Section 8: Real Estate Contracts Flashcards
(156 cards)
1
Q
Contracts and Components:
*Contracts can be used for many purposes and many reasons in all types of daily activities and must include certain components to be considered “______”.
A
Valid
2
Q
Contracts and Components:
Real estate is full of both promises and contracts. Most agents in fact don’t know the difference between contracts and ______, but it’s vital to understand this going forward.
A
Agreements
3
Q
Contracts and Components:
Remember, being an agent gives you the powers to draft, edit, and write contracts under the ______, but the power that this really brings, is why we want future agents to know how important it is to not only understand contracts, but to know what goes into them as well to protect your client!
A
Arizona Constitution
4
Q
Contracts and Components:
“A contract is a promise or set of promises which is protected under the ______, whereas an agreement is a manifestation of mutual assent which does not necessarily carry legal implications.”
-Supreme Court of Washington
A
Law
5
Q
Contracts and Components:
“A contract is a promise or set of promises which is protected under the law, whereas an agreement is a manifestation of mutual assent which does not necessarily carry ______ implications.”
-Supreme Court of Washington
A
Legal
6
Q
Contracts and Components:
Contract differ in nature by each industry served and contain different components:
o ______: Agreements between parties to either do something or not do something
A
Contracts
7
Q
Contracts and Components:
By entering into an agreement, all parties assume that the other party is acting in a reasonable standard and with good faith.
o ______: All parties acting fairly with the intent to complete the agreement.
A
Reasonable Standard
8
Q
Contracts and Components:
Contracts Validity:
*There are 5 effects that make contracts COMPLETE.
1.
2.
3.
4.
5.
A
- Valid
- Void
- Voidable
- Enforceable
- Unenforceable
9
Q
Contracts and Components:
Contracts Validity:
*1 of the 5 effects that make contracts COMPLETE:
______: Contract has the required components.
o Legal, enforceable and binding upon all parties.
A
Valid
10
Q
Contracts and Components:
Contracts Validity:
*1 of the 5 effects that make contracts COMPLETE:
______: Contract is missing one of the required components.
o Not legal, unenforceable, nonbinding.
A
Void
11
Q
Contracts and Components:
Contracts Validity:
*1 of the 5 effects that make contracts COMPLETE:
______: Contract that could be voided by one party.
o Valid contract which may be either affirmed or rejected by one of the parties to the contract or an outside party.
A
Voidable
12
Q
Contracts and Components:
Contracts Validity:
*1 of the 5 effects that make contracts COMPLETE:
o Voidable:
Voidable contracts are considered valid until it is ______.
o If the contract this NEVER happens, it is accepted by all parties.
A
Rescinded
13
Q
Contracts and Components:
Contracts Validity:
______: Revoked, cancelled or taken back
A
Rescind
14
Q
Contracts and Components:
Contracts Validity:
*1 of the 5 effects that make contracts COMPLETE:
______: contract has all components and is binding on all parties in a court of law
o If a party defaults or breaches, the other party can sue for damages.
A
Enforceable
15
Q
Contracts and Components:
Contracts Validity:
*1 of the 5 effects that make contracts COMPLETE:
Enforceable:
o A valid contract can become unenforceable due to the ______.
A
Statutes of Limitations
16
Q
Contracts and Components:
Contracts Validity:
*1 of the 5 effects that make contracts COMPLETE:
Enforceable:
______: Contract appears to be valid but may be invalid.
o If a contract were agreed upon in conversation but never put in writing.
o In a real estate agreement for sale, if the listed owner is not in fact legal owner.
A
Unenforceable
17
Q
Contracts and Components:
Written vs Verbal Contracts:
*IMPORTANT: Even though we assume that contracts are in ______ to be enforceable, don’t forget that not all contracts must be in writing to be enforceable.
- In Arizona, leases for less than 1 year do NOT have to be in writing
A
Writing
18
Q
Contracts and Components:
Written vs Verbal Contracts:
* ______:
These can be assumed to be valid by both parties while other contracts are mandated to be in writing, such as the real estate contracts because of the statute of frauds.
o In Arizona, leases for less than 1 year do NOT have to be in writing.
A
Verbal Contracts
19
Q
Contracts and Components:
Written vs Verbal Contracts:
Implied Contract:
Both parties assume a contract based upon the parties ______.
o By entering a restaurant, ordering food and eating, it is understood and assumed that you will pay the bill–both parties actions assume this.
o Landscapers who show up, work and then expect to be paid is implied contract.
A
Actions
20
Q
Contracts and Components:
Written vs Verbal Contracts:
______: An exchange of promises either orally or in writing.
o Both parties have agreed to something and each party will be held to the contracts terms and conditions.
A
Express Contract
21
Q
Contracts and Components:
Written vs Verbal Contracts:
Express Contract:
o Real Estate contracts where one party offers to buy a condo and the other party agrees to sell and it is in writing is considered a ______ Express Contract.
o One party agrees to rent their home to snowbirds for 3 months in the winter, and the other party agrees verbally is an oral express contract.
A
Written
22
Q
Contracts and Components:
A contract where we agreed in a conversation to do something is known as an Express Contract where our actions proved our intent is an __________.
A
Implied Contract
23
Q
Contracts and Components:
One vs Two Party Contracts:
*It’s entirely possible for a contract to be one sided while __________ are two sided.
A
Most
24
Q
Contracts and Components:
One vs Two Party Contracts:
__________:
This is a one-sided contract where only one party must perform.
o Only one side must do or not do something in order for the contract to be valid and enforceable while the other party is under no obligation to perform.
