Real Estate Economics 156

Fred Foldvary

Contracts

Contractus est quasi actus contra actum.

A contract is as it were, act against act.

Quid pro quo, something for something. Mutual consideration.

Contractus ex turpi cause, vel contra vonos mores, nullus est.

A contract founded on a base consideration, or against good morals, is null.

Including a slave contract.

Contractus legem ex conventione accipiunt.

Contracts receive legal sanction from the agreement of the parties.

A legally valid contract must have the following elements:

Offer, acceptance, consideration, parties with capacity, and a lawful purpose.

An offer is a proposal to do something or pay some amount for something.

An offer creates the power of acceptance.

The offeror, maker of the offer, promises that he is willing to be bound by that proposal.

The offer becomes a contract upon acceptance by the offeree.

The other party can make a counter offer, which then becomes a new offer.

The offeree rejects the offer and proposes a new offer.

Consideration is the inducement to a contract.

It is the cause, motive, or influence which induces a party to enter into a contract.

There can be express or implied consideration.

Consideration implies that each part to a contract must give up something of value.

All parties must have contractual capacity.

Each must be mentally capable of understanding the contract.

As a bright line, the law presumes that minors do not have capacity.

A contract for an illegal purpose may make it void.

All contracts involving land or attachments must be in writing to be enforcible.

Failure to perform according to contract is a breach of contract.

The victim may in some cases sue for specific performance, or seek payment for damages.

Conditional contracts include contingencies: financing, title, inspection, acceptance of reports.

Offers and counteroffers can be withdrawn by the offeror at any time prior to acceptance.

The financing contingency must involve good faith by the buyer.

He has to attempt to borrow the money within a reasonable time interval.

The escrow agent, a neutral third party,

must safeguard the deposit according to the terms of the contract.

Other contracts.

Option to buy.

One purchases the right to buy the property at a particular price during a particular time.

Unlike stock options, a real estate option is for a specific property.

The option ensures that the property will not be sold to another party before the option holder has made a final decision. In turn, the property owners gets money for the option.

An installment contract is also called a contract for deed or a land contract.

The seller retains title, and the buyer has possession as the equitable owner.

Negotiation strategies

Find out what is important to the other party; their subjective values can be different from yours.

Closings

The buyer is responsible for obtaining financing, examining title, getting the land surveyed, obtaining insurance, and having the property inspected.

The seller is obligated to disclose significant defects.

The seller pays the remainder of his loan from the sale, or

transfers the loan to the buyer for an assumable loan.

The seller pays the real estate commission, but sometimes there is a buyer’s agent also.

An escrow is a deed, money, and other items delivered by the grantor to a third party,

who holds these until the contract is effective, and then delivers them to the grantee.

It is a system of transferring documents and assets.

The escrow agent, such as a bank or insurance company,

is an intermediary and safeguards the deposit.

Points are an extra charge for a loan, beyond the interest payments.

They are paid when one gets a loan.

Each point is one percent of the loan.

Closing costs can include loan points, appraisals, mortgage insurance, fees to the closing agents, possibly lawyers’ fees, real estate commissions.

There is also a real estate transfer tax, and prorete insurance and property tax payments.

As to which party pays closing costs such as taxes, commissions, and insurance,

this depends on local custom and the contractual agreement.

Costs such as taxes are often shared and prorated.

The borrower and lender close the loan.

The escrow agent closes the transaction.

Title is transferred.