Real Estate Transactions and Contracts: A Comprehensive Guide, Exams of Nursing

Download Real Estate Transactions and Contracts: A Comprehensive Guide and more Exams Nursing in PDF only on Docsity! 1 FINC 4673 LAW OF CONTRACT EXAM NEW AND LATEST REVIEW. Guaranteed A+ 2024 Default of contracts & types of damages - ✓✓✓BUYER DEFAULT: In the event of default by the buyer, the seller may have several options Liquidated damages Monetary damages Specific performance Punitive and compensatory damages must be pursued in court. Punitive damages punish the defaulting party, and compensatory damages are set to cover the actual injury or economic loss. SELLER DEFAULT: In the event of default by the seller, the buyer becomes the injured party. The buyer may have the following options: • Specific performance (see above) • Monetary damages (see above) • Refund of earnest money Leases and "right of first refusal" - ✓✓✓giving the tenant the right to purchase the leased property by matching or bettering any offer before the property will be sold to someone else. Default remedies and their results - ✓✓✓Liquidated damages. The seller can choose to accept the buyer's earnest money as liquidated damages, releasing all parties from any further obligation under the contract. Liquidated damages are damages that are established in the contract. • Monetary damages. In addition to specific performance, the injured party may "seek such other relief as may be provided by law." This would be an award of monetary damages by the court. Because monetary damages are awarded by the court, one never knows what they will be until the court rules. • Specific performance. The injured party files a court action seeking an order of the court directing the defaulting party to perform according to the terms of the contract. Specific performance is the only remedy that would possibly result in the full execution (closing) of the transaction. pg. 1 1 The primary difference between monetary and liquidated damages is that the court awards monetary damages, and liquidated damages are stipulated in the contract. Punitive and compensatory damages must be pursued in court. Punitive damages punish the defaulting party, and compensatory damages are set to cover the actual injury or economic loss. SELLER DEFAULT: In the event of default by the seller, the buyer becomes the injured party. The buyer may have the following options: • Specific performance (see above) • Monetary damages (see above) • Refund of earnest money - The buyer's acceptance of an earnest money refund terminates the contract, releasing both parties from any further obligation under the contract. Because this is a refund of the buyer's earnest money, this cannot be considered liquidated damages. Paragraph 11 - legal vs illegal entries - ✓✓✓In all states, license holders are barred from the unlawful practice of law. Therefore, license holders should ensure that any special provisions added to a contract are factual statements that do not change the legal effect of the contract. TVLB programs & provisions - ✓✓✓The Texas Veterans Land Board Housing Assistance Program (VHAP) is a benefit that every buyer with a military background should consider. To participate in the program, the veteran obtains an FHA, VA, or conventional loan from a participating lender. The qualification process is the same as for any other FHA, VA, or conventional loan. The difference is that the loan is sold to the Texas Veterans Land Board (VLB), as opposed to a secondary market purchaser such as Fannie Mae or Freddie Mac. The primary benefit to the veteran is that the rate on the Veterans Land Board loan is often up to one percent below prevailing market rates. Economic & physical characteristics of land - ✓✓✓Land has three physical characteristics: Indestructibility or durability refers to the fact that land cannot be destroyed. It remains, no matter what happens to it. It may go underwater, become a crater, or be added to. In any case, the land will still be there; it is permanent. pg. 2 1 chooses to buy. The contract is said to be a unilateral contract because only one party is obligated to perform. Paragraph 11 - Special provisions - what can an agent write - ✓✓✓license holders should ensure that any special provisions added to a contract are factual statements that do not change the legal effect of the contract. Prorations and prorated items at closing - ✓✓✓At closing, prorations for property taxes and property owner association fees will be calculated. Taxes for the year that have not been paid will be deducted from the seller's proceeds, usually through the day of closing. Prepaid items such as property owner association fees will be collected from the buyer from closing to the end of the year. Government rights in land (PETE) - ✓✓✓Police Power - the right of the government to regulate and control the way land is used. The most common example of police power is zoning. Eminent Domain - is the right of the government to take private land for public use. Examples of valid