A
Unilateral Contract
25
Contracts and Components:
One vs Two Party Contracts:
Unilateral Contract:
o A __________ is unilateral since the seller must pay a commission if the broker brings a buyer, BUT the broker does NOT have to do anything IF a buyer naturally comes in.
Listing Agreement
26
Contracts and Components:
One vs Two Party Contracts:
Unilateral Contract:
o Life insurance company is promising to pay out upon death, but the __________ of the insurance policy doesn’t have to do anything *One Promise*.
- REMEMBER: The Beneficiary here, is the person who benefits from the payout of the policy.
Beneficiary
27
Contracts and Components:
One vs Two Party Contracts:
__________:
This is when both parties promise to do something in exchange for something.
Bilateral Contract
28
Contracts and Components:
One vs Two Party Contracts:
Bilateral Contract:
Most contracts are bilateral especially in real estate where one party is agreeing to something if the other party promises to ALSO __________.
o A purchase agreement where one side agrees to pay $500,000 for a ranch and the other side agrees to deliver the deed in exchange for the $500,000.
- If the buyer didn't bring the money, the seller wouldn't deliver the deed.
- The buyer would be in breach of contract as an example here.
Deliver
29
Contracts and Components:
Which of the following could be used to describe the state of a contract?
Valid
Void
Inviolable
Unenforceable
Valid
Void
Unenforceable
30
Contracts and Components:
Case Study:
Q: A potential client calls you to list a home for sale. They sign a listing agreement with you to represent them. However, during the listing process, it becomes apparent that they do not own the home. When you ask the client why this is, they state that they are selling it for their mother (the actual owner), who has been moved to a nursing home. Is the contract (the listing agreement) valid? Why or why not?
A: In a real estate agreement for sale, if the listed owner is not, in fact, a legal owner due to unenforceable effect, the contract appears to be valid but may be invalid. Suppose a contract was agreed upon in conversation but never put in writing.
31
Contracts and Components:
Case Study:
Q: Give an example of an Implied Contract. (It does not have to be real estate related.)
A: By entering a restaurant, ordering food, and eating, it is understood and assumed that you will pay the bill – both parties' actions think this.
32
Contracts and Components:
Case Study:
Q: Give an example of an Express Contract. (It does not have to be real estate related.)
A: One party agrees to rent their home to snowbirds for 3 months in the winter, and the other party agrees verbally is an oral express contract.
33
Contracts and Components:
Case Study:
Q: What is the difference between an Implied Contract and an Express Contract?
A: In an Implied Contract, both parties assume a contract based upon their actions, while an express Contract is an exchange of promises either orally or in writing.
34
Contracts and Components:
Quiz:
When all parties act fairly with the intent to complete the agreement, they are acting within a?
Accord and Satisfaction
Reasonable Stipulation
Good Faith
Assumed intentions
Good Faith
35
Contracts and Components:
Quiz:
A voidable contract that is never rescinded is considered to be?
Unenforceable
Valid
Null and void
Limited
Valid
36
Contracts and Components:
Quiz:
A broker verbally agreed to list a neighbor’s house for sale and put the house in the local MLS and promised to get the agreements to the sellers soon. What is the status of this listing?
Void
Valid
Enforceable
Rescinded
Void
37
Contracts and Components:
Quiz:
An owner of a condo while at a community function agrees to sell their unit to someone who is currently renting in the same complex. The buyer and seller agreed on all the terms, including the price. This is an example of a(n)?
Undeniable Contract
Unilateral Contract
Executed Contract
Express Contract
Express Contract
38
Contracts and Components:
Quiz:
A unilateral contract requires?
A written contract
One party to perform
Two parties to perform
Two parties to perform the same task
One Party to Perform
39
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie:
This is Dr. Jackie! She has an acronym we want you to Remember: _______
This will aid you in understanding what you need for a valid contract.
COLD+SIC(k)
40
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie:
First of all, remember:
This is Dr. Jackie! She has an acronym we want you to remember: COLD+SIC(k).
Real estate contracts must be in writing and have a description of what is being conveyed and for how long.
The contract, in Arizona real estate, must be accepted (signed by all parties) and the copies must be delivered to the parties in order to be deemed valid.
Remember? Signed, sealed and delivered? That applies here as well!
If a contract were never _______ to the parties, it would be impossible to enforce as they didn't know the offer or acceptance had taken place.
Delivered
41
Contracts and Components:
Components of a Valid Contract:
IMPORTANT: According to the statutes, E-signing is now acknowledged in the State of Arizona for all correspondences including real estate contracts. However, some banks or government agencies will still require '_______' signatures and will NOT allow E-signatures.
Wet Ink
42
Contracts and Components:
Components of a Valid Contract:
*Contracts must have _______, offer and acceptance, consideration and be legal in nature.
Capacity
43
Contracts and Components:
Components of a Valid Contract:
*For REAL ESTATE CONTRACTS must be signed, in writing and have a legal description.
As in any real estate agreement, a contract must be signed in order to be accepted, but it has to be delivered also to the agent or the _______ themself.
o NOTE: According to the statutes, E-signing is now acknowledged in the State of Arizona for all correspondences.
Principal
44
Contracts and Components:
Components of a Valid Contract:
Remember the Acronym
C.O.L.D + S.I.C(k) to relate to contracts validity.
What's the meaning of the acronym?
C= Competent parties or Capacity
O= Offer and acceptance
L= Legal purpose
D=Description (Legal Description)
S= Signed
I= In Writing
C=Consideration
45
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
_______: All parties are legally deemed able to enter into agreements.
Competent Parties
46
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Competent Parties:
_______:
o People who are not of sound mind or body as deemed by the courts have no capacity to perform and as such the contract would be automatically voided.
o However, people who have not yet been deemed insane, could enter into an agreement, but that agreement could be voidable.
