Understanding Real Estate Contracts for Sale: Requirements, Risks, and Advantages, Assignments of Real Estate Management

Download Understanding Real Estate Contracts for Sale: Requirements, Risks, and Advantages and more Assignments Real Estate Management in PDF only on Docsity! 1 Copyright © 2008 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Professor Thomson Fin 3433 Chapter 14: Contracts for Sale and Closing 14-2 Contract for Sale: The Most Important Document in Real Estate 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 14-3 Required Elements of a Contract Competent parties Legal objective Offer and acceptance Consideration No defects to mutual assent Contract for sale of real estate: • Written (per Statute of Frauds) • Proper description of property 14-4 A Closer Look at Requirements Competent parties • Of legal age • Not incapacitated at time of signing • Appropriate official if representing a corporation • Power of attorney if acting for another person Lawful intent Offer and acceptance Consideration No defects to mutual assent In writing Legal Description should be used 14-5 Legal vs. Equitable Title Legal title: Ownership of a freehold estate Equitable title: Right to obtain legal title Buyer obtains equitable title when a contract for sale of real estate is fully signed 14-6 Would This Be a Valid Contract? Competent parties? Legal objective? Offer and acceptance? Consideration? Defects to mutual assent? In writing? Valid description? I, Ben Buyer, agree to buy and pay $20,000, and I, Cecil Celler, Agree to sell the parcel of real estate at 1013 NE Seventh Road in North Platte, Nebraska. Ben Buyer: Cecil Celler 2 14-7 Problems with This Contract? What are boundaries of 1013 NE Seventh Road? When is the closing? When does Ben get possession? Cash sale? Earnest money deposit? Must Cecil deliver marketable title? Is a quitclaim deed acceptable? Any fixtures (e.g., fences?) Is Cecil married? Are there structures? Condition now? Condition at closing? I, Ben Buyer, agree to buy and pay $20,000, and I, Cecil Celler, Agree to sell the parcel of real estate at 1013 NE Seventh Road In North Platte, Nebraska. Ben Buyer: Cecil Celler 14-8 Advantages of Form Contracts Neutral (not prepared by opposite party) Ready-made treatment of details • Prorations • Inspections • Performance dates • Many others Local real estate boards are a good source • Up-to-date with current relevant law • Adapted to locally important issues Radon risk Flood plain Insulation quality Water supply • Generally neutral between the buyer and seller 14-9 Risks with Standard Form Contracts May treat some issues too lightly • Perpetual struggle on contract detail • Attorneys: More detail reduces future disputes • Brokers: Long contracts put a chill on negotiations • Resolution: Bar Assn.-Realtors jointly drafted contract form Inappropriate and inadequate application of a form contract: • Residential contract for apartment property • Residential contract for undeveloped land 14-10 Components of a 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 14-11 Handling of 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 14-12 Sales Contract - 1 Deposit receipt Legal description Addressing fixtures problem 5 14-25 Sales Contract - 14 What are the remedies of the seller?What are the remedies of the buyer? How do you modify this contract? 14-26 Sales Contract - 15 Is time “of the essence,” i.e., does ANY breech of a deadline constitute default? What must seller provide Concerning any leases? Who pays unpaid assessments for utility or street improvements begun prior to the “effective date”? 14-27 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 14-28 Contract Terminology (continued) 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 14-29 Remedies of Buyer and Seller Suit for damages: Always an option to both parties 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 14-30 Roles of Brokers and Lender in the Transaction Selling broker: No legal role after contract is signed; facilitator for buyer Listing broker: • May handle closing if no lender is involved • May assist in retaining services for seller Lender: • Requirements • Often handles closing 6 14-31 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 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 14-32 Financial Items in a Closing 1. Purchase price 2. Earnest money deposit 3. Assumed mortgage 4. Purchase money mtg. Prorated Items 5. Interest on assumed mtg. 6. Existing insurance 7. Property taxes Buyer pays Buyer has prepaid Buyer takes over from seller Seller loans to buyer Buyer pays, receives credit Seller paid, receives credit Buyer pays, receives credit 14-33 Financial Items in a Closing (continued) 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 Paid by buyer Paid by seller Paid by buyer Generally paid by seller Paid by buyer Paid by buyer Paid by buyer Paid by seller 14-34 Proration – Property Tax: Example Closing date: May 14 (365-day year) • Annual property tax: $500 Jan. 1 Dec. 31May 14 133 days 232 days Seller’s days Buyer’s days Seller’s share of tax: 133 365 x $500 = $182.19 14-35 Proration of Insurance: Example Closing date: March 16 (365 day year) • Prepaid Insurance: Dec. 15 to Dec. 14, $250 per year Dec. 15 Dec. 14Mar. 16 91 days 274 days Seller’s days Buyer’s days Buyer’s share of insurance: 274 365 x $250 = $187.67 14-36 Good Faith Estimate of Buyer’s Closing Costsood aith sti ate of uyer’s losing osts 7 14-37 Good Faith Estimate of Buyer’s Closing Costsood aith sti ate of uyer’s losing osts 14-38 Good Faith Estimate of Buyer’s Closing Costs (continued) ood Faith sti ate of uyer’s losing osts (continued) 14-39 Preclosing Steps of Buyers (Joneses) 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 14-40 Preclosing Steps of Sellers (Johnsons) Order owner’s title policy Order termite inspection Order discontinuation of hazard insurance and utilities 14-41 Preclosing Steps of Closing Agent (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 14-42 Settlement Statementettle ent tate ent