Chapter 13
Contracts for Sale and Closing
Real Estate
FIN 331
The Most Important Document
A. Contract for Sale
1.
2.
3.
4.
Determines price and terms of the transaction
Defines property interest being conveyed
Determines the grantee
Determines other conditions of the transaction
a. Financing
b. Date of occupancy
c. Any repairs or other conditions of the sale
Requirements for a Contract for Sale
A. A [written] contract for sale must contain the
following elements
1. Competent parties: parties must be of minimum legal
age
2. Legal objective: contract objective must be legal
3. Offer and acceptance: contract binds parties to
specific actions in the future
4. Consideration: the value given up by each party to the
contract
5. No defects to mutual assent: the contract may be
broken if there are defects
6. a proper legal description of the property
7. Must be in writing (Statute of Frauds)
Statute of Frauds
A 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 remedy
2. 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.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Parties to the contract
Description of the property (includes legal description)
Purchase price
Time for acceptance of offer and counter offers
Closing date
Date of the contract
Date and Place of closing
Financing terms of any
Prorating of costs and expenses
Required inspections and disclosures relevant to the property
Assurance of good and marketable title
Remedies for breach of contract
Responsibilities of the escrow agent and broker
Earnest money deposit (consideration)
FORM OF THE CONTRACT FOR SALE
C. Forms of Title
1. Legal title: ownership of a freehold estate
2. Equitable title: grants the right to obtain legal
title
3. Buyer obtains equitable title when a contract
for sale of real estate is fully signed
D. Rationale for written contracts
1. Reduce chances for fraud
2. 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 Terminology
1. 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 liability
b. 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 deal
1. 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.
2.
3.
4.
Provisions for survey
Proration procedure
Disbursement of funds
Recourses in case of default
Handling Funds
A. Broker normally handles funds for a transaction
B. Broker must put deposits in escrow
1. Escrow account: An account holding funds dedicated
for a particular purpose
2. 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
institutions
2. FHA and VA loans
3. Loans to be sold to Fannie Mae or Freddie
Mac
REAL ESTATE SETTLEMENT
PROCEDURES ACT
B. Requirements:
1. Borrower to be provided information booklet
2. Borrower receives good faith estimate of
closing costs
3. Closing statement must be HUD-1 form
4. Closing statement available 24 hours before
closing
5. Kickbacks to closing-related vendors are
prohibited
6. Limit to lender escrow deposit requirement
REAL ESTATE SETTLEMENT
PROCEDURES ACT
C.Pre-closing requirements
1.
2.
3.
4.
5.
Good faith estimates the buyers closing costs
Check property for encroachments
Review zoning
Property inspected; include termite inspection
Verify seller’s required actions
REAL ESTATE SETTLEMENT
PROCEDURES ACT
D. Pre-closing actions of closing agent
1.
2.
3.
4.
5.
Prepare or obtain general warranty deed
Prepare mortgage and note
Prepare check from lender to the seller
Prepare HUD-1 closing statement
Obtain satisfaction of mortgage from sellers’
mortgagee confirming balance
REAL ESTATE SETTLEMENT
PROCEDURES ACT
E. Financial items in the closing
1.
2.
3.
4.
Purchase price (what buyer pays)
Earnest money deposit (buyer prepaid)
Assumed mortgage (takes over payments)
Purchase money mortgage (seller loans to
buyer)
REAL ESTATE SETTLEMENT
PROCEDURES ACT
F. Prorated Items: Seller’s days, Buyers days
1. Interest on assumed mortgage
2. Existing insurance
3. Property taxes
Preclosing Steps for Buyers
A. Had property surveyed for encroachments
B. Reviewed private restrictions for violations
C. Reviewed zoning for neighborhood
D. Examined estimated closing costs
E. Ordered lenders title insurance
F. Had property inspected
G. Verified that seller has performed required
tasks
H. Arranged utility service transfers
Preclosing Steps for Sellers
A. Order owner’s title policy
B. Order termite inspection
C. Order discontinuation of hazard insurance
and utilities
Preclosing Steps for Lender
A. Prepare or obtain general warranty deed
B. Prepare mortgage and note
C. Prepare check from lender to the seller
D. Prepare HUD-1 closing statement
E. Obtain satisfaction of mortgage from
sellers’ mortgagee confirming balance
Financial Items at Closing
A. Title insurance – owner’s
B. Title insurance – lender’s
C. Attorney – buyer
D. Attorney – seller
E. State doc. tax – Mtg.
F. State doc. tax – Deed
G. Intangibles tax – Mtg.
H. Recording of new mtg.
I. Recording of deed
J. Brokerage commission
A. Paid by seller
B. Paid by buyer
C. Paid by buyer
D. Paid by seller
E. Paid by buyer
F. Generally paid by seller
G. Paid by buyer
H. Paid by buyer
I. Paid by buyer
J. Paid by seller
REAL ESTATE SETTLEMENT
PROCEDURES ACT
A. Post closing actions
1. Recording the new mortgage
2. Record the deed
3. 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, 8
1. How is the pro rata of miscellaneous charges
accomplished? Example: insurance
premiums, water and sewer charges, property
taxes: review study questions one through
four