Chapter 13Contracts for Sale and Closing

Real EstateFIN 331

The Most Important Document

A. Contract for Sale1. Determines price and terms of the transaction2. Defines property interest being conveyed3. Determines the grantee4. Determines other conditions of the transaction

a. Financingb. Date of occupancyc. Any repairs or other conditions of the sale

Requirements for a Contract for Sale

A. A [written] contract for sale must contain the following elements1. Competent parties: parties must be of minimum legal

age2. Legal objective: contract objective must be legal3. Offer and acceptance: contract binds parties to

specific actions in the future4. Consideration: the value given up by each party to the

contract5. No defects to mutual assent: the contract may be

broken if there are defects6. a proper legal description of the property7. Must be in writing (Statute of Frauds)

Statute of FraudsA 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.

1. Plaintiff: the party that initiates a lawsuit seeking a legal remedy2. Defendant: the party against whom some type of civil relief is sought

FORM OF THE CONTRACT FOR SALE

B. Elements of a complete contract (see Exhibit 13 – 1)1. Parties to the contract2. Description of the property (includes legal description)3. Purchase price4. Time for acceptance of offer and counter offers5. Closing date6. Date of the contract7. Date and Place of closing8. Financing terms of any9. Prorating of costs and expenses10. Required inspections and disclosures relevant to the property11. Assurance of good and marketable title12. Remedies for breach of contract13. Responsibilities of the escrow agent and broker14. Earnest money deposit (consideration)

FORM OF THE CONTRACT FOR SALE

C. Forms of Title1. Legal title: ownership of a freehold estate2. Equitable title: grants the right to obtain

legal title3. Buyer obtains equitable title when a contract

for sale of real estate is fully signed

D. Rationale for written contracts1. Reduce chances for fraud2. Avoid the possibility of promissory estoppel

Promissory Estoppel

A. Estoppel occurs when a party "reasonably relies on the promise of another party, and because of the reliance is injured or damaged“

B. Promissory Estoppel is an alternative to consideration as a basis for enforcing a promise.1. Prevents one party from withdrawing a

promise made to a second party if the latter has reasonably relied on that promise

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!

FORM OF THE CONTRACT FOR SALE

C. Contract Terminology1. Contingent contract: Obligation of a party to

perform depends on one or more conditions being met

2. Assignment: One party’s contractual rights and obligations are transferred to someone else

a. Does not relieve assignor of liabilityb. Can be explicitly prohibited

3. Escrow agent: Third party who holds moneys or documents on behalf of contract parties

a. Distributes items in accordance with contract b. Can be attorney, financial institution, or title company

Standardized Form Contract

A. Part I: Points particular to the deal1. Items to be negotiated (price, date of closing,

distribution of expenses)2. Items that characterize the property (water

source, zoning, flood zone status)

B.Part II: Items that must be clear (the same for most transactions)1. Provisions for survey2. Proration procedure3. Disbursement of funds 4. Recourses in case of default

Handling Funds

A. Broker normally handles funds for a transaction

B.Broker must put deposits in escrow1. Escrow account: An account holding funds

dedicated for a particular purpose2. Must be with insured institution or title

company

C.At closing, money is disbursed in accordance with a closing statement

REMEDIES FOR NONPERFORMANCE

A. Suit for damages: Always an option to both parties

B. Rescission: both parties agree to return to pre-contract status

C. Specific performance: Buyer can force seller to convey title

D. Liquidated damages (seller): Seller can retain deposit if buyer backs out

E. Rescission: Mutual agreement to cancel

REAL ESTATE SETTLEMENT PROCEDURES ACT

A. Applies to virtually every home loan:1. Loans from federally chartered or

insured institutions2. FHA and VA loans3. Loans to be sold to Fannie Mae or

Freddie Mac

REAL ESTATE SETTLEMENT PROCEDURES ACT

B. Requirements:1. Borrower to be provided information booklet2. Borrower receives good faith estimate of

closing costs3. Closing statement must be HUD-1 form4. Closing statement available 24 hours before

closing5. Kickbacks to closing-related vendors are

prohibited6. Limit to lender escrow deposit requirement

REAL ESTATE SETTLEMENT PROCEDURES ACT

C.Pre-closing requirements1. Good faith estimates the buyers closing

costs2. Check property for encroachments3. Review zoning4. Property inspected; include termite

inspection5. Verify seller’s required actions

REAL ESTATE SETTLEMENT PROCEDURES ACT

D. Pre-closing actions of closing agent1. Prepare or obtain general warranty

deed2. Prepare mortgage and note3. Prepare check from lender to the seller4. Prepare HUD-1 closing statement5. Obtain satisfaction of mortgage from

sellers’ mortgagee confirming balance

REAL ESTATE SETTLEMENT PROCEDURES ACT

E. Financial items in the closing1. Purchase price (what buyer pays)2. Earnest money deposit (buyer prepaid)3. Assumed mortgage (takes over

payments)4. Purchase money mortgage (seller loans

to buyer)

REAL ESTATE SETTLEMENT PROCEDURES ACT

F. Prorated Items: Seller’s days, Buyers days

1. Interest on assumed mortgage2. Existing insurance3. Property taxes

Preclosing Steps for Buyers

A. Had property surveyed for encroachmentsB. Reviewed private restrictions for violationsC. Reviewed zoning for neighborhoodD. Examined estimated closing costsE. Ordered lenders title insuranceF. Had property inspected G. Verified that seller has performed required

tasksH. Arranged utility service transfers

Preclosing Steps for Sellers

A. Order owner’s title policyB. Order termite inspectionC. Order discontinuation of hazard

insurance and utilities

Preclosing Steps for Lender

A. Prepare or obtain general warranty deed

B. Prepare mortgage and noteC. Prepare check from lender to the

sellerD. Prepare HUD-1 closing statementE. Obtain satisfaction of mortgage

from sellers’ mortgagee confirming balance

Financial Items at Closing

A. Title insurance – owner’sB.Title insurance –

lender’sC.Attorney – buyerD.Attorney – sellerE. State doc. tax – Mtg.F. State doc. tax – DeedG.Intangibles tax – Mtg.H.Recording of new mtg.I. Recording of deedJ. Brokerage commission

A. Paid by sellerB.Paid by buyerC.Paid by buyerD.Paid by sellerE. Paid by buyerF. Generally paid by

sellerG.Paid by buyerH.Paid by buyerI. Paid by buyerJ. Paid by seller

REAL ESTATE SETTLEMENT PROCEDURES ACT

A. Post closing actions1. Recording the new mortgage2. Record the deed3. Pay brokerage commissions

HOMEWORK ASSIGNMENT

A. Key terms: Assignment, Consideration, Earnest money, Equitable title, Escrow, Legal title, Rescission, Specific performance, estoppel, proration

B. Study Questions: 6, 81. How is the pro rata of miscellaneous

charges accomplished? Example: insurance premiums, water and sewer charges, property taxes: review study questions one through four