reasons for taking the land include schools, parks, hospitals, government buildings, roads, and utilities. Taxation - the government retains the right to tax real property. Escheat - if a person dies intestate (without a will) and without heirs, the government will take title. If a property is abandoned, escheat will also be the solution. The government does not want land to be unowned. (Note: Single, without children does not mean without heirs.) Government does not want land to be unowned. Offers, counteroffers, rejections, acceptance - ✓✓✓A counteroffer is made when a party changes an offer in some way and communicates that change to the other party. The counteroffer is actually a two- step process: pg. 5 1 the rejection of the original offer coupled with a new offer. A counteroffer communicated to the other party becomes a new offer. Rejection of the original offer. In most cases, a counteroffer is a rejection of the original offer. Acceptance of an offer means that the accepting party does so with no change to the contract whatsoever. Any change, no matter how trivial, turns the offer into a counteroffer. Real & personal property transfer documents at closing - ✓✓✓Things of a temporary or movable nature are not part of the real property. They are considered personal property. Personal property is also known as personalty or chattel. If personal property is being transferred along with real property, a bill of sale is generally used to accomplish the transfer, which would normally accompany the deed. Removing fixtures (by detaching them from real property or by uninstalling them) to create personal property is severance. Examples of fixtures include wall-to-wall carpeting, ceiling fans, window coverings, and built-in appliances Escrow & trust accounts, how they are used and who administers them - ✓✓✓A mortgage banker uses money or a line of credit to fund loans when the final closing conditions have been satisfied. RESPA - rules & prohibitions - ✓✓✓PROHIBITION AGAINST KICKBACKS AND UNEARNED FEES NO REFERRAL FEES NO SPLIT OF CHARGES EXCEPT FOR ACTUAL SERVICES PERFORMED THING OF VALUE DEFINED IN REGULATION X AGREEMENT OR UNDERSTANDING AS DEFINED IN REGULATION X pg. 6 1 Ownership estates - severalty, joint tenancy, syndicate, tenancy in common, entirety - ✓✓✓The form of ownership created when real estate is purchased is determined by the manner in which the property is deeded. An estate in severalty involves ownership of real estate by one individual or entity. The advantage of ownership in severalty is total control of the property. The disadvantage is full responsibility. In addition to individuals, companies may hold ownership in severalty. Tenancy in common is ownership of real estate by two or more entities in undivided interests. Because these interests are undivided, all co-owners share the right of possession of the property. A less popular type of ownership by more than one is joint tenancy. The unique aspect of joint tenancy is the right of survivorship of the tenants. When a joint tenant dies, his or her share is equally divided among the surviving joint tenants immediately. In order to create a joint tenancy, four unities are required. Time - Owners must acquire their interest at the same time. Title - They must acquire their interest from the same source (will, contract, deed, etc.) Interest - They must hold equal shares. Possession - Possession of the property must be shared equally. All of the four unities must vest at the same time, generally from a single deed of conveyance. Heirs and devisees have no claim on the property because joint tenancy is not an estate of inheritance. The final sursurvivor becomes an owner in severalty. Joint tenancy has been referred to as a "poor man's will. Statute of frauds - rules & exceptions - ✓✓✓Five essential elements must exist for a contract to be considered valid and enforceable. They are: Competent parties Offer and acceptance (mutual agreement) Legal purpose In writing (when required by law) pg. 7 1 Executed vs executory contracts - ✓✓✓An executory contract is defined as a contract that is binding on the parties, with one or more of the parties having contractual duties that have not yet been performed. The effective date is the date that acceptance was communicated to the offering party. From the effective date to closing, a contract is an executory contract. When the sale is closed, the contract has been fully executed. However, according to the TREC- promulgated contract forms, all representations made by seller and buyer "survive closing," which means that both parties remain liable beyond closing for their representations made in the contract.All oral negotiations are voluntary and do not become binding until committed to writing. FHA loans - insurance premiums associated w/them - ✓✓✓Because the FHA is a mortgage insurance program, premiums are paid into a pool of funds, out of which claims are paid when a borrower defaults on a loan. The cost of the mortgage insurance is passed along to the borrower in