Chapter 11 & Related Closing Concepts (Summary Notes)
Terminology and General Principles
A contract is formed when two or more parties agree to do or not do something and are legally bound by the terms.
Parties to real estate contracts can be individuals, partnerships, corporations, or trusts; ensure the signer has authority to bind the entity.
Subject of the contract (real property) must be accurately described using a legal description; a plain address is not sufficient.
Form of contract: real estate contracts must be in writing to be enforceable under the statute of frauds (parol/verbal contracts may be valid but are hard to enforce).
Consideration: something of value (usually money). Earnest money deposits demonstrate intent and are typically held by a neutral third party.
Core Contract Types and Principles
Four types of contracts that licensees may prepare (without practicing law):
Buyer brokerage agreement
Listing agreement
Contract for sale and purchase
Option contract
If a transaction requires a contract beyond these four, an attorney must prepare the documents.
Procuring cause: term used to determine who introduced the buyer to the property and is entitled to a commission.
Offer and Acceptance; Time, Contingencies, and Performance
Offer and acceptance mark the formation of a contract; a written contract is required for enforcement under the statute of frauds.
Contingencies are conditions that must be met (e.g., financing contingency). If not met by the stated time, the contract may terminate.
Time is of the essence in contract terms; deadlines determine when obligations must be fulfilled.
Performance occurs when both parties fulfill their promises and title transfers to the buyer at closing.
Deeds and Ownership Interests (Overview)
Deed types commonly reflected in Florida transactions include:
Statutory warranty deed (most common, forms per F.S. 689)
Personal representative's deed (estate settlement)
Trustee's deed (trust sale)
Ownership interests include:
Estate in severalty (sole owner)
Estate by the entireties (joint ownership by spouses)
Joint tenancy (equal rights, with right of survivorship)
Tenancy in common (equal or unequal rights)
The deed describes the owner's interest and the legal description of the property.
Four Types of Contracts Licensees May Prepare
Buyer brokerage agreement
Listing agreement
Contract for sale and purchase
Option contracts (including lease-option)
Note: Other legal documents (deeds, mortgages) are outside the scope of licensee authority.
Options and Related Rights
Option contracts (unilateral): the optionor (owner) must perform if the optionee exercises the option; the optionee has no obligation.
Lease-option agreements: unilateral option to purchase within a specified period; option fee must be definite and non-refundable to sustain enforceability.
A lease-purchase agreement may obligate both parties to residential purchase terms after expiration.
Listing Agreements
Four common types:
Open listing: multiple brokers; only the procuring broker who brings the sale is paid; unilateral and terminable at will.
Exclusive agency listing: owner can sell without a commission if they find the buyer; broker still may earn a commission if another broker brings the buyer.
Exclusive right-of-sale listing: most common for residential; broker earns a commission if sold during listing period, regardless of who procures the buyer; may share with cooperating broker.
Net listing: owner sets a net price; broker keeps the difference as commission; can create incentives for inflated sale prices; generally discouraged or illegal in many places.
MLS marketing is typically restricted to exclusive-right-to-sell listings.
Procuring cause issues can arise in determining who is entitled to the commission.
Other Contracts and Provisions
Right of first refusal: three-party arrangement (owner, holder of ROFR, and third party)
Agreement for deed (installment contract): generally not prepared by licensees; treated more like a loan contract.
Buyer brokerage agreements in commercial real estate: “to find real property” arrangements; often involve single agent, transaction broker, or no brokerage relationship.
Contract for Sale and Purchase: Key Elements
Parties: seller and buyer named exactly as recorded; joint ownership needs proper listing.
Property Description: must reference legal description; exact wording from deed is best.
Personal Property: distinguished from real property; typically listed with a statement that it has no contributory value.
Purchase Price and Deposits: includes earnest money deposit; deposits are usually placed in escrow and subject to collection rules.
Closing and Financing: outlines financing terms; includes contingencies and how damages or defaults are handled.
Occupancy/Possession: specifies when buyer takes possession; may include post-closing occupancy arrangements.
Title, Survey, and Liens
Title evidence includes abstract of title and title commitment; lender may require a survey to confirm property boundaries and encroachments.
Mortgage considerations: lender must have clear title; existing mortgages must be paid off or assumed in accordance with the contract.
