miscellaneous Real Estate Contracts:

Escrow InstructionsA document signed by the Buyer and Seller employing the escrow agent to carry out the terms of their purchase contract. **In event of a dispute, the purchase contract takes precedence over the escrow instructions. Escrow instructions are part of the purchase contract.

Promissory NoteIOU, promise to pay a certain sum of money during a certain period of time

OptionA contract to keep an offer open (like a regular purchase contract with an additional clause that gives the Buyer a stated number of days to make a final decision (called exercise the option) – it gives the Buyer time to see if the property is what they want – a time to choose whether they want it or not)**An option usually requires a valuable (large) consideration (reason for entering into the contract) in the form of money. Typically, this consideration is lost, if the Buyer chooses not to follow through with the option. **It is possible for a Buyer to sell their option on a property to another party. This is called assignable. Hint:

Optionor – Seller (giving the choice/ option)

Optionee – Buyer (has the choice/ option)

First Right of RefusalA contract that includes the right of one party to match the offer of another party, an offer in which the Seller was willing to accept. Example: If you are leasing a property, you might consider asking the owner of the property for a first right of refusal, if the owner ever decides to sell the property. This would give you the opportunity to either match the offer (price), which you make your offer take precedent over the offer the owner was willing to accept.

Land Contract (Agreement for Sale)A financing instrument that is an installment (time) contract for the sale of real property The buyer takes possession of property but does not receive legal title, until the contract is satisfied (paid in full)The Seller retains a Bare Legal Title (stripped of all rights) after the sale of the land and now owns personal property (the contract). The Buyer receives an Equitable Title or Equitable Conversion (a form that by its virtue makes the Buyer the owner of the land). Since the Buyer does not have a deed (instead a Land Contract), the Buyer can record the land contract which will protect their rights and making it public knowledge.

Hint:

Vendor – Seller

Vendee – Buyer

Example: A owns a house. A has a mortgage on the house. The mortgage company does not own the house. The mortgage company owns the mortgage on the house. The mortgage company does have the right to foreclose on the house in order to get back the debt. Foreclosure is the forced sale to pay for property. However, if the foreclosure sale money is beyond the owned amount on the house, A would receive the monies beyond what was owned.

Example: A (Vendee) has a land contract with B (Vendor). A (Vendee) is in default on payments to B (Vendor). In this case A (Vendee) does not own the land; instead A has the land contract (paper). B (Vendor) can ask the court for forfeiture. Forfeiture is when the seller takes back the land.

**This is the only time in real estate that the seller can get back their property.

***Arizona law states that the more an individual stands to loose, the more time the individual has to rectify the problem.

****Steps of Forfeiture:

If the Vendee has paid less than 20% of the purchase price, then the Vendor must wait 30 days before forfeiture. If the Vendee has paid 20% or less than 30% of the purchase price, then the Vendor must wait 60 days before forfeiture. If the Vendee has paid 30% or less than 50% of the purchase price, then the Vendor must wait 120 days before forfeiture. If the Vendee has paid 50% or more of the purchase price, then the Vendor must wait 9 months before forfeiture. Example: $100,000 Sale Price $200,000 Present Day Price – $32,000 Down payment +$ 51,000 Paid To Date $68,000 Money still owed $149,000 Equity *** $100,000 Purchase Price-$ 51,000 paid$49,000 Still owes – therefore Vendee gets 120 days to pay strict Performance Clause – If during the forfeiture process, the Vendor accepts any partial payment from the Vendee, then the forfeiture is over

Acceleration Clause – the lender can call up the entire debt, however once this is done it can no longer go through forfeiture and instead becomes a foreclosure. This means the Vendor can not take back the property, only the portion of money owned after the sale of the land. This foreclosure goes through the judicial process, as in a mortgage foreclosure.

