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Exam Prep - Ch 4
Real Estate Contracts and Agency
| Question | Answer |
|---|---|
| TYPES OF CONTRACTS | Contracts can be express or implied. |
| Express contract | Written or stated |
| Implied contract | By actions or evidence |
| Unilateral contract | Binds only one party An option is a unilateral contract. |
| Option contract | The right to purchase property within a definite time period at a definite price. |
| Bilateral contract | An exchange of promises, which binds both parties |
| REQUIRED ELEMENTS OF A CONTRACT | 1. Competent parties 2. Offer and acceptance (mutual agreement, or mutual consent) without qualification 3. Legal purpose aka legality of object 4. In writing - (Statute of Frauds) 5. Consideration - something of value (payment or a promise) |
| Executed vs. executory | The term executed, or the phrase fully executed, is used when all the terms and conditions of the contract have been met and carried out. It is considered performed or discharged. |
| Executory contract | A contract that is signed but not yet carried out |
| The void or invalid contract | has no binding effect on the parties who made it – for example, an agreement with someone who is documented as insane |
| Voidable vs. unenforceable | voidable agreement - one party has the right to withdraw or rescind (a minor, someone who signed under duress, or under the influence of alcohol or drugs, an injured party, etc.). . The contract can be said to be “voidable due to incapacity |
| Unenforceable agreement | is one that violates the Statute of Frauds and will not be enforced by the courts – the verbal real estate agreement. |
| A contract may be terminated for any of several reasons | bankruptcy or foreclosure new laws making it illegal destruction of the property. If one of the parties to a contract dies, the contract will be binding on the heirs. |
| Default | The non-performance of a duty under a contract. |
| Liquidated damages | Money damages set out in the contract |
| Punitive damages | Punish the defaulting party, and compensatory damages are set to cover the actual injury or economic loss. |
| Statute of Frauds | All contracts that relate to the transfer of any interest in real estate must be in writing to be enforceable |
| Time is of the essence | A clause in a contract that allows each party to hold the other to strict performance by the date specified is called time is of the essence |
| Assignment vs. novation | An assignment of a contract a new party will step in and replace the existing party – the agreement does not change. |
| Novation | A new contract is substituted for an existing contract. |
| An offer | A properly completed form with a price less than, equal to, or more than the seller’s asking price and signed by the buyer. |
| Counteroffer | A rejection of the offer and the presentation of a new offer |
| Earnest money | Not necessary in a sales contract; it is not the consideration. The amount of earnest money is determined by agreement of the parties. In the usual real estate sales contract, the earnest money will be the liquidated damages if the buyer defaults. |
| Contingency | A condition in a contract, which has not yet been met Common contingencies include financing, the sale of another property, insurability and inspections. |
| The economic life | The period of profitable use during which improvements contribute to value or are being depreciated |
| The boot. | Additional capital or property included in a transaction to even out the exchange |
| The IRS permits 1031 tax deferred exchanges. | • An investor must own a property for 1 year before they can do a 1031. • At the time of a 1031, taxes on capital gains are deferred. • The only thing taxed at the time of a 1031 is the boot. |
| Installment sale | The seller is saving on capital gains tax by spreading the gain over a period of more than one tax year. In an installment sale title transfers to the buyer at closing |
| An installment sale and an installment contract | Are two different types of seller financing. |
| In an installment contract aka contract for deed | The seller is working with a buyer who typically cannot qualify for traditional financing |
| The Principal | The client. |
| The Principal-Agent relationship is a fiduciary relationship. | The relationship is based on trust. The principal is often referred to as the client |
| Public responsibility | honesty, integrity, fairness, disclosure of material facts, and accounting of funds held. (These are your duties to customers or third parties in a transaction.) An agent does not support or defend a customer’s interest |
| Fiduciary responsibility | put the interests client 1st, give full disclosure t (advice and opinions in addition to disclosing all pertinent facts ) loyal to your principal & competent. (duties to your client.) Agent supports & defends his client’s interests. |
| Attorney-in-fact | Person with power of attorney |
| Universal agency | gives the agent the authority to represent his client in all matters, both business and personal. It is the equivalent of having unlimited power of attorney and is very rare in real estate. |
| General agency | (Owner - Property Manager) (Broker - Sales agent) |
| Power to bind a principal | Is the power to sign a legally binding agreement in the name of your principal. |
| Limited Power of Attorney | Can be used to create general agency Examples: Owner- Property Manager, Broker - Sales Agent |
| Special or limited agency | Gives the agent the power to perform only specific acts and no others. This agent does NOT have the power to bind his client/principal. ( examples: Buyer Representation Agreements and Listing Agreements) |
| Employment contracts. | • A Buyer’s Representation Agreement - fiduciary to buyer • A Listing Agreement employs the broker to act as a fiduciary to the seller. • A Management Agreement employs the broker/property manager to act as a fiduciary to the owner. |
| A single agency broker | Is one who does not act as a dual agent when one of the broker’s buyer clients wants to purchase an in-house listing. |
| A transactional broker/facilitator | Is a licensee who assists a buyer and seller in reaching an agreement in a real estate transaction but does not have an agency relationship with either party |
| A Dual agency broker | Practicing under the Common Law of Agency and agrees to represent both parties with their written permission Not legal in TX |
| Intermediary | In Texas, a broker who agrees to represent both parties in a single transaction must do so as an Intermediary. Intermediary is a Statutory Law concept. |
| A principal’s duties to an agent are: (CRIP) | • Compensation – pay the commission when earned • Reimbursement – repay approved expenses • Indemnification – defend the agent when the agent acts on the client’s instruction • Performance – comply with the written agreement |
| An agent’s duties to his principal are: (OLD CAR) | • Obedience • Loyalty – ( agent's primary or most important duty) place your client’s best interests first • Disclosure – reveal all known facts, give non-legal advice & opinions • Confidentiality – protect the private information of your client |
| An agent’s duties to his principal are: (OLD CAR), cont | • Accounting – handle funds with care . A broker handling client funds must never mix them with his/her own (commingling) or spend client or commingled funds (conversion). • Reasonable care – protect the property and legal interest of your client |
| Broker and commissions | Only a broker may earn a commission, and only a broker may sue to collect a commission |
| compensation/employment agreement must be in writing | A a compensation/employment agreement in writing to enforce it. (A verbal agreement makes you a volunteer - no commission is paid) |
| Agency coupled with an interest, | When an agent is also the seller, buyer, landlord or tenant, this dual role must always be disclosed. |
Created by:
deidresj
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