the form of a mortgage insurance premium (MIP). The borrower pays two premiums, an up-front premium at closing, and an annual premium. Up-Front Mortgage Insurance Premium (UFMIP): When a loan is funded, the FHA charges an Up-Front Mortgage Insurance Premium. The UFMIP can be paid at closing or added to the loan at funding. The UFMIP can be added to the loan even if it causes the loan to exceed the appraised value of the property. DTPA coverage categories - ✓✓✓Goods — are defined as tangible chattels (real property is tangible when purchased or leased. Under DTPA, the sale of a house is considered a good). • Services — means work, labor, or repair of goods. Brokerage is a service. • Consumer — an individual, corporation, partnership, or government source who seeks to acquire or purchase the goods or services. Any consumer can bring an action against a provider of services when the consumer can prove that the servicer was the producing cause of any of the following: pg. 10 1 • use or employment by any person of a false, misleading, or deceptive act or practice that is specifically identified in the act. • breach of an express or implied warranty. • any unconscionable action or course of action by any person. • the use or employment by any person of an act or practice in violation of the Texas Insurance Code. Producing cause requires proof that the act or omission was a significant factor in bringing about injury. Five elements of a valid and enforceable contract - ✓✓✓1. Competent parties 2. Offer and acceptance (mutual agreement) 3. Legal purpose 4. In writing (when required by law) 5. Consideration Common law vs statutory law - ✓✓✓Common law is a body of law developed in England and based upon "common sense" and local custom. Common law expanded over the years as a result of prior court decisions. Under common law, a court looks to the findings of prior courts when rendering a decision. The concept of common law was brought to the American colonies by English settlers. Statutory law is the body of laws and regulations enacted by federal and state legislatures. Much of what was once embodied in common law is now codified in statutes passed at the state and federal level. Contract definition - ✓✓✓A contract is an agreement between two or more parties to do something or to refrain from doing something. The SAFE Act - terminology - ✓✓✓The Secure and Fair Enforcement for Mortgage Licensing Act is designed to enhance consumer protection and reduce fraud. pg. 11 1 The federal SAFE Act required each state to enact SAFE legislation or defer to the U. S. Department of Housing and Urban Development (HUD) for such regulation. State SAFE legislation must be compliant with the federal SAFE Act, and HUD was charged with the responsibility of monitoring compliance. Types of businesses - ✓✓✓A sole proprietorship is a venture that is owned by one individual. A partnership is more easily created than a corporation and can be created with a simple written or oral agreement. A partnership must have one or more general partners. A general partner may take part in the day-to day management of the business and has full personal liability for partnership-related issues, including everything from financial obligations to personal injury lawsuits. The unlimited liability of the general partnership is a serious concern for anybody who might want to invest in a real estate venture. The limited partnership addresses that concern. A limited partnership includes two distinct classes of partners: • General Partner - The general partner is responsible for the day-to-day operations of the business and has full liability. At least one general partner is required in a limited partnership. The general partner is most often the "promoter" who brought the limited partners into the venture. • Limited Partners - The limited partner's liability is limited to the amount he or she invested in the partnership. The limited partner has no involvement in the day-to-day operation of the business. The limited partners are the investors in the venture. CORPORATE OWNERSHIP The corporate entity is comprised of three components: • shareholders (stockholders) who are the owners of the corporation • a board of directors elected by the shareholders who represent the interests of the shareholders • corporate officers who are responsible for the overall management of the operation of the business A corporation is regarded under the law as a distinct legal entity with the right to own real estate and other assets. pg. 12 1 knowledgeable of settlement services costs, RESPA also prohibits abusive practices such as Real Estate Settlement Procedures Act (RESPA), ensures that consumers throughout the nation are provided with more helpful information about the cost of the mortgage settlement and protected from unnecessarily high settlement charges caused by certain abusive practices. The act requires mortgage loan originators and servicers of residential loans to provide borrowers with timely disclosures of the nature and costs of