Insanity
47
Contracts and Components:
Components of a Valid Contract:
Competent Parties:
Quiz:
Which of these is NOT an example of an incompetent party?
Someone who is under the age of 18
Someone being threatened into an agreement
Someone who has a prescription for anxiety medication
Someone under the influence of alcohol and drugs
Someone who has a prescription for anxiety medication
48
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Competent Parties:
_______:
o Parties must be of legal age to enter into agreements
o Legal age varies by state and by contract and in Arizona it is 18 years of age
o Exceptions to the rule include the emancipation of minors
Age
49
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Competent Parties:
_______:
o A party that was forced to enter into an agreement or contract cannot be deemed to have been in sound mind or body at time of agreement was made.
o A state of coercion, fear, threat or even to humiliate are all examples.
Duress
50
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Competent Parties:
_______:
o Being under the effects of alcohol, drugs or even medication can render someone incompetent to enter into agreements.
o Courts will look at the type of influence and character to determine competency.
Under the Influence
51
Contracts and Components:
Components of a Valid Contract:
_______:
An offer to contract by one party to another party and an indication by the agreed upon acceptance of those terms.
o An offer is simply a proposal to enter into an agreement.
Offer and Acceptance
52
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Offer and Acceptance:
o There must be at least two parties to have an offer and acceptance:
_______= the person making the offer, the “Give-or”
_______= the person receiving the offer, the “Receiv-ee”
o All offers must display agree to terms known as a ‘meeting of the minds’.
o All offers must display terms that are certain and definite.
o All offers must be delivered or communicated to the offeree.
OfferOR
OfferEE
53
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Offer and Acceptance:
o _______:
Offers Acceptance must have a time of expiration. They can NOT last forever.
You must submit offers as soon as practical. The owners must be informed that the offer has been made, and in a timely fashion!
Expiration Date
54
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Offer and Acceptance:
In commercial properties this is also known as a “_______”. It is designed to express interest in purchasing a property.
Letter of Intent
55
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Offer and Acceptance:
*_______:
There is a Deadline looming or expiration.
Time Is Of The Essence
56
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Offer and Acceptance:
IMPORTANT: Offer must be accepted as it was offered or a _______ is created.
Counteroffer
57
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Offer and Acceptance:
*_______:
A new and changed offer based on the original.
Original ‘Offeree’ now becomes the ‘Offeror’ with the counteroffer.
Counteroffer
58
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Offer and Acceptance:
o Offeror can _______ his offer up to the MINUTE before it has been accepted.
* Offers are not considered accepted until the offeror has been NOTIFIED of its acceptance.
Rescind
59
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Offer and Acceptance: IMPORTANT: If the ‘Agent’ on behalf of the offeror had been notified of acceptance, notice is considered to have been given to offeror (agent on behalf).
o If the offeror DIES before the offer was _______, the offer is VOID.
Accepted
60
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Offer and Acceptance:
If the offer had been ACCEPTED and then the offeror DIED, the contract is _______ and is enforceable against the estate of the Offeror.
Valid
61
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
Offer and Acceptance:
Counteroffer the same is true if Offeree DIES while under contract, the estate of the Offeree can be forced to perform after the Seller's _______.
Death
62
Contracts and Components:
Components of a Valid Contract:
If the offeror dies before the offer was accepted, the offer is:
Valid
Void
Enforceable
Accepted
Void
63
Contracts and Components:
Components of a Valid Contract:
REMEMBER: Nurse Jackie: COLD+SIC(k):
MEMORIZE:
LDS Acronym in C.O. [L.D. S.] I.C.
L is for Legal Purpose,
D is for Description,
S is for Signed!
64
Contracts and Components:
Components of a Valid Contract:
_______:
Only a contract that is for legal purposes is considered a valid contract.
o Any contract must be for legal purposes only if it were to ever go to court.
o Even if both parties agreed to it, and either party knew of it being illegal, the contract would be unenforceable and void.
Legal Purpose
65
Contracts and Components:
Components of a Valid Contract:
Nurse Jackie: C.O.L.D. S.I.C.(k)
_______:
Real Estate contracts must have the legal description of the property.
o To avoid confusion in real estate, some form of property description must be given other than the property address.
o Legal Descriptions work best or if land, a surveyors instructions and coordinates.
- We don't use an address for specific reasons:
not all real estate has an address.
- Sometimes we are conveying oil, gas, water, minerals, crops etc.
Description
66
Contracts and Components:
Components of a Valid Contract:
Nurse Jackie: C.O.L.D. S.I.C.(k)
_______:
Signatures from each party must be on the contract to affirm it’s acceptance.
o By signing the contract, parties have ratified the terms and agreed to it.
o In Arizona, it takes ONE signature from a married couple to buy, but TWO to sell.
Signed
67
Contracts and Components:
Components of a Valid Contract:
TRUE or FALSE; By signing a contract, parties have ratified the terms and agree to them.
True
False
True
68
Contracts and Components:
Components of a Valid Contract:
Nurse Jackie: C.O.L.D. S.I.C.(k)
_______:
Due to Statute of Frauds, all real estate contracts must be in writing.
o To prevent fraud, under English law, all contracts are required to be written.
o All states require that the real estate contract be in writing to be valid.
In Writing
69
Contracts and Components:
Components of a Valid Contract:
Nurse Jackie: C.O.L.D. S.I.C.(k)
In Writing:
o Contracts do NOT have to be on boilerplate forms, can use a _______, receipt, etc.
o The written word takes precedence over boiler plate writings.
