Champions School of Real Estate-Law of Contracts Exam 1(ANSWERED)

Default of Contract - ANSWER When a party to a contract fails to perform under the contract, also known as breach of contract. Buyer Default(Remedies) - ANSWER In the event of default by the buyer, the seller may have several options which include: -Liquidated Damages -Monetary Damages -Specific Performance Liquidated Damages - ANSWER 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 - ANSWER 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 - ANSWER 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. Buyer Default - ANSWER In the event of default by the buyer, the seller may have several options which include: -Liquidated Damages -Monetary Damages -Refund of Earnest Money Refund of Earnest Money - ANSWER 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. TREC has only two promulgated lease forms: - ANSWER 1. Buyer's Temporary Residential Lease 2. Seller's Temporary Residential Lease Buyer's Temporary Residential Lease - ANSWER For use when the buyer occupies the property for no more than 90 days prior to closing. Seller's Temporary Residential Lease - ANSWER For use when the seller occupies the property for no more than 90 days after closing. Right of First Refusal - ANSWER Gives the tenant the right to purchase the leased property by matching or bettering any offer before the property will be sold to someone else. -TREC does not have promulgated forms for this. Lease-Purchase Agreement - ANSWER Gives the tenant occupancy in the present time and the right to purchase at a future date. In an option to purchase, the price is set when the lease agreement is negotiated, which is advantageous to the tenant-buyer. -TREC does not have promulgated forms for this. TVLB (Texas Veteran's Loan Program) - ANSWER 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. Physical Characteristics of Land - ANSWER 1. Indestructibility or durability 2. Immobility 3. Nonhomogeneity Economic Characteristics of Land - ANSWER 1. Scarcity 2. Modification 3. Fixity 4. Stitus Indestructibility or Durability - ANSWER Refers to the fact that land cannot be destroyed Immobility - ANSWER Refers to the fact that land cannot be moved. Nonhomogeneity - ANSWER Refers to the fact that no two parcels of land are the same. Scarcity - ANSWER Comes from the theory of supply and demand. When there is a shortage of something that individuals want, the price goes up. Modification - ANSWER Refers to the fact that value is affected by man-made changes to the land. Fixity - ANSWER Refers to the fact that land, and additions to the land, such as buildings, take long periods to pay for themselves. Stitus - ANSWER Refers to the location of the property or land from an economic, not geographic view point. Responsibility of Agents when Receiving an Offer - ANSWER A license holder has a duty to communicate or submit offers to his or her client. The communication or submission of an offer should be done promptly because the license holder's duty is to keep the principal or client informed at all times of material information. An Offer can be Communicated by: - ANSWER - Phone - Fax - E-mail - Letter - Hand Delivery What can be done when an offer is made? - ANSWER 1. Do nothing 2. Reject 3. Accept 4. Counteroffer What is done when a seller receives multiple offers? - ANSWER If a broker receives more than one offer, all offers must be presented to the seller unless instructed otherwise. No offer has a priority of presentation over another. -Ex: , if a license holder receives an offer at 9 a.m. and presents it to the seller. Then, receives a second offer at 3 p.m. (before the seller has accepted the first offer), the license holder has the duty to submit the later offer to the seller. If the agent representing the second buyer is aware that multiple offers have been received, then the listing agent should notify the agent representing the first buyer that multiple offers have been received. Termination of Offers - ANSWER An offer can be terminated prior to acceptance by the offeree due to: - The acts of the parties - The operation of law Abstract of Title - ANSWER An investigation of all the documents that have been recorded about a property. Title Policy - ANSWER Insurance policy against losses resulting from defects in title. Attorney's Opinion of Title - ANSWER An opinion regarding the state of the title and its ability to be transferred. Chain of Title - ANSWER A history or list of all recorded owners back to the sovereignty of the soil. Cloud on the Title - ANSWER A missing link or break in the chain of title. General Warranty Deed - ANSWER Contains covenants in which the grantor formally guarantees that good and marketable title is being conveyed. Highest deed - 5 covenants. Contract - ANSWER An agreement between two or more parties to do something or to refrain from doing something. Implied Contract - ANSWER Contracts created by our behavior. -Ex: When ordering a meal in a restaurant, a contract is created. The restaurant agrees to deliver the meal, and the customer implicitly agrees to pay for it. Express Contract - ANSWER A contract in which the terms of the agreement are fully and explicitly stated in words, oral or written. - Ex: On the other hand, if somebody came to your door and offered to mow your lawn for $30.00, your acceptance of the offer created an express contract. Bilateral Contracts - ANSWER Contracts in which both parties are obligated to perform. - Ex: A contract of sale between a buyer and seller because both parties have duties to perform. The seller's primary duty is to show up at closing and sign a deed conveying ownership to the buyer. The buyer's primary duty is to