©2011 Cengage Learning
California Real Estate
Principles
Chapter 5
Real Estate Contracts and
Mandated Disclosures
©2011 Cengage Learning
Chapter 5
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Discuss types of contracts and list the legal
requirements for an enforceable contract.
Distinguish between the Statute of Frauds
and Statute of Limitations.
Describe how contracts are terminated or
discharged.
Explain the purpose and types of listing
agreement.
Explain the purpose and main provisions of a
purchase contract.
Describe when a counter offer form is used.
Discuss the purpose of an option contract.
Describe the major mandated disclosures
required in a real estate transaction.
CONTRACT
 An enforceable agreement between two or more
legally competent persons.
 A promise or mutual promise to do or not do
specified acts.
 For consideration
 Money
 Services
 Forbearance
 Legal object
“Honor Thy Contract”
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TYPES OF CONTRACTS
EXPRESS
Written or Oral
BILATERAL
Both Parties
Obligated
EXECUTORY
Yet to be Performed
More action required
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OR
IMPLIED
Acts of Parties
OR
UNILATERAL
One Party
Obligated
OR
EXECUTED Fully
Performed
Contract complete
VOID
No Contract
No legal effect
No one can enforce it
An essential element is
missing: Capacity or
•Mutual Consent or
•Lawful Object
UNENFORCEABLE
Not able to be enforced
Was not put in writing
•Property does not Exist
•Statute of Limitations has
run out
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VOIDABLE
Able to be Enforced or
Voided only by the Injured
Party; Other side can’t cancel
•Lack of Capacity
•Fraud, Undue Influence,
Duress, Menace
VALID
Fully Enforceable
A binding contract
•All Essentials Included
•No Negative Influences
ESSENTIAL ELEMENTS OF A
VALID CONTRACT
1. Capable parties (Emancipated minor or Age
18+)
2. Mutual Consent (Offer and Acceptance)
3. Lawful Object
(Cannot break law)
4. Sufficient Consideration
(Anything of value)
-Money -Goods -Promises -Services
5. Must be in writing to be enforceable by a
court of law as stipulated by the Statute
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of Frauds
BREACH OF CONTRACT
Anticipation of/or actual legal action
constituting default remedies
1.
Action by the parties:

2.
Cancel or Rescind
Legal remedies:




Liquidated Damages
Actual Money Damages
Specific Performance
(Statute of Limitations)
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TERMINATION OF
CONTRACT
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Mutual Agreement
Destruction of the property
Written release
Substituting -- Novation
Rejection of Contract
Impossibility of performance
Incapacity of Either Party
Counter Offer
Completed Performance
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STATUTE OF LIMITATIONS
Provides deadline for filing a court action
Examples:
Must file within:
1 Year
 Against Bank for Forged Check
2 Years
 Oral Contract
 Title Insurance Matter
3 Years
 Trespass
 Fraud or Mistake (3 years from discovery)
4 Years
 Written Contract
10 Years
 Judgment
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RESIDENTIAL LISTING AGREEMENTS
A contract between the Principal (Seller) and Agent
(Broker) that:


Authorizes agent to find buyer or tenant
Establishes the commission
(Note: Commissions are negotiable)