Possible Test Questions:
1. Can you take a post-dated check from a Buyer for earnest money? Yes, you can take a post-dated check from a Buyer for earnest money. However, you must inform the Seller that the earnest money is in the form of a post-dated check.
2. Is every land contract a carry back? Yes, every land contract is a carry back. A carry back is when the Seller carries the loan for the Buyer.
3. Is every carry back a land contract?No, not every carry back is a land contract. 4. What is the title called when a purchase contract has been signed by all parties, prior to escrow? Equitable Title is the title when a purchase contract has been signed by all parties, prior to escrow. 5. Could a death cancel a listing? If either the Seller or Broker die, a listing is cancelled. 6. Can the Buyer/Seller’s heirs be forced to follow through with a contract? Yes, the heirs can be forced to follow through, unless the heirs are minors.
Listing/Purchase Contracts

Earnest money is money given to the Seller as evidence of the Buyer’s good faith and intention to complete the transaction. Earnest money is part of the purchase contract. Listing contracts are used by the Seller. These listing contracts provide employment of a Broker to sell a property. There are different parts to a contract, depending on whether it is a listing or a purchase contract.

Discover more vocabulary and valuable points to these contracts, by continuing to read more.

Listing/Purchase Contracts

Listing Contract – a copy of the listing must be given to the principal (Broker) upon execution, hence the minimum number of copies to prepare (counting the original) would be two – one for the principal and one for the agent

There are no standard forms for listing properties in Arizona.

Listing Contracts Must Include:
1. Being in Writing
2. Include the date of inception and date of expiration (there is no requirement of certain number of days for a listing)
3. Terms and Conditions (what the Seller wants, this defines the services)
4. Stated compensation (how much is the fee – $,% or personal property)
5. Description of property (not every contract needs a legal description, not essential)
6. Signatures

Four Kinds of Listings:
1. Exclusive Right To Sell – Seller owes commission, even if the Seller sells the property himself, Broker is due of commission, no matter who sell the property (including the owner himself), one Broker is given the sole and exclusive right to sell the property for definite term of time, and if the property is sold by anyone within that time, including the owner, the Broker is entitled to a commission Should be approached as being the best service to the client Only get paid, when the job gets done Many times Buyers, who go to homes for sale by owner reduce the money offered in the sale because they take off a commission (most often the Buyer gets the benefit, not the Seller of a home for sale by owner) 2. Exclusive Agency – Broker is due a commission, no matter who sells the property, except for the owner, one broker is chosen as exclusive agent but the owner reserves the right to sell the property without obligation to the broker
3. Open Listing (General) Broker due a commission only if sells the property, a owner lists property with a number of brokers with the commission payable only to the broker who sells the property and the owner reserves the right to sell the property without obligation to any broker (a seller can have lots of these open listings with a variety of real estate companies – whichever ones sells the property that one gets the commission) (open listings are not placed in the Multiple Listing)
4. Net – Seller wants a net amount for himself, everything is excess of that amount is a brokerage commission, owner is to receive a certain sum of money as cash after a consideration of all selling expenses and existing loan payoffs and the broker is free to offer the property for sale at any price higher than the listed price and the broker’s compensation is the amount over and above the seller’s price needed (how much the Broker gets paid) (This is illegal in some states, but not in Arizona) Seller’s agent is obligated to share all offers with the Seller, even if that means not getting a commission. This listing is discouraged by the National Association of Realtors because of the problems it can cause.