the real estate settlement process. Designed to help consumers become more knowledgeable of settlement services costs, RESPA also prohibits abusive practices such as undisclosed referral fees and kickbacks. Wills and the associated terminology - ✓✓✓llThe formal judicial proceeding to prove or confirm the validity of a will, to collect the assets of the decedent's estate, to pay the debts and taxes, and to determine the persons to whom the remainder of the estate is to pass is called probate. Even if there is no will, the estate is still subject to a probate action. An individual who creates a will, known as a testator A will is a written expression of the desire of a person as to the disposition of that person's property after death. An individual who dies leaving a valid will is said to have died testate. That individual's estate will be settled by an executor chosen by that person and named in the will. The deceased's property will be passed to his or her beneficiaries at probate. Holographic or handwritten wills are also used in some states, including Texas. They are perfectly legal, but more easily contested. A nuncupative will is an oral or deathbed will. This type, while legal in many states, including Texas, is very vulnerable to being contested. Also, this type of will is only legal for personal property, not real property. A codicil is an addition or an amendment to an existing will. It must be done in the same in the same way as the original will. Therefore, a formal will requires a formal codicil, and a holographic will must have a holographic codicil. pg. 15 1 Intestate succession occurs when an individual dies, leaving no valid will. Types of deed & their uses/benefits - ✓✓✓general warranty deed. In this deed, the grantor states promises to warrant and defend the grantee's interest in the property, back to the sovereignty of the soil. A grantee who wishes to ensure that the grantor has good title should require this type of deed. In a special warranty deed, the grantor promises to warrant and defend title, but only against claims which may have arisen during his or her period of ownership - executors or trustees who are transferring title for another use this type of deed often. A grantee can protect his or her ownership interest with this type of deed by purchasing title insurance. A bargain and sale deed is one with no guarantees or warranties. A quitclaim deed is one with no guarantees, warranties, or covenants. The grantor does not even claim to own the property. Some other types of less commonly used deeds include a gift deed, in which the consideration is love and affection, a guardian's deed, by which a minor's interest is conveyed, a sheriff's or trustee's deed, in the case of foreclosure, a correction deed, to correct an error in a previously executed deed, and a tax deed, which is used to convey title to property sold by the government at a tax sale. Types of mortgage loan & their uses/purposes - ✓✓✓The fixed-rate mortgage loan has dominated residential lending in the United States for many years. The typical mortgage loan is for a term of 15 or 30 years, with the rate remaining fixed for the entire term of the loan. Most of these loans are fully amortized. In an amortizing loan, the monthly payment includes an amount that is applied first to the interest due, with the remainder of the loan payment applied to the outstanding loan balance (also known as the principal balance). The most widely used alternative loan was an Adjustable Rate Mortgage (ARM). pg. 16 1 These alternative repayment plans were viewed as a way of helping borrowers qualify for a larger loan than they would have using a standard, fixed-interest rate product. A blanket mortgage covers more than one piece of property. A package mortgage includes both real and personal property (fixtures and furnishings). Furnished condominiums in resort areas are often sold this way. In a budget mortgage, the monthly house payment includes principal, interest, taxes, and insurance (known as PITI). The tax and insurance portion of the payment is held in a special account called an escrow account. It is also called an impound, trust, or reserve account. BALLOON NOTE Balloon loans are beneficial to some borrowers, especially those who do not plan to stay in their homes for an extended period. A balloon loan is a partially amortized loan with a final payment substantially larger than the others. The benefit of this type of loan is a lower interest rate A hard money loan is a specific type of asset-based financing in which a borrower receives funds secured by the value of a parcel of real estate. A wraparound mortgage is a method of financing that preserves the low, existing interest rate on the original note. The wraparound is seller financing, in which a new loan takes a secondary lien position, and the original mortgage is not repaid. OPEN-END MORTGAGE An open-end mortgage permits additional borrowing on the same note and mortgage In a participation loan, two or more lenders own a share, allowing