Napkin
70
Contracts and Components:
Components of a Valid Contract:
Nurse Jackie: C.O.L.D. S.I.C.(k)
In Writing:
_______: Contract must rely on written words.
Parol of Evidence
71
Contracts and Components:
Components of a Valid Contract:
Nurse Jackie: C.O.L.D. S.I.C.(k)
In Writing:
o The written word takes precedence over boiler plate writings.
Exceptions to the rule are:
Short term leases (less than one year).
Sales of personal goods less than$500.
_______ agreements between brokers.
Commission
72
Contracts and Components:
Components of a Valid Contract:
Nurse Jackie: C.O.L.D. S.I.C.(k)
_______:
Something of value must be given up inducing another to perform.
o When something of value is exchanged for a promise to do something or to not do something is valid consideration.
Compensation / Consideration
73
Contracts and Components:
Components of a Valid Contract:
Nurse Jackie: C.O.L.D. S.I.C.(k)
Compensation / Consideration:
o Doesn’t have to be money, could be a _______ of assets, love, services etc.
o As long as the exchange is based on LEGAL consideration
You can trade your yacht for another party’s house.
Mother can ‘gift’ her love and affection to her son by gifting him a home.
IMPORTANT: Transfer of property between family is usually no exchange of consideration, so the county recorder will state a nominal amount ($10.00 in AZ)
Trade
74
Contracts and Components:
Components of a Valid Contract:
What are the exceptions to the rule of "… all real estate contracts must be in writing":
Short term leases
Consideration
Contracts
Parol of evidence
Commission agreement between brokers
Short term leases
Consideration
Parol of evidence
Commission agreement between brokers
75
Contracts and Components:
Components of a Valid Contract:
Q: Name 3 of the seven components of a valid real estate contract
A: By remembering the Acronym C.O.L.D + S.I.C. to relate to contract validity.
C = Competent parties or Capacity
O = Offer and acceptance
L = Legal purpose
D = Description (Legal Description)
S = Signed
I = In Writing
C = Consideration
76
Contracts and Components:
Components of a Valid Contract:
Case Study:
Q: A buyer offers to purchase a house for $5,000 less than asking. Who is the offeror and offeree? The seller counter offers with $1000 less than asking. Who is now the offeror and offeree?
A: The Offeror is the person making the offer, the “Give-or”. However, the Offeree is the person receiving the request, the “Receiv-ee.” In the first case, the buyer is the offeror, while in the second case, the seller is the offeror.
77
Contracts and Components:
Components of a Valid Contract:
Case Study:
Q: An elderly gentleman agrees to pay cash for an investment property. The following day, he passes away. Would the agreement still be enforceable?
A: If the offer had been accepted and then the offeror died, the contract is valid and is enforceable against the estate of the offeror.
78
Contracts and Components:
Components of a Valid Contract:
Case Study:
Q: Why is a description a required component of a valid real estate contract?
A: Real Estate contracts must have the legal description of the property. Property descriptions must be given beside the property address to ensure everything is transparent in real estate. Legal Descriptions work best, or if land, a surveyor's instructions and coordinates.
79
Contracts and Components:
Components of a Valid Contract:
Quiz:
The broker had been showing homes for some time to a high end buyer. After a few months, she found out that her buyer bought a different house from a different agent. She tried to sue the other agent but the judge in the case cited that she was missing what?
Valid Consideration
Signatures by all parties
Statute of description
Statute of validity
Signatures By All Parties
80
Contracts and Components:
Components of a Valid Contract:
Quiz:
A contract signed by a party under the influence of pain medication could be considered voidable due to the lack of?
Competent parties
Duress
Consideration
Parol of Evidence
Competent Parties
81
Contracts and Components:
Components of a Valid Contract:
Quiz:
Which is not an additional requirement for real estate contract validity?
Signed
In Writing
Escrow Instructions
Consideration
Escrow Instructions
82
Contracts and Components:
Components of a Valid Contract:
Quiz:
What clause would an agent use in an offer to purchase that indicates in a hot market that they want an ANSWER before their deadline in an effort to prevent other buyers from making better offers?
Counteroffer
Time is of the essence
Description
Legal Purpose
Time is of the Essence
83
Contracts and Components:
Components of a Valid Contract:
Quiz:
During contract negotiations, the counterofferor died unexpectedly. What is the status of the Sale?
The offeror is under contract and must proceed
The agent must deliver the signed acceptance
There is no contract
The parties can sue for specific performance
There is No Contract
84
Contracts and Components:
Completed vs Incomplete:
*Since not every contract is completed at the immediate time of agreement, we need to identify WHEN a contract is considered complete:
o _______:
These are contracts that are in process, but not yet completed.
A house that has a contract and is in escrow is an executory contract.
Executory Contracts
85
Contracts and Components:
Completed vs Incomplete:
*Since not every contract is completed at the immediate time of the signing of the agreement, we need to _______ when a contract is considered complete.
Identify
86
Contracts and Components:
Completed vs Incomplete:
_______:
These are agreed upon and completed and all promises have been kept.
The recording of the deed and the conveyance of real property concludes the transaction and both buyers and sellers have fulfilled all promises to the contract.
Contracts
87
Contracts and Components:
Contract Fulfillment:
_______:
“When the main obligations of a contract end".
*The discharge of a contract and a release of its parties of the obligations in the contract could take place in any number of ways.
Discharge Of A Contract
88
Contracts and Components:
Contract Fulfillment:
Discharge Of A Contract:
*Sometimes, parties may still discharge or terminate a contract even when they do not fulfill the _______ obligations required by a contract.