show up at closing and pay the agreed consideration (sales price). Option Contracts - ANSWER An agreement between a buyer and seller or landlord and tenant. A seller, in exchange for some form of consideration (an option fee), gives the buyer the right to purchase the property at some present price and terms for a period. These contracts are said to be unilateral because only one party is obligated to perform and is said to lack mutuality. Five Elements of a Valid and Enforceable Contract: - ANSWER 1. Competent Parties 2. Offer and Acceptance (Mutual Agreement) 3. Legal Purpose 4. In Writing (when required by law) 5. Consideration Competent Parties - ANSWER A person who enters into a contract under the influence of drugs or alcohol could be considered mentally impaired. In most cases, a person seeking to void a contract on such a basis must show that the other contracting party used the drugs or alcohol as an inducement to sign. It would seem that providing clients with alcohol before writing a contract could be a risky marketing strategy. Offer and Acceptance (Mutual Agreement) - ANSWER A valid contract must be based upon the consent of the parties. The contract must, therefore, reflect the intent and wishes of the parties. Mutual consent is often referred to as mutual consent or a "meeting of the minds." For a contract to exist, there must have been a meeting of the minds (offer and acceptance) between the parties. The determination of mutual consent is usually a question of fact and is completed by this process. Legal Purpose - ANSWER A contract for an illegal purpose is void, and the law treats the contract as if it were never created. An example of a void contract would be one to have somebody killed or to deliver illegal drugs. In Writing - ANSWER In order to comply with the Statute of Frauds, contracts for the conveyance of an interest in real estate or leases for a term of more than one year must be in writing. If the contract is not in writing, it would be valid, but not enforceable. Consideration - ANSWER Defined as something given in exchange for a promisie. Executory Contracts - ANSWER Once all the terms of an offer have been agreed to and signed by the parties, and the acceptance communicated to the offeror, the contract becomes binding on the parties. Executed Contracts - ANSWER Occurs at closing when a all parties have performed the contract becomes "fully executed". Assignment of a Contract - ANSWER Transfers all of the rights related to the contract to another party known as an assignee. The Assignee assumes primary liability for performance under the contracts, and the assignor, unless released, remains secondary liable. Novation - ANSWER Occurs when a new contract is substituted for an existing one. The new agreeement may include new parties, which becomes a novation of the parties. A novation may occur when a contract that has been marked up with many changes is replaced with a clean copy. Statute of Frauds Rules and Exceptions - ANSWER Special Provisions(What can and Agent Write?) - ANSWER For states (like Texas) that use standard contract forms, a blank space is usually provided to allow for special provisions to the contract. This space is where terms can be addressed that are not covered in standard contracts or addenda forms. 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. Prorations and Prorated Items at Closing - ANSWER 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. Depositing Earnest Money - ANSWER Is deposited in an escrow account when the contract is signed by all parties, and acceptance is communicated. Residential Financing Options - ANSWER 1. The most common type of financing is obtained from a third party, such as a mortgage company or bank. In Texas, financing information is now on a separate addendum. 2. Another possible financing scenario would be the assumption of the seller's existing mortgage. All FHA and VA loans are assumable. Conventional loans are generally not assumable. 3. 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. Statute of Frauds and Leases - ANSWER In many states, lease agreements for one year or less are the exception to the Statute of Frauds. In such cases, an oral lease for one year or lease is valid and enforceable. In spite of this exception, to avoid confusion and misunderstanding, all lease agreements should be in writing. Government Rights in Land (PETE) - ANSWER - Police Power - Eminent Domain - Taxation - Escheat Police Power - ANSWER The right of the government to regulate and control the way land is used. Eminent Domain - ANSWER The right of the government to take private land for public use. Taxation - ANSWER The government retains the right to tax real property. Escheat - ANSWER If a person dies intestate (without a will) and without heirs, the government will take title to his real property under this right. Police Power Terminology - ANSWER - Zoning: - Downzoning: Changing the zoning of a property to lower a value. - Setback: The amount of space required between the lot line and the building line. - Buffer Zone: An area of land separating one land use from another, such as residential from commercial. - Building Codes: All residential structures must conform to code, whether they are site-built homes or modular homes Land - ANSWER Defined as the surface of the earth, extending downward to the center of the earth and upwards above the surface to infinity. Real Estate - ANSWER Includes all that is encompassed in land, with the addition of all man-made additions to the land (improvements) such as roads, houses, and commercial buildings. Real Property - ANSWER A more broad term that foes beyond the physical real estate and includes