Chapter 4: Real Estate Contracts and Agency Flashcards
Unilateral Contract
Binds only one party
Bilateral Contract
An exchange of promises, which binds both parties.
A sales contract is a bilateral contract. Both parties make promises, and either or both can be sued.
Implied Contract
Actions or evidence. This agreement is neither written nor discussed. It is
simply performed.
Examples: taking a taxi, ordering from a menu, filling your gas tank and paying
at the pump with a credit card.
Express Contract
Written or stated.
Examples: a written sales contract, a verbal lease agreement, a written listing, a verbal buyer representation agreement.
What must a valid AND enforceable contract have?
COLIC
- Competent parties
- Offer and acceptance
- Legal purpose
- In writing
- Consideration
Executed vs Executory Contract
executed/ fully executed: used when all the terms and conditions of the contract have been met and carried out. It is considered
performed or discharged.
executory contract: a contract that is signed but not yet carried out
Valid vs. Void
Valid contract: meets the requirements of a contract 1,2,3, and 5.
Void/invalid contract: has no binding effect on the parties who made it – for example,
an agreement with someone who is documented as insane.
Voidable vs. Unenforceable
Voidable agreement: one party has the right to withdraw (a minor, someone who signed under duress, or under the influence of alcohol or drugs, an
injured party, etc.). Absence of legal ability, competence, or qualifications can be described as incapacity. The contract can be said to be “voidable due to incapacity.”
Unenforceable agreement is one that violates the Statute of Frauds and will not be enforced by the courts – the verbal real estate agreement
Default
the non-performance of a duty under a contract. When one of the parties to the contract is in default, the agreement has been breached.
Liquidated damages
money damages set out in the contract
Punitive damages
Punish the defaulting party
Compensatory damages
Set to cover the actual injury or economic loss
Seller options if the buyer defaults
Accept damages negotiated in the contract - liquidated damages i.e., seller keeps the buyer’s deposit
Specific performance- ask the court to force the buyer to buy the property
Sue for money damages – money damages are both actual/compensatory and punitive
Mutual rescission – release the buyer
Buyer options if the seller defaults
Decide on mutual rescission and recover the earnest money
Specific performance - ask the court to force the seller to sell the property
Sue for money damages
Statute of Frauds
All contracts that relate to the transfer of any interest in real estate
must be IN WRITING to be enforceable
What is an exception to the Statute of Frauds?
A lease for 1 year or less is the exception to this law. It does not have to be in writing to be enforceable
Time is of the Essence
A clause in a contract that allows each party to hold the other to
strict performance by the date specified
In a contract with this clause , if one party cannot perform exactly on time, the contract becomes voidable at the option of the other party. This clause is not a requirement of a valid
contract. It is a choice.
Offer
a properly completed form with a price less than, equal to, or more than the seller’s asking
price and signed by the buyer.
May be called a PURCHASE AGREEMENT
When does an offer become a contract?
When it is accepted, and acceptance is communicated
Earnest Money
- not necessary in a sales contract; it is not the consideration.
- the amount is determined by agreement of the parties.
- typically will be the liquidated damages if the buyer defaults.
Straight-line Method
Allows for equal amounts of depreciation of improvements every year during the economic life of a property, which is set by the IRS.
Depreciable value divided by (/) economic life = yearly depreciation amount.
EXAMPLE: $275,000 to be depreciated over 27.5 years = $10,000 per year.
Economic Life
The period of profitable use during which improvements contribute to value or are being depreciated. When the improvements are fully depreciated, that is the end of the economic life.
1031 Tax-deferred Exchange
Real estate investors can defer taxation of capital gains by making a property exchange - a trade of one business or investment property
for another
An intermediary is required to hold the money from the sale of the first property until the investor finds another property to buy.
As long as the investor never possesses the money, capital gain taxes are deferred until the second property is sold.
Boot
Additional capital or property included in a transaction to even out the exchange
Taxed at the time of the exchange. The investor must hold the property for one year.
An individual can have a tax-free capital gain on the sale of real property up to what amount if the property was the individual’s principal residence for at least 2 of the last 5 years?
$250,000
Installment Sale
sales price is paid in installments, and at least one of the payments is to be received after the close of the taxable year in which the sale occurs.
NOT THE SAME AS AN INSTALLMENT SALES CONTRACT
Which federal government agency regulates accounting for all industries in the US including real estate?
The IRS
Fiduciary relationship
A relationship built on trust
Another name for principal
Client
What 2 levels of responsibility do licensees have in agency relationships?
- Public Responsibility: honesty, fairness with customers
2. Fiduciary Responsibility: client first
Ratification
agency created when a principal accepts actions that he did not authorize
What are the 3 levels of agency?
- Universal
- General
- Special/Limited
Universal Agency
Gives the agent the authority to represent his client in all matters, both business and personal. Equivalent to having unlimited power of attorney and is very rare in real estate.
Minors
Medical
Out of Country
Imprisonment
General Agency
The power to bind a principal aka the power to sign a legally binding agreement in the name of your principal.
The general agent’s signature binds or commits the client to the
agreement. Limited Power of Attorney can be used to create general agency.
Property Manager for Owner
(Owner - Property Manager) (Broker - Sales agent)
Special or Limited Agency
Gives the agent the power to perform only specific acts and no others. This agent does NOT have the power to bind his client/principal.
Advice/Opinions Only
No Decisions
Buyer Representation Agreements and Listing Agreements
Employment Contracts
A written agreement that creates agency (a listing, a buyer’s representation agreement, a property management agreement).
Single Agency Broker
the practice of representing either the buyer or the seller but never both in the same transaction.
apartment locator - only represents buyer
A transactional broker/facilitator, transaction coordinator, a finder, or a middleman.
a licensee who assists a buyer and seller in reaching an agreement in a real estate transaction but does not have an agency relationship with either party.
Dual Agency Broker
Agrees to represent both parties. May appoint a designated agent to represent the buyer and another designated agent to represent the seller.
Intermediary
In Texas, a broker who agrees to represent both parties in a single transaction must do so as an Intermediary. The broker may appoint associates to work with the parties - one licensee to work with the
seller and one licensee to work with the buyer.
What are a principal’s duties to an agent?
CRIP
Compensation – pay the commission when earned
Reimbursement – repay approved expenses
Indemnification – defend the agent when the agent acts on the client’s instruction
Performance – comply with the written agreement
What are an agent’s duties to his principal?
OLDCAR
Obedience – adhere to given instructions
Loyalty – (agent’s primary or most important duty) place your client’s best interests first
Disclosure – reveal all known facts, give non-legal advice and opinions
Confidentiality – protect the private information of your client
Accounting – handle funds with care (This is the easiest duty of a dual agent. For all other duties, the buyer and seller can have opposing interests). A broker handling client funds must never mix them with his/her own (commingling) or spend client or commingled funds (conversion).
Reasonable care – protect the property and legal interest of your client
Who can earn a commission?
Only a broker may earn a commission, and only a broker may sue to collect a commission
Agency Coupled with an Interest
Agent is also the seller or the buyer. this
dual role must always be disclosed.
Cooperative Broker
A broker selling the listing of another broker. may complete the transaction as a subagent of the listing broker or represent the buyers under an agency agreement; also known as the other broker.
Subagency
when a license holder is not associated with the seller’s broker, but is representing the seller through a cooperative agreement with the seller’s broker because their buyer client is interested in the property