Lists the
a.
b.
c.
d.
delegated powers to broker, as agent
terms and conditions that the seller will sell
amount of the broker’s commission and when
earned
has a definite termination date
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Open listing
 Owner has contract with several agents
 Commission paid only to lst agent with acceptable
offer
 Owner may sell property without a commission
 No definite termination date required
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Exclusive Agency Listing
 Only one agent is employed to represent the
principal (seller)
 Listing broker may share commission with
subagent who finds a buyer
 Seller reserves the right to sell the property
without paying a commission
 Must contain a definite termination date
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Exclusive Right-to-Sell
 Only one agent is employed to represent the
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
principal (seller)
Commission to agent regardless of who sells the
property
Owner liable for commission if owner withdraws
or makes unmarketable
MUST have a definite termination date
Cooperating agents are often used via MLS
Most common agency used in the industry
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Net Listing
 Can be an open or an exclusive listing
 Seller and broker agree seller is to receive a
fixed amount
 Broker earns everything over the net amount
guaranteed to the seller
 Broker must reveal the exact selling price to
buyer and seller before closing and the amount
of commission earned
 Not frequently used in the industry
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MULTIPLE LISTING SERVICE (MLS)
 A real estate organization.
 Pools agent listings with other agents.
 Shares market information on property features,
price, terms of sale, availability.
 Written contract with membership rules.
 Commission split for cooperating broker.
 Usually a computerized database of
information.
 Increases market exposure.
 Owner must five written permission to submit
their property on the MLS.
 Controlled by local association members
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THE REAL ESTATE PURCHASE
AGREEMENT AND ESCROW INSTRUCTIONS
Commonly called the deposit receipt
An agreement between principal and agent
B. Functions of a Deposit Receipt:
A.
1. Serves as a receipt of funds broker received
2. May create a binding purchase contract
3. Requires agency election
4. Reaffirms commission
5. Requires good faith consideration
6. Party must receive a copy of what
they sign at the time they sign it.
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Other important features:
 1. An enforceable legal contract
 2. Buyer’s offer to purchase
 3. Buyer may withdraw the offer any time before
seller’s acceptance communicated
back to
buyer.
 4. Lists all terms and conditions (CLAP)
 5. Specifies the time:
 A. Time buyer may disapprove
 B. Disclosure defects prior to contract
 6. Agent must submit all offers after received
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THE DEPOSIT RECEIPT
(Important Features)
ash
oans
greements
ossession
 And
 Disclosure
 Disclosure
 Disclosure
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Summary of Major Mandated
Disclosures
Real Estate Agency Relationship
Real Estate Transfer Disclosure Statement
Residential Environmental & Earthquake Hazards
Disclosure
Natural Hazard Disclosure Statement
Common Interest Development General
Information
Seller Financing Addendum & Disclosure
Statement
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OTHER:
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Megan’s Law
Military Ordinance Location
Home Inspection Notice
Water Heater Bracing/Smoke Detector Notice
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DISCLOSURE
 Environmental hazards
 Earthquake disclosure (Priolo-Almquist)
• Asbestos
• Formaldehyde
• Lead-based paint
• Radon gas
• Hazardous waste
• Household hazardous waste
 Affirmative duty to disclose ANY known
environmental hazard affecting property
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Residential Earthquake Hazards
Report
 Disclose known weaknesses
 Built prior to 1960 = seller must provide buyer
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booklet “The Homeowners Guide to Earthquake
Safety
Seller required to disclose weaknesses
Seller’s agent required to provide booklet
Report: seller to fill in and give to buyer
Seller signs one and gives it to the agent
Buyer signs one and gives it to seller.
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Easton v. Strassburger
The broker has an affirmative duty to:
 CONDUCT a reasonably, competent and
diligent INSPECTION of residential (1-4)
property, and to
 DISCLOSE to prospective purchasers
 ALL FACTS revealed by the inspection that
MATERIALLY affect the
 VALUE or DESIRABILITY of the property
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REAL ESTATE TRANSFER
DISCLOSURE (TDS)
 Material facts affecting value or desirability of the
property relevant to a person making an
informed decision
 Seller and real estate agents are required to
disclose defects (Easton v Strassburger) that
affect the value
 Agents has affirmative duty to inspect, inquire,
disclose, recommend, document.
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THE NEGOTIATING PROCESS
 When buyer (offeror) makes an offer, the
offer may
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Be withdrawn
Expire
Be changed
Be accepted
 The seller (offeree) may
 Accept
 Reject
 Counter
 When seller counters, the buyer may
 Accept
 Reject
 Counter the counter
ARC
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THE DEPOSIT RECEIPT
Steps to Bind the
Parties:
•Offer
•Acceptance
•Communication of acceptance
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COUNTER OFFER
 When the Seller changes terms of buyer’s offer
in ANY WAY.
 Counter REJECTS the original offer.
 If buyer accepts the counter, this must be
communicated in writing to the seller.
©2011 Cengage Learning
Other Contracts:
 Option: Right to buy in the future.
 Optionee = buyer
 Optionor = seller
 Exchange contract
1031 IRC
Trade one property for another under specific tax
guidelines allowable by statute.
©2011 Cengage Learning
Review Quiz Chapter 5
1. Buyer makes a written bonafide offer to purchase,
and seller signs the acceptance. A contract is first
created:
a. When buyer receives proper communication of
seller’s acceptance
b. Immediately upon seller’s acceptance
c. When the buyer and seller sign escrow
instructions
d. When the broker presents the offer to the seller
©2011 Cengage Learning
Review Quiz Chapter 5
2. The law that states real estate contracts must be in
writing to be enforceable is called the statute of:
a. Frauds
b. Time contracts
c. Limitations
3. All of the following are essential for a valid real
estate contract, except:
a. Lawful object
b. Mutual consent
c. Capable parties
d. Parole evidence
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Review Quiz Chapter 5
4. An executed contract is a contract that is:
a. Signed
b. In writing
c. Completed
d. Recorded
5. An owner gives Ace Realty an exclusive right to sell listing
for 90 days. Thirty days later the owner finds a buyer and
seller the property with the services of Ace Realty. The:
a. Owner owes Ace Realty a commission
b. Owner does not owe a commission
c. Sale is voidable
d. Two of he answers are correct
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Review Quiz Chapter 5
6. When the owner of a piece of leased property gives
the lessee an option to buy, the option:
a. Requires the optionee to complete the sale
b. Is a lien on the seller’s title
c. Requires no consideration or fee
d. Is not a purchase contract until exercised
©2011 Cengage Learning
Review Quiz Chapter 5
7. If the seller refuses to sell after signing a valid
purchase contract and the buyer wants the property
instead of money damages, the buyer will sue for:
a. Specific performance
b. Reversion of title
c. Damages
d. recission
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Review Quiz Chapter 5
8. If the property in question is intended to be the
home of the buyer, the CAR deposit receipt
liquidated damage clause limits the buyer’s liability
upon default. The maximum liability for the buyer is
the amount of the deposit or what percentage of the
sales price, whichever is the lesser?
a. 3%
b. 5%
c. 10%
d. There is no limit
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Review Quiz Chapter 5
9. A real estate agent may legally refuse to show
property available for sale to a person of a minority
race if the:
a. Agent feels the home was not suited for the people
b. Owners were out of town and had left instructions
that the home was not to be shown to anyone
during their absence
c. Owners had given specific instructions against
showing the home to minority buyers
d. Agent felt the buyers would not like the location
©2011 Cengage Learning
Review Quiz Chapter 5
10. Four separate co-buyers of a parcel of land signed
a deposit receipt contract at different times and
places. A copy must be:
a. Given to the first signer only
b. Given to each at the time they sign
c. Given to the first and last signers only
d. Sent to each one after the last one signed
©2011 Cengage Learning
Answers Review Quiz Chapter 5
Real Estate Contracts
1.
A
6. D
2.
A
7. A
3.
D
8. A
4.
C
9. B
5.
A
10. B
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