lenders to share or distribute the risk. Another form of participation loan allows the lenders to share in the profitability of the property, in addition to collecting principal and interest on the loan. pg. 17 1 Residential financing options - ✓✓✓The most common type of financing is obtained from a third party, such as a mortgage company or bank. Another possible financing scenario would be the assumption of the seller's existing mortgage. A third possibility is seller financing, with the seller agreeing to accept a portion of the sales price in the form of a promissory note, which usually calls for the payment of monthly principal and interest. Depositing Earnest Money - ✓✓✓Earnest money is not a requirement of a valid contract. Earnest money is a payment that is placed into escrow to show that the buyer is serious (earnest) in his or her intent to purchase the property. Earnest money serves as a source for the payment of liquidated damages to the seller in the event of default by the buyer. While there is no set requirement for the amount of earnest money to be paid, depending on the market, it ranges from a low of about one percent to as much as ten percent of the sales price. A buyer who wishes to purchase a property with a small deposit (or none at all) would be a source of concern to the seller. Time is of the essence when dealing with earnest money. If the buyer fails to deliver the amount of earnest money within the time required in the contract, the seller can terminate the contract or seek other remedies as outlined in the contract. Earnest money is deposited in an escrow account when the contract is signed by all parties, and acceptance is communicated. Seller's Disclosure Notice rules & the buyer's rights - ✓✓✓Buyer has not received the Notice. Within days after the Effective Date of this contract, Seller shall deliver the Notice to Buyer. If Buyer does not receive the Notice, Buyer may terminate this contract at any time prior to the closing and the earnest money will be refunded to Buyer. If Seller delivers the Notice, Buyer may terminate this contract for any reason within 7 days after Buyer receives the Notice or prior to the closing, whichever first occurs, and the earnest money will be refunded to Buyer. pg. 20 1 Causes for contract termination - ✓✓✓A contract is considered discharged when all parties have performed. In real estate sales, performance (full execution) is most often achieved at the closing of the transaction. A contract may also be discharged due to: • A change in the law that makes performance illegal. For example, if a buyer is purchasing or leasing a property contingent on operating a retail store, the contract could be discharged if a zoning change made that activity illegal. • The destruction of property. Examples include fires, earthquakes, acts of war, or hurricanes. Note that, if the seller intentionally destroys the property, he or she is not discharged, and is liable for damages. The death of a party does not necessarily discharge a contract. In many cases, if the seller is deceased, the sale can be completed by the estate. On the other hand, a buyer who dies will likely be discharged from the contract. The impossibility of performance may be a cause for the discharge of a contract. Agent's responsibilities when a client needs legal advice - ✓✓✓Refer to an attorney or legal professional. Cooperatives - ✓✓✓Owners within a cooperative do not own a specific unit. A corporation owns the entire cooperative complex. Those who wish to live in the cooperative buy shares in the corporation and receive proprietary leases on their units. When listing and selling cooperatives, a real estate license is often not required because the sale of a cooperative is the sale of stock rather than real property Types of leases - ✓✓✓Gross Lease - The gross lease is perhaps the simplest of all leases. In a gross lease, the landlord pays costs regularly incurred in ownership, such as taxes, insurance, utilities, and maintenance. The tenant pays only rent. This type of lease is riskier for the landlord because of the possibility of rising costs during the lease term. • Net Lease - A net lease is one in which, in addition to rent, the tenant pays expenses such as taxes, insurance, and maintenance. A net lease shifts the risk of cost increases from the landlord to the tenant. Net leases are often characterized as net (N), double net (NN), and triple net (NNN). pg. 21 1 • The single net lease (N) is a lease in which the tenant pays rent and property taxes. The landlord is responsible for all other costs associated with the property. • The double net lease (NN) is a lease in which the tenant pays rent, property taxes, and property insurance. The landlord is responsible for repairs and maintenance of the building. • A triple net lease (NNN) is a lease in which the tenant is responsible for rent and all fixed and variable expenses related to a property (property taxes, property insurance, maintenance In most cases, the landlord is still responsible for