Primary
89
Contracts and Components:
Contract Fulfillment:
*The discharge of a contract and a release of its parties of the obligations in the contract could take place in any number of ways:
_______: Tis occurs when the main obligations of a contract end.
Discharge of a Contract
90
Contracts and Components:
Contract Fulfillment:
*The discharge of a contract and a release of its parties of the obligations in the contract could take place in any number of ways:
_______:
o Most common type of contract completion whereby all parties have performed
Completed Contract
91
Contracts and Components:
Contract Fulfillment:
*The discharge of a contract and a release of its parties of the obligations in the contract could take place in any number of ways:
_______:
This occurs when one party in a contract gives up their position to another party.
o Assignor wants the assignee to step into his shoes and assume all their contractual obligations, rights and even benefits.
o Original party (assignor) is still however fully liable to perform in case the assignee doesn’t perform–not off the hook.
Assignment
92
Contracts and Components:
Contract Fulfillment:
*The discharge of a contract and a release of its parties of the obligations in the contract could take place in any number of ways:
Assignment:
o _______= the original party to the original contract who is the ‘give-or’.
o _______= the new party to the old contract or the 'receiv-ee’.
Assignor
Assignee
93
Contracts and Components:
Contract Fulfillment:
*The discharge of a contract and a release of its parties of the obligations in the contract could take place in any number of ways:
_______:
This occurs when there is a substitution of parties or parts of an existing contract.
o It is possible to substitute a new buyer for an existing buyer if the existing buyer can’t perform and there is a backup offer for the identical terms.
o The substitution of terms or sections of a contract that both parties agree to.
Novation
94
Contracts and Components:
Contract Fulfillment:
_______: Most common type of contract completion whereby all parties have performed.
Completed Contract
95
Contracts and Components:
Contract Fulfillment:
Assignment: “One party in a contract gives up their position to "_______”
Assignor wants the assignee to step into his shoes and assume all their contractual obligations, rights and even benefits
Original party (assignor) is still however fully liable to perform in case the assignee doesn’t perform – not off the hook
Assignor: “The original party to the original contract who is the give-or“
Assignee: “The new party to the old contract or the receiv-ee“.
Another Party
96
Contracts and Components:
Contract Fulfillment:
_______: “When the main obligations of a contract end".
Discharge Of A Contract
97
Contracts and Components:
Contract Fulfillment:
Novation: “The _______ of parties or parts of an existing contract”.
It is possible to exchange a new buyer for an existing buyer if the existing buyer can’t perform and there is a backup offer for the identical terms.
This can also apply to terms or sections of a contract that both parties agree to.
Substitution
98
Contracts and Components:
Contract Fulfillment:
* _______:
This is the term that is used when we identify the party who is to be substituted.
Ex: "Using my rights of novation, I nominate William to take my place."
Nomination
99
Contracts and Components:
Contract Fulfillment:
Quiz:
TRUE or FALSE; The most common type of contract completion whereby only one of the parties have performed their obligations.
True
False
False
100
Contracts and Components:
Partial or Unable to Complete Contracts:
*Not every contract terminates with all aspects of the agreements being met and sometimes, this is acceptable by both parties:
o _______:
Agreement to discharge a claim in which the parties agree to give and accept different performance which is usually less than what is required or owed.
In this case, both parties are agreeing to accept the current situation and walk away from the contract as it stands without pursuing further action.
Accord and Satisfaction
101
Contracts and Components:
Partial or Unable to Complete Contracts:
*Not every contract terminates with all aspects of the agreements being met and sometimes, this is acceptable by both parties:
_______:
o When law supersedes a contract, that would make it impossible to perform
o A city chooses to condemn a property in order to build a new road, would discharge any contract the owner had with a contractor to improve that property
Legal Cause
102
Contracts and Components:
Partial or Unable to Complete Contracts:
*Not every contract terminates with all aspects of the agreements being met and sometimes, this is acceptable by both parties:
_______:
o The agreement is not possible due to an outside action that has occurred.
o A roofing company is unable to perform if the owners can’t get a permit.
Inability to Perform
103
Contracts and Components:
Partial or Unable to Complete Contracts:
*Not every contract terminates with all aspects of the agreements being met and sometimes, this is acceptable by both parties:
_______Substantial Performance:
o When the promisor does not perform all of his contractual obligations, but does enough so the promise is required to fulfill his obligations.
o A swimming pool contractor builds a pool per plan and finished, but doesn’t fill the pool with water, he expects to get paid as they did the 99% of the work.
Substantial Performance
104
Contracts and Components:
Partial or Unable to Complete Contracts:
*Not every contract terminates with all aspects of the agreements being met and sometimes, this is acceptable by both parties:
*_______:
o When some performance duties of the contract has been performed that satisfies the essential or primary requirements of a contract.
o Painters painting a house are 70% completed when the owner changes the color, the painter would be paid to finish but hasn’t yet.
Partial Performance
105
Contracts and Components:
_______:
o One party can pull the contract back or take it away under some circumstances.
o Rescinding of a contract in essence is returning the parties to the original starting point as if they had never made a contract.
o Before the seller had a chance to review the offer, a buyer found a better home and decided to rescind their offer they made to that seller.
Contract Rescission
106
Contracts and Components:
_______:
*As per the purchase contract, listing and buyer’s agreements and other real estate contracts, all parties are agreeing to both Mediation and Arbitration, looking for an agreed outcome.
Dispute Resolution
107
Contracts and Components:
Dispute Resolution:
*_______:
All parties agree to have a neutral 3rd party hear their sides and make determinations.