Common Clauses in Residential Listing Contracts:
1. Owner’s permission to advertise property.
2. Owner’s permission to place sign on property.
3. Owner’s permission to accept earnest money on their behalf and to issue receipt.
4. Agreement of owner to furnish title insurance and convey title.
5. Agreement of owner to pay commission
6. Agreement of a 90 day clause (provides that if property is sold by owner within a stated period of time after the expiration of the listing to any party with whom the broker negotiated during the listing term, the owner must pay broker commission
7. Hold-Harmless Clause – agreement by owner to hold agent harmless from any liability or damage arising from incorrect information supplied by the owner 8. Statement that property is offered without respect to race, color, sex, religion, national origin, familial status or handicap according to the Fair Housing Laws 9. Statement that commission rate was not set by the Association of Realtors

Mere Volunteer – A broker that accepts a verbal employment and then sues for a commission (merely volunteering services)

procuring Cause –

Who actually caused the sale or purchase of a property

Multiple Listing Service (MLS) – A cooperative effort wherein brokers sell properties listed by other member brokers with an agreement to split the earned commission

Multiple Listing –

It is an exclusive right to sell or exclusive agency listing with the additional authority of the broker to distribute the listing to other members of the Multiple Listing Service.

Sherman Anti-Trust Act –

Law created to maintain business competition, any conspiracy between businesses to manipulate or control the marketplace in order to limit consumer choices for products/services would be a violation of this act.

Examples of Violations:

price fixing –

Agreements between brokers to set commission rates

Group Boycotts –

Brokers agree not to do business with a particular company

Agreements not to compete in certain areas –

Brokers agree not to work in certain parts of the town

More Questions/Answers About Listing/Purchase Contracts:

1. What is a listing contract?

A listing contract is an employment or compensation contract.

2. Are verbal listings illegal?

Verbal listings are illegal because Arizona law requires that all listings must be in writing.

3. Must a listing contract have a monetary amount (commission) written on it?

No, a listing contract does not need a monetary amount (commission) listed on it. There are a variety of means of receiving compensation such as money, % or personal property. However, a stated compensation must be on the listing contract.

4. Can you still receive compensation (commission) if you do not have it in writing?

No, you may not receive compensation (commission), unless it is written down. This is Arizona law.

5. What is the difference between an Exclusive Right To Sell and an Exclusive Agency?

The difference between an Exclusive Right to Sell and an Exclusive Agency is that the Exclusive Right to Sell gives a Broker a commission no matter who the listing agent sells to, even if the seller sells the property. An Exclusive Agency pays a commission to the Broker to unless the Seller sells the property.

Example: Listing

Homeowner wants to sell home for $100,000 Cash

Listing Agent finds a ready willing and able buyer to purchase for $100,000

The Seller turns down the offer.

1. Does the Seller owe a commission to the listing broker?

Yes, the seller does owe a commission because the services were given for the listing. Broker may sue the Seller.

2. Can the Broker force the Seller to sell?

No, the Broker can not force the Seller to sell. The seller did not promise to sell.

3. Can the Buyer sue the Seller for specific performance?

No, the Buyer can not sue the Seller for specific performance because the Seller did not sign, there was no performance given.

4. Which of the following is not a legal listing in Arizona?

Exclusive Agency Exclusive Right to Sell Multiple Listing

Multiple Listing is not a legal listing in Arizona. A multiple listing is an organization that posts listings for Brokers.

5. What kind of listing is illegal in some states, but not in Arizona?

Net Listing is illegal in some states, but not in Arizona. Net listing is when the Seller wants a net amount for himself, everything is excess of that amount is a brokerage commission (how much the Broker gets paid).

purchase Contracts –

Contract for the purchase and sale of real property in which the Buyer agrees to purchase for certain price and the Seller agrees to convey

purchase Contract Should Include:

Minimum number of copies counting the original is four

Should be neat and legible

Should be carefully worded, without ambiguity

Avoid using uncommon abbreviations

Should tell the whole story about the agreement between the two parties, with nothing left to oral understanding

Signatures of all parties in proper spaces

Any changes to contract must be initialed by all parties (indicate date and hour of the change)

Earnest Money –

Sum of money paid by the Buyer, usually at the time that the offer is signed, as evidence of the Buyer’s good faith and intention to complete the transaction.