structural repairs. The advantage of a triple net lease to a tenant is that the rent is usually lower than it would be under a gross, single net or double net lease. The primary disadvantage to the tenant is that expenses are more variable and harder to anticipate and control. • Percentage Lease - In the retail environment, a percentage lease obligates the tenant to pay a base rent and a percentage of the gross sales. The percentage may vary, depending on the level of sales, and will be calculated based on breakpoints in the lease. The percentage rent provides an incentive to the landlord to build foot traffic in the center with promotions, events, and superior maintenance. Contract terms - ✓✓✓1. sale of other property contingency. In this case, the seller and buyer agree that the purchase of the property is contingent on the sale and closing of the buyer's existing property. 2. Appraisal contingencies are related to financing contingencies because lenders use appraisals to determine the amount of money they will lend on a property. This maximum loan amount is a percentage of the lesser of the sale price or appraised value. 3. inspection contingency Police power terminology - zoning & associated terms - ✓✓✓Police Power - the right of the government to regulate and control the way land is used. The most common example of police power is zoning. Other examples include wetlands legislation, environmental protection legislation, and health and fire codes. Government programs may include water conservation, land reclamation, crop programs, drought relief, and wildlife conservation. pg. 22 1 Consideration in a valid contract - ✓✓✓Consideration is defined as something given in exchange for a promise. There is no requirement that the consideration be in the form of money. Consideration in a contract could be nothing more than a promise made by one party in exchange for a promise made by the other. In the typical real estate contract, the seller agrees to convey the property to the buyer, and the buyer agrees to pay the negotiated sales price. Therefore, the purchase or sales price of the property is the consideration for the contract. As a rule, an earnest money deposit will be collected from the buyer when entering into a contract. The earnest money should not be confused with consideration. Lease terminology - subletting, assignment, option to buy, right of refusal - ✓✓✓Subletting is the transfer of some or all of the tenant's rights and/or leased space to another with liability remaining with the lessee. So, the sublessee pays rent to the lessee, who, in turn, pays the landlord. The key distinction between assignment and subletting is that assignment releases the original. An assignment of a lease occurs when a tenant's rights and liabilities are transferred to another. When the assignment is complete, the original tenant is no longer obligated under the lease. An option agreement gives a potential buyer or tenant the right to purchase or lease a property. Right of first refusal (ROFR), also known as first right of refusal, is a contractual right to enter into a business transaction with a person or company before anyone else can. Statute of Frauds & leases - ✓✓✓In many states, lease agreements for one year or less are the exception to the Statute of Frauds Listing Agreements • Management Agreements • Buyer Representation Agreements • Lease and Lease Purchase Agreements • Options • Right of First Refusal • Cancellation and Rescission Agreements pg. 25 1 Methods of creating easements - reservation, prescription, necessity, grant, agreement, condemnation - ✓✓✓Grant - the easement is given specifically by one party to the other. "A" sold lot "B" and granted the easement in the deed. • Reservation - the seller, in granting property to a buyer, reserves an easement in the deed. "B" sold lot "A" and reserved the right to cross over "A" in the deed. • Implied grant - in selling lot "B," "A" did not actually grant the easement in writing but implied in word or action that access to property "B" would be by easement. • Prescription - continuous use of the land over time without the permission of the owner establishes the right to use the land. (An encroachment is the unauthorized intrusion of another's property onto an adjoining property. An encroachment that is allowed to remain can eventually acquire the right to be there.) Prescription may also be called limitation Necessity - the courts may award an easement to a property owner who has no legal access to his or her land. (Usually in the case of "landlocked" property.) • Condemnation - The government, under its power of eminent domain, takes an easement Presentation of offers - methods - ✓✓✓Under ideal circumstances, an offer on a residential property is presented in writing on the required forms, including any needed addenda. On the other hand, circumstances are not always ideal, and any offer must be presented, even if it is an oral offer. An offer can be communicated by: • phone • fax • e-mail • letter • hand delivery pg. 26