Mediation
108
Contracts and Components:
Dispute Resolution:
*_______:
More formal, like a small court where all parties plead their side to a board and the outcome must again be agreed upon by all parties.
Arbitration
109
Contracts and Components:
Dispute Resolution:
Which of these is NOT a valid reason a contract was unable to be completed?
Legal Cause
Inability to Perform
Full Performance
Partial Performance
Full Performance
110
Contracts and Components:
Failure to Perform Contract:
*Be failing to adhere to a contract, either party, this is a default. The injured party has the right to damages from the other party. The default is known as a _______.
Breach
111
Contracts and Components:
Failure to Perform Contract:
o _______:
Breaking or failing to observe a law, agreement, or contract.
Breach
112
Contracts and Components:
Failure to Perform Contract:
There are some specific remedies for breach of contracts that one party can pursue:
o _______:
The injured party can force the other party to fulfill the contract.
o By suing for this reason, the party is asking the courts to force the opposite party to live up to their obligations and perform according to the terms in the contract.
o Seller goes under contract with a buyer but decides to cancel the sale and not move, the buyer has a legal right force the seller to sell the house by filing this type of suit.
Suit for Performance
113
Contracts and Components:
_______:
* If the breaching party cannot live up to the obligations set forth in the contract, the injured party is OWED compensation in some capacity to remedy the broken contract.
Damages
114
Contracts and Components:
o _______:
This is an award issued to one party as compensation for breach of contract.
o A court may award two basic types of damages to the injured party.
Damages
115
Contracts and Components:
_______:
These provide a plaintiff with the monetary amount necessary to replace what was lost, and nothing more (compensation).
* Designed to return the party to original state, make whole again.
Compensatory Damages / Actual Damages
116
Contracts and Components:
Damages:
_______: monetary damages agreed upon UPFRONT if either party were to breach the terms of the contract
* The party who is in default will automatically relinquish the agreed upon money as damages to their opposite party
Liquidated Damages
117
Contracts and Components:
Damages:
_______: Damages exceeding simple compensation and awarded to PUNISH the defendant (rarely used in cases of contract disputes).
*Almost as a punishment, intended to deter the defendant and others from engaging in conduct similar to that which formed the basis of the lawsuit.
Punitive Damages
118
Contracts and Components:
Damages:
Case Study:
Q: A buyer gets “cold feet” before closing a house. His friend offers to have the purchase agreement assigned to her. If the assignee were to pass away, who would be liable to fulfill the contract?
A: The Assignor wants the assignee to step into his shoes and assume all their contractual obligations, rights, and benefits. The original party (assignor) is still fully liable to perform in case the assignee doesn’t perform – not off the hook.
119
Contracts and Components:
Damages:
Case Study:
Q: A seller has five days to submit SPDS (Seller's Property Disclosure Statement) to a buyer after offer acceptance. In this instance, they took 12 days to do so. Is their contract still valid?
Yes, the contract is still valid. The buyer is assumed to accept the property in its condition if they did not raise any objections during their inspection period. They have lost their rights to change their offer due to the time restraints agreed upon in the offer and acceptance.
120
Contracts and Components:
Damages:
Case Study:
Q: What options do I have about putting someone in my place if I can no longer fulfill the terms of my agreement or contract?
A: A possible solution would be that you could "Novate" someone to take over your position and obligations, in which case, the new party would be held responsible for the remainder of the contract terms. Another option is to "Assign" your rights to someone else, but the problem is that you would still be held responsible if the new party were to default.
121
Contracts and Components:
Damages:
Case Study:
Q: If a seller has been harmed by the action or inaction of a buyer's behaviors or acts, what types of damages could they seek?
A: There could be damages related to the "actual or compensatory" damages or costs incurred by the seller, or if it's a bad case where the buyer caused significantly more damage to the seller, a judge/jury might award "punitive" damages, which are designed to punish the guilty party. Lastly, both parties had agreed to limited "liquidated" damages up front in case of breach or default, which in a real estate contract could be the Earnest Money being released to the injured party.
122
Contracts and Components:
Damages:
Quiz:
In a contract assignment, which party is legally obligated to fulfill the original terms of the contract?
Owner
Assignor
Designee
Assignee
Assignor
123
Contracts and Components:
Damages:
Quiz:
Two siblings are under contract to buy a house together. The brother no longer wants to proceed with the purchase but the sister does, however she cannot afford it on her own. What clause could allow the sister to replace her brother’s position on the contract with her husband for identical terms while releasing her brother from the obligations?
Sub-lease
Buyer substitution
Election
Novation
Novation
124
Contracts and Components:
Damages:
Quiz:
Damages awarded in excess of simple compensation, designed to punish the defendant, are known as?
Compensatory Damages
Punitive Damages
Liquidated Damages
Preventive Damages
Punitive Damages
125
Contracts and Components:
Damages:
Quiz:
In the event of a contractual breach, the injured party could pursue what action?
Suit for Performance
Limited Damages Action
Broker Damages Settlement
Assignment of Duty
Suit for Performance
126
Contracts and Components:
Damages:
Quiz:
Which of the following would be generally a correct statement?
While in escrow a buyer can void a contract
The closing of escrow and recording of the deed deems an executed contract
Earnest money is always returned to the buyer if there is a breach of contract
Executory contracts are unenforceable
The closing of escrow and recording of the deed deems an executed contract
127
Contracts and Components:
Damages:
Quiz:
What methods can be used to settle disputes in real estate contracts?