Earnest Money Requirements:

purchase contract is the receipt for the earnest money (copy is given to the Buyer at the time of signing)

Form of earnest money (cash, check, etc. ) must be described on contract

Accepting a post-dated check as earnest money can be dangerous

Earnest money accepted by salesperson should be turned over to the broker promptly and not later than the close of the next business day

Earnest Money Status:

At the time the Buyer makes an offer, the broker becomes the trustee for the money (earnest money). The Buyer can, at any time, prior to the acceptance of the offer by the seller, withdraw the offer and get earnest money back.

When a broker gets an offer accepted by the Seller, the broker becomes a trustee of the money (earnest money) for both the Buyer and the Seller. This money should be kept intact by the broker. In case, the money needs to be returned to the Buyer, if the Seller can’t show good title to the property or if the Seller defaults on the contract. If the Buyer defaults, the broker will have to account for it to the Seller.

Arizona Residential Purchase Contract Clauses Include:

Instruction by the Seller to the broker to deposit the earnest money into the broker’s trust account or in a neutral escrow depository

Agreement that when the loan is to be assumed, the loan figure in the contract is an approximation

Specifying the alternatives of the Seller, if the Buyer breaches contract

Giving definite time allowance to the Seller to ‘perfect title’, if the title search comes up with a cloud

Agreement that the evidence of title is the issuance of a Title Insurance Policy, insuring the purchaser in the full amount of the purchase price

Agreement upon an escrow a closing date

Agreement by the seller to maintain the property and be responsible for the heating, cooling, plumbing, electrical appliances, etc. up to a specific point in time

Statement ‘pin pointing’ who would suffer the risk of loss to property by reason of fire, vandalism, flood, etc. , after the creation of contract between the Buyer and Seller

Statement that the Buyer is of legal age

Statement placing the Buyer into a position of caveat emptor (Let the Buyer Beware)

Statement that the contract is not binding unless, executed by both the Buyer and Seller

‘Time is of the Essence’ in which punctual performance is an essential requirement of the contract, prevents unjust delaying on either the part of the Buyer or Seller when closing escrow

Agreement by Buyer and Seller to execute escrow instructions within 10 days after the acceptance of the offer

Agreement to pay the escrow fee and other costs of the transaction

Expressed time limit given to the Seller to respond to the Buyer’s offer

Agreement by the Seller to pay the broker a stated sum of money as commission

Agreement that if the Buyer breaches the contract and the Seller declares the earnest money forfeited, the Seller will share the earnest money 50/50 with the broker, instead of paying a commission

Commissioner’s Rules Concerning Listings/Purchases:

All offers on a property must be promptly submitted to the principal, delays will not be tolerated by the Real Estate Commissioner.

Licensees are not permitted to use ‘high pressure’ tactics on either parties

Licensees must guard against inaccuracies in their representations to clients (Misrepresentations are actionable by law, failure to disclose restrictions by zoning laws or other conditions affecting the use of the property is misrepresentation)

Negotiations concerning property listed with one licensee shall be conducted through the listing broker, unless the listing brokers and principal waive such a requirement or no licensed representative of the listing broker is available for 24 hours

Licensee should not discourage any party to a real estate transaction from seeking the advice of an attorney

More Questions/Answers About Listing/Purchase Contracts:

1. If a dispute arises from a poorly written contract, what will happen?

If a dispute arises from a poorly written contract, it will be construed most strongly against the party, who wrote the contract. In event of a dispute, the handwritten word takes precedence over the pre-printed word (more important and enforceable).

2. What does Article 26 of the Arizona Constitution state?

Article 26 of the Arizona Constitution states that real estate agents can (have the authority to) write contracts.

3. Must a purchase contract include earnest money?

No, a purchase contract does not have to have earnest money. However, earnest money has become a powerful tool in convincing a Seller to go with a purchase contract.

4. When earnest money is taken, what must the purchase contract state?

When earnest money is taken, the purchase contract must state three important elements: the amount of the earnest money, the form is which it was taken (cash, check, etc. ), and where this earnest money is to be deposited.