Chapter 14:

Chapter 13:Contracts for Saleand ClosingCopyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin1Contract for Sale: The Most Important Document in Real Estate?Determines price and terms of the transactionDefines property interest being conveyedDetermines the granteeDetermines other conditions of the transactionFinancingDate of occupancyAny repairs or other conditions of the sale13-22Required Elements of a ContractAll contracts:Competent partiesLegal objectiveOffer and acceptanceConsiderationNo defects to mutual assentContract for sale of real estate:In writing (per Statute of Frauds)Proper description of property

13-33A Closer Look at RequirementsCompetent partiesOf legal ageNot incapacitated at time of signingAppropriate official if representing a corporationPower of attorney if acting for another personLawful intentOffer and acceptanceConsiderationNo defects to mutual assentIn writingLegal Description should be used13-44Legal vs. Equitable TitleLegal title: Ownership of a freehold estateEquitable title: Right to obtain legal titleBuyer obtains equitable title when a contract for sale of real estate is fully signed13-55Would 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 13-66Problems 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 13-77Advantages of Form ContractsNeutral (not prepared by opposite party)Ready-made treatment of detailsProrationsInspectionsPerformance datesMany othersLocal real estate boards are a good sourceUp-to-date with current relevant lawAdapted to locally important issuesRadon risk Flood plainInsulation qualityWater supplyGenerally neutral between the buyer and seller13-88Risks with Standard Form ContractsMay treat some issues too lightlyPerpetual struggle on contract detailAttorneys: More detail reduces future disputesBrokers: Long contracts put a chill on negotiationsResolution: Bar Assn.-Realtors jointly drafted contract form Inappropriate and inadequate application of a form contract:Residential contract for apartment propertyResidential contract for undeveloped land13-99Components of a Form ContractPart I: Points particular to the dealItems 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 surveyProration procedureDisbursement of funds Recourses in case of default13-1010Handling of FundsBroker normally handles funds for a transactionBroker must put deposits in escrowEscrow account: An account holding funds dedicated for a particular purposeMust be with insured institution or title companyAt closing, money is disbursed in accordance with a closing statement13-1111Contract TerminologyContingent contract: Obligation of a party to perform depends on one or more conditions being metAssignment: One partys contractual rights and obligations are transferred to someone elseDoes not relieve assignor of liabilityCan be explicitly prohibited

13-1212Contract Terminology (continued)Escrow agent: Third party who holds moneys or documents on behalf of contract partiesDistributes items in accordance with contract Can be attorney, financial institution, or title company13-1313Remedies of Buyer and SellerSuit for damages: Always an option to both partiesSpecific performance: Buyer can force seller to convey title Liquidated damages (seller): Seller can retain deposit if buyer backs outRescission: Mutual agreement to cancel13-1414Roles of Brokers and Lender in the TransactionSelling broker: No legal role after contract is signed; facilitator for buyerListing broker: May handle closing if no lender is involvedMay assist in retaining services for seller Lender:RequirementsOften handles closing13-1515Real Estate Settlement Procedures ActApplies to virtually every home loan:Loans from federally chartered or insured institutionsFHA and VA loansLoans to be sold to Fannie Mae or Freddie MacRequirements:Borrower to be provided information bookletBorrower receives good faith estimate of closing costsClosing statement must be HUD-1 formClosing statement available 24 hours before closingKickbacks to closing-related vendors are prohibitedLimit to lender escrow deposit requirement13-1616Financial Items in a ClosingPurchase priceEarnest money depositAssumed mortgagePurchase money mtg.Prorated ItemsInterest on assumed mtg.Existing insuranceProperty taxes

Buyer paysBuyer has prepaidBuyer takes over from sellerSeller loans to buyer

Buyer pays, receives creditSeller paid, receives creditBuyer pays, receives credit

13-1717Financial Items ina Closing (continued)Title insurance ownersTitle insurance lendersAttorney buyerAttorney sellerState doc. tax Mtg.State doc. tax DeedIntangibles tax Mtg.Recording of new mtg.Recording of deedBrokerage commissionPaid by sellerPaid by buyerPaid by buyerPaid by sellerPaid by buyerGenerally paid by sellerPaid by buyerPaid by buyerPaid by buyerPaid by seller13-1818Proration Property Tax: ExampleClosing date: May 14 (365-day year)Annual property tax: $500

Jan. 1Dec. 31May 14133 days232 daysSellers daysBuyers daysSellers share of tax:133365x $500 = $182.1913-1919Proration of Insurance: ExampleClosing date: March 16 (365 day year)Prepaid Insurance: Dec. 15 to Dec. 14, $250 per yearDec. 15Dec. 14Mar. 1691 days274 daysSellers daysBuyers daysBuyers share of insurance:274365x $250 = $187.6713-2020

Good Faith Estimate of Buyers Closing Costs

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13-2424Preclosing Steps of Buyers (Joneses)Had property surveyed for encroachmentsReviewed private restrictions for violationsReviewed zoning for neighborhoodExamined estimated closing costsOrdered lenders title insuranceHad property inspected Verified that seller has performed required tasksArranged utility service transfers13-2525Preclosing Steps of Sellers (Johnsons) Order owners title policyOrder termite inspectionOrder discontinuation of hazard insurance and utilities13-2626Preclosing Steps of Closing Agent (Lender)Prepare or obtain general warranty deedPrepare mortgage and notePrepare check from lender to the sellerPrepare HUD-1 closing statementObtain satisfaction of mortgage from sellers mortgagee confirming balance13-2727HUD-1 Settlement Statement

13-2828HUD-1, Page 2, Settlement Expenses

13-2929HUD-1, Page 2, Expense (top)

13-3030HUD-1, Page 2, Expense (bottom)

13-3131HUD-1, Page 1, Settlement Calculations

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13-33End of Chapter 13

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