Dispute Disagreement
Mediation and Arbitration
Negotiation Clause
Agency Agreements Clause
Mediation and Arbitration
128
Contracts and Components:
Contract Clauses and Terms:
*Since no two contracts will rarely be identical in all terms, it is best to use the standard contracts if available and to inject special clauses or change the terms as needed:
*_______:
These are pre-drafted contracts that are industry standards and commonly used
o Remember that anything that is hand written in this type of contract, overrides the standard pre-printed words, and written numbers override numerals.
(One Hundred Thousand Dollars will override $100,000)
Boilerplate Contracts
129
Contracts and Components:
Contract Clauses and Terms:
*Since no two contracts will rarely be identical in all terms, it is best to use the standard contracts if available and to inject special clauses or change the terms as needed:
_______:
A provision in a contract for an unforeseen event or circumstance
o There are a multitude of these that buyers and sellers can have but most are limited to a duration of time, otherwise the offer would go on for infinite time
o By adding these to a contract, that contract becomes voidable at anytime if the contingencies are not met and voided if the contract is cancelled
Contingency
130
Contracts and Components:
Contingency:
_______:
o Contingent upon seller obtaining legal deed before they can sell the property
o Contingent upon both husband and wife agreeing to terms in Community Property states.
o Court Approval needed
Short Sale Approval needed
Seller Contingencies
131
Contracts and Components:
Contingency:
_______:
o Contingent upon buyer successfully obtaining a loan
o Contingent upon passing all inspections
o Contingent upon the sale and closing of buyers current home
o Contingent upon spouses approval after they see it
o Contingent upon the successful offer of employment to a buyer
Buyer Contingencies
132
Contracts and Components:
Contingency:
Buyer Contingencies:
_______:
Money used to confirm acceptance of a contract.
o Also known as good faith money, the buyer will offer to the seller a deposit of earnest money which is held by the escrow company (or title, or broker).
o This amount of money is agreed upon as liquidated damages in case of breach
The escrow agents act as intermediaries and will determine who is owed the earnest money based upon facts in case of breach.
Earnest Money Deposit
133
Contracts and Components:
Contingency:
Buyer Contingencies:
*_______= Neutral third party who listens to each side of the story.
Interpleader
134
Contracts and Components:
Contingency:
Buyer Contingencies:
________:
Contract on property that allows the buyer right to purchase.
Once a buyer has an option to buy a property, the seller cannot sell the property to anyone else.
The optionee is not forced to buy the property but the optionor is obligated to sell if the optionee exercises their rights to buy.
Usually a nominal fee is paid to the optionor for this right.
Option
135
Contracts and Components:
Contingency:
Buyer Contingencies:
Options:
________: The person giving the option (Giv-or), one who grants or sells an option.
________: The person who is receiving the option (Receiv-ee), one who is granted or buys an option.
Optionor
Optionee
136
Contracts and Components:
Contingency:
Buyer Contingencies:
________:
o Seller’s obligation to notify a primary interested party, that a secondary party has made an offer to purchase real estate.
o The primary interested party is given the opportunity to purchase the real estate at the same or better terms as the secondary parties’ offer.
First Right Of Refusal
137
Contracts and Components:
Optionor vs Optionee real life Example:
(Remember, the “optionor” or giv-or gives to another person, the “optionee” (receiv-ee) to buy certain property at a fixed price for a definitive duration.)
An investor wants to buy in an area where they think a new factory is going to be built, but they are not sure yet if this is going to happen. Instead of buying on speculation, they can offer an option. The investor offers $4000 to a land owner for the rights to buy the land in the next one year. The investor in this case is the optionee, they have received the '________' to buy, but they don't HAVE to, while if they do decide to buy, the optionor (seller or giv-or of the option) MUST sell. The $4000 was the option fee, or nominal consideration in case the buyer does not purchase, and that goes to the optionor/seller.
Rights or Option
138
Contracts and Components:
Contingency:
Buyer Contingencies:
________:
o Things change during contracts and negotiations and as such one would amend a contract to reflect those changes and both parties would agree to the change.
o Buyer elects to change the buyer by using the and or nominee clause.
o If the address were wrong, you would need to amend the contract.
Amendments
139
Contracts and Components:
Contingency:
Buyer Contingencies:
________:
When changes arise that don’t affect the terms of the original contract but are ‘added’ on to the contract an addendum would be used.
Addendums
140
Contracts and Components:
Contingency:
Buyer Contingencies:
Addendums:
Buyers and sellers would agree to these addendums in writing.
They become part of the contract and are numbered in order.
The ________ addendum is always referenced and moves backwards in case of a discrepancy with the interpleader or escrow agent.
Newest
141
Contracts and Components:
Contingency:
MATCH THE TERMS:
Addendum The one giving the option
Contingency Adding onto an existing contract
Optionor A neutral third party who interprets
Interpleader The one receiving the option
Opinionee A predetermined escape clause
Optionor
Addendum
Interpleader
Opinionee
Contingency
142
Contracts and Components:
Contingency:
Case Study:
Q: Give an example of a contingency a buyer could ask for in a contract to purchase a home
A: Buyer Contingencies are
1. Contingent upon the buyer successfully obtaining a loan
2. Contingent upon passing all inspections
3. Contingent upon the sale and closing of the buyer's current home
4. Contingent upon spouses approval after they see it
5. Contingent upon the successful offer of employment to a buyer.
143
Contracts and Components:
Contingency:
Case Study:
Q: What are some of the advantages of using boilerplate contracts?
A: Boilerplate Contracts are pre-drafted contracts that are industry standards and commonly used. Remember that anything handwritten in a boilerplate contract overrides the standard preprinted words, and reported numbers override numerals.
