Chapter 11, 12 Real Estate Contracts and Residential Mortgages

Contract

1. Contracts are agreements between two or more competent parties that create an obligation to do or not to do a specific thing.

2. The terms must be clear and enforceable. Contracts may be written or oral.

The four essential elements to create a valid contract are:

lawful subject, offer and acceptance (meeting of the minds), consideration, and competent parties.

Creation of a contract

is when the offer of one party is accepted, and acceptance of the offer is communicated to the person who made the offer.

The memory device COLIC represents the elements of a valid and enforceable real estate contract

which stands for Competent Parties, Offer, Legal Purpose, Intent, and Consideration.

Statue of Limitations

provides time limits during which parties are allowed to bring legal action to enforce their rights under a contract

Oral contracts

four years

Written contracts

five years

Memory Device: WILD CARD

A mnemonic that helps remember the key differences between types of contracts in real estate.

Memory Device “BRRLAP”

A mnemonic for remembering the key elements and differences in real estate contracts.

Offer and Counteroffer

The party who makes an offer is called the offeror, while the party receiving it is the offeree. If the offeree changes any of the terms or conditions of the original offer it becomes known as counteroffer.

The three basic remedies for a breach of contract are as follows:

damages, specific performance, and rescission.

Earnest money deposits

The vendee customarily gives a binder deposit, also called the earnest money, to show serious intent to buy the property.

Equitable Title

Is the interest held by one who has agreed to purchase property but has not yet closed.

Homeowners’ Association Disclosure

F.S. 720 requires that a homeowners' association disclosure be provided to potential buyers before the sale, informing them of the association's rules, regulations, and any fees.

listing contract

A legal agreement between a property owner and a real estate broker, granting the broker the right to market and sell the property.

Net listing

A type of listing agreement where the seller sets a minimum price for the property, and the broker keeps any amount over that as commission.

Single percentage example: Calculating a sales associate’s share of the commission

A broker charges a commission of 5% of the gross sales price. A sales associate sells a property for $308,500 and receives 60% of the broker’s commission due, and what is the sales associate’s share of the commission.

$15,425 Total commission due

$9,255 is the sales associate's share of the commission.

Option contract

A contract that gives a buyer the exclusive right to purchase a property at a specified price within a certain timeframe, often in exchange for a fee.

Parties to an option

The parties to an option contract typically include the optionor, who grants the option, and the optionee, who receives the right to purchase the property.

Title theory

A legal theory where the lender retains title to the property until the borrower repays the loan in full.

Promissory note

A written promise to pay a specified amount of money at a designated time, often used in real estate transactions to secure a loan.

Mortgage

A legal agreement in which a borrower pledges property as security for a loan, allowing the lender to take possession if the borrower defaults.

A valid mortgage

1. Must be in writing

2. Be signed by the mortgagor

3. Conform to the same requirements as any valid contract

4. Contain the legal description of the property

5. Be witnessed by two persons

Letter of satisfaction

A document from a lender confirming that a debt has been paid in full and that the mortgage lien on the property is released.

Acceleration clause

allows the lender to demand full repayment of the loan if the borrower defaults or fails to meet certain conditions.

Defeasance clause

a provision in a mortgage that cancels the mortgage obligation once the debt is paid in full.

Due-on sale clause

a provision allowing the lender to demand full repayment of the loan if the property is sold or transferred, ensuring that the new buyer cannot assume the existing mortgage.

Escalation clause

this allows the lender to increase the interest rate or payments if specified conditions, such as an increase in market rates, occur.

Prepayment clause

a provision that permits the borrower to pay off all or part of the mortgage before the due date, often with specific terms regarding penalties or fees.

Receivership clause

a provision that allows a lender to take control of the property in the event of default, typically to protect their interests during foreclosure or bankruptcy.

Release clause

a provision that allows the borrower to be released from liability on a mortgage when certain conditions are met, usually related to the sale of a property.

Subordination clause

a provision that allows a mortgage to take a lower priority in claim to repayment than an existing mortgage, often used to facilitate refinancing.

Tax clause

a provision in a mortgage that stipulates the borrower must pay property taxes, ensuring the lender's lien priority is maintained.

Discount points

are an upfront payment to the lender in exchange for a lower mortgage rate, referred to as a buydown or a way to reduce monthly payments. One discount point is an upfront payment of 1% of the loan amount (not the purchase price at closing).

Effective yield

is the actual interest rate earned by a lender on a loan, taking into account any points or fees paid upfront and the loan's term.

LTV Ratio

Note: L comes before P

Loan amount/Price price or appraised value expressed as a percentage.

Contract for deed

is a type of real estate agreement where the buyer makes payments to the seller in exchange for the right to occupy the property while the seller retains the title until the contract is fulfilled.

Blanket mortgage

is a single mortgage that covers multiple properties or lots, allowing a borrower to finance several properties under one loan agreement.

Default

occurs when a borrower fails to meet the legal obligations or conditions of a loan, such as making scheduled payments.

Equity of redemption

is the right of a borrower to cure the default before foreclosure rather than lose the property. This right allows the borrower to pay off the overdue amount and reclaim their property.

Statutory right of redemption

is the right that allows a borrower to redeem from a foreclosure for a period-of-time after a foreclosure sale.

Foreclosure

is the legal process by which a lender takes possession of a property when the borrower fails to repay their mortgage.

writ of execution

is a court order that permits a sheriff or other authority to enforce a judgment, typically by seizing and selling property to satisfy a debt.

A deed in lieu of foreclosure

is an arrangement where you voluntarily turn over ownership of your home to the lender to avoid the foreclosure process.