rights that a person has in the land. These rights are often referred to as the "bundle of rights." Surface rights - ANSWER The owner of surface rights has the ability to develop (improve) the surface and to use resources extracted from or near the surface, including stone, gravel, water, and limestone. Subsurface Rights - ANSWER Include the rights to oil, gas, and other minerals and are commonly conveyed through a lease, mineral deed, or by reservation. Air rights - ANSWER Extend above the surface without limitations. Improvements - ANSWER Any man-made additions to the land that are permanent. Fixtures - ANSWER Personal property that has become attached to the land in such a way as to become real property. Real and Personal Property transfer documents at closing - ANSWER 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. RESPA Prohibitions - ANSWER Prohibits any person who, pursuant to any agreement or understanding, gives or receives a fee or a thing of value (including payments, commissions, fees, gifts, or special privileges) for the referral of settlement business. Payments in excess of the reasonable value of goods provided or services rendered are considered kickbacks. Estate in Severalty - ANSWER Involves ownership of real estate by one individual or entity. Co-ownership - ANSWER Involves ownership of real estate by two or more entities. Trust - ANSWER A property may be placed in a trust, with ownership conveyed to a trustee for the benefit of others. Tenancy in Common - ANSWER 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. If a deed does not make the type of joint ownership clear, Texas courts will always assume that the owners are tenants in common. Joint Tenancy - ANSWER 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. 1. Time - Owners must acquire their interest at the same time. 2. Title - They must acquire their interest from the same source (will, contract, deed, etc.) 3. Interest - They must hold equal shares. 4. Possession - Possession of the property must be shared equally. Syndicate - ANSWER When two or more parties join together to create and operate a real estate investment. Tenancy by Entirety - ANSWER The joint ownership, recognized in some states, of property acquired by husband and wife during marriage. Upon the death of one spouse, the survivor becomes the owner of the property. (Not used in Texas) Lien - ANSWER A right given by law to certain creditors to have debts paid out of the property of a defaulting debtor, usually through a court sale. Common Examples include: - Mortgages and Trust Deeds - Tax Liens - Judgements - Mechanics and Materialman's (M&M) liens Encumberances - ANSWER A claim, lien, charge, or liability attached to and binding real property. This places limitation on property owners and diminishes their property rights. Contingency - ANSWER A provision in a contract that requires a specific act or event happens for the contract to be binding on the party and must be specific as to what action needs to take place, who must complete the action, and when it will be completed. Types: - Title - Financing - Sale of Other Property - Appraisal - Inspection Ammendments - ANSWER As a transaction progresses, amendments to the original contract may be needed. Common amendments include: - Changes to the closing date - Changes to the sales price, down payment and/or amount financed. - Repairs that the seller agrees to perform. - Removal or waiver of contingencies Addendum - ANSWER An attachment to a contract that adds or further describes the rights and duties of the parties. Common forms: - Financing addendum - Lead-based paint - Seller Financing - Flood Hazards - Mineral Reservations - Property owners association information Promissory Note - ANSWER Also known as a real estate lien note, is the borrower's unconditional promise to repay and includes the amount borrowed, payment amount, due date, and rate of interest. Mortgages or Deeds of Trust - ANSWER Can be one of two formes, depending on state law and custom. A standard mortgage is a contract between two parties: - The borrower (mortgagor) and - The lender (Mortgagee) If the borrower fails to repay the note, the mortgage allowed the lender to foreclose the property. Foreclosure - ANSWER The legal procedure whereby the secured property may be sold to satisfy the unpaid promissory note. Short Sale - ANSWER May take place when a seller is unable to sell his or her property at or above what the seller owes the lender. Title Theory State - ANSWER A mortgage is an actual transfer of ownership from the borrower to the lender. Title remains with the lender until the loan is repaid. The lender transfers title back to the borrower when the loan is repaid. Lien Theory State - ANSWER The borrower retains ownership of the property, subject to the lien that secures the repayment of the loan. Lease-Purchase Agreement - ANSWER A contract used in real estate that combines some of the elements of a sale with a lease. Lease Option - ANSWER Allows a tenant to buy the property at a preset price and terms for a given period. Can also be called a lease with an option to buy. Contract for Deed - ANSWER A contract between buyer and seller where the buyer agrees to make regular payments to the seller. FHA (Federal Housing Administration) - ANSWER 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. Up-Front mortgage insurance premium (UFMIP) - ANSWER A one-time mortgage insurance premium on FHA mortgage loans that is paid at closing. Annual Premium - ANSWER The annual premium is based on the loan-to-value ratio (LTV), and is utilized for 30-year loans with an LTV greater than 95%. The premium is 1.35% of the base loan amount. The annual premium