144
Contracts and Components:
Contingency:
Case Study:
Q: A seller agrees to a selling price of $250,000. The boilerplate contract used has numerically written “$250,000”. But it is also written on the form as “two hundred and fifteen thousand dollars.” Which price is the seller legally obligated to sell for?
A: Two hundred and fifteen thousand dollars will override “$250,000.
145
Contracts and Components:
Contingency:
Case Study:
Q: When would an interpleader be used?
A: The escrow agents act as intermediaries and will determine who is owed the earnest money based on facts in case of breach. Interpleader is the neutral third party who listens to each side of the story.
146
Contracts and Components:
Contingency:
Quiz:
What is a buyer exercising when they decide to buy a property that they were not required to buy but the seller was obligated to sell?
First right of refusal
An option
An Amendment
A contingency
An Option
147
Contracts and Components:
Contingency:
Quiz:
A buyer must sell their current home before purchasing your seller’s home. What could an agent use to protect the buyer in case their house doesn’t sell?
A seller contingency
A buyer contingency
A boilerplate
An option
A Buyer Contingency
148
Contracts and Components:
Contingency:
Quiz:
Buyer and Seller mutually agree to change an existing clause in their signed purchase agreement using a?
New purchase agreement
Addendum
Transcript
Contingency Clause
Addendum
149
Contracts and Components:
Contingency:
Quiz:
Before the seller had a chance to review the offer, your buyer found a better home and removed their original offer. There was no recourse to either party because they chose to do what to their offer?
Rescind
Exercise an option
Novate
Terminate for Cause
Rescind
150
Contracts and Components:
Contingency:
Quiz:
James signed an option to sell a piece of land to Hank. The option was for 18 months and was never recorded. James died 10 months after the option was signed and his heirs decided to sell the land to an investor. What rights does Hank have?
Hank can not do anything since James died
Hank can sue the investor who purchased the property
Hank can file a judgement lien against the property
Hank can sue the heirs who sold the property as they represented the estate of James
Hank can sue the heirs who sold the property as they represented the estate of James
151
Contracts and Components:
Contingency:
Quiz:
The ____________________ is commonly used in commercial real estate to start the buying process?
Letter of Investment
Universal Agreements
Executory Offer
Letter of Intent
Letter of Intent
152
Seller Net Proceeds Math:
Investor Dan has hired you to sell his duplex in Casa Grande. You have said the best way to get it sold is to offer it for sale at $135,000 and have the seller pay 3% towards buyer’s closing costs and offer a home warranty for $500 to the buyer as well. If you are to get 6% of the sales price, what will Dan Net? (Excluding all closing fees for the example here)
* $135,000 x .03 (buyers costs) =$4,050
* $135, 000 x .06 (commission) =$8,100
* $8,100+ $4,050 + $500 (warranty) = $12,650
* $135,000-$12,650 = $122,350
ANSWER: Dan will net $122,350
153
Seller Net Proceeds Math:
The Klein's Family has enlisted your services to help them sell their home. Calvin has asked you to Net them $125,000 and they are going to pay you 7% commission to do so. What do you need to sell Calvin Klein's house for?
* 100% (sales price)–7% (commission) = 93%
* $125,000 ÷ .93 (93%) = $134,409
* Work the problem backwards to check the math
o $134,409 x .07 = $9409
o $134,409-$9409 = $125,000
ANSWER: The Calvin house needs to be sold for $134,409
154
Seller Net Proceeds Math:
Douglas McArthur owns a parcel of land in Flagstaff that he is going to split and then sell off. He plans on splitting it into 3 pieces and selling each one for $50,000. He will hire you to sell them all but only if you can net him $135,000 after commissions. Assuming title and escrow fees are $3000, what is the commission you can offer him to net him his $135,000?
* $135,000 (net) + $3,000 (escrow) =$138,000
* $50,000 x 3 =$150,000
o $138,000 ÷ $150,000 = .92
o 100%-92% = 8%
* Work the problem backwards to check the math
o $150,000 x .08 = $12,000
o $12,000 + $3,000 = $15,000
o $150,000-$15,000 = $135,000 Net to Seller
ANSWER: The commission must be 8%
155
Seller Net Proceeds Math:
You have a client who is selling their home in Phoenix. They have a loan balance of$202,000. Taxes owed are $918. Escrow and Title fees will be $2482 and commissions are 6%of the sales price. If they need to ‘net’ $78,000 what will they need to sell their home for?
* Taxes $918 + Escrow $2,482 + Payoff $202,000 =$205,400(Costs)
* $205,400 (costs)+ $78,000 (Net to Sellers) =$283,400
* $283,400 ÷ .94 (100%-6%) =$301,489
* Work the problem backwards to check the math:
o $301,489 x 6% = $18,089 (commissions)
o $301,489-$18,089 =283,400(Gross)
o $283,400–$205,400 (Expenses) = $78,000 NET to Seller
ANSWER: The seller must sell their home for $301,489
156
Seller Net Proceeds Math:
Seller Judith has agreed to a net listing with you. She expressed that she is willing to accept any offer that nets her $240,000 after all costs and expenses. Escrow fee’s amount to $4250.Taxes are $1360. HOA prorated dues are $890. She won’t be offering a commission at all. What is the MINIMUM amount this house must sell for to get her the $240,000 NET and is this even legal?
* $4,250 (escrow) + $1,360 (taxes) + $890 (HOA) =$6,500.
* $240,000 + $6,500 = $246,500
o YES this is legal in Arizona but agent will not receive any commission.
ANSWER Agent can sell this property for ANY AMOUNT of money above$246,500 and can keep the amount over the $246,500!