Zoning, variances, and non-conforming uses: knowledge of local zoning essential to avoid disputes.
Disclosures and Material Facts
Johnson v. Davis: sellers must disclose material defects that could affect property value.
Rayner v. Wise Realty: extends duty of disclosure to licensees and parties involved in the transaction.
HIV/AIDS disclosure: F.S. 689 and 780 provide that disclosure of prior infection is not required; protects occupants.
Brokerage relationship disclosure: licensees must disclose the nature of the brokerage relationship.
HOA and restrictive covenants: buyers must receive HOA documents; review period provides an opportunity to terminate if desired (F.S. 720).
Ad valorem tax disclosure: helps buyers understand potential tax increases; resets at sale.
CDD disclosure: if located in a Community Development District, notify the buyer.
Lead-based paint disclosure: required if property built before 1978.
Energy efficiency, radon, and mold disclosures: required where applicable.
Permits: disclose improvements completed without required permits.
Transaction fees disclosure: ensure RESPA-compliant fees; fees beyond the service provided must be disclosed.
Zoning and Land Use
Zoning divides land into permitted uses (residential, commercial, industrial).
Zoning variances: approved changes to standard usage.
Non-conforming uses: legal grandfathered uses vs illegal non-conforming uses; penalties may apply.
Closing Real Estate Transactions (Overview)
RESPA (Real Estate Settlement Procedures Act) and TRID: disclosures at application, before settlement, and at settlement; TRID integrates with the Loan Estimate (LE) and Closing Disclosure (CD).
Kickbacks: RESPA prohibits kickbacks unless services are actually performed and properly disclosed; brokers may share commissions with the other party if all parties are informed.
Closing Disclosure (CD): a 5-page form used to present final loan terms and settlement costs; LE is provided within 3 business days of application; CD must be provided no later than 3 business days before closing.
IRS reporting: Form 1099-S for real estate transactions; exceptions apply for certain principal residences (under 250,000 or 500,000 with spouses).
Foreign investors: 15% withholding on gross proceeds; exclusions apply for residential purchases under certain thresholds.
Prorations and Closing Costs
Prorations: dividing costs between buyer and seller at closing; typically use either the 12-month/30-day method or the 365-day method.
12-month/30-day method: annual cost → monthly cost (divide by 12) → daily cost (divide by 30); allocate days owned by seller vs buyer.
365-day method: daily cost = annual cost / 365; multiply by days owned by each party.
Proration examples include real estate taxes, rent, and mortgage interest, plus HOA fees.
Closing costs: typically split by negotiated terms; standard items include title insurance, recording fees, transfer taxes, attorney fees, lender charges, and broker commissions.
Government transfer taxes (state):
State documentary stamp tax on the deed: $0.70 per $100 of sale price (Miami-Dade: $0.60 per $100).
State documentary stamp tax on notes: $0.35 per $100 of the note amount.
Intangible tax on mortgage: 0.002 of the mortgage amount.
Closing Disclosure pages (quick guide):
Page 2: Loan Costs and Other Costs for the borrower; government fees may appear here.
Page 3: Summaries of Transactions (Brokerage, sale price, and loan/credit details).
Page 4-5: Additional disclosures and loan information.
Calculations and Formulas ( Essentials )
Loan-to-Value (LTV): ext{LTV} = rac{ ext{Loan amount}}{ ext{Property value or sale price}}
Proration (12-month/30-day method) – general approach:
If annual: dailycost = annualcost / 365 (or monthly_cost / 30 for monthly items)
Seller days and buyer days are allocated according to the closing date; balance due to/from each party is calculated accordingly.
Proration (365-day method) – general approach:
dailycost = annualcost / 365; multiply by days owned by each party for the prorated amount.
Closing costs basics:
Down payment + loan amount = sale price (plus/minus credits/debits at closing)
Costs and credits are allocated as debits to one party and credits to the other; the Closing Disclosure summarizes these as part of the Summaries of Transactions.
Exam-Style Quick Facts
Procuring cause is critical in determining who earns a commission in certain listing setups.
A valid real estate contract requires offer, acceptance, consideration, legal purpose, and a written form (per statute of frauds).
Johnson v. Davis and Rayner v. Wise Realty establish and extend the seller disclosure duty to material defects and to licensees.
HIV/AIDS disclosure: not required under F.S. 689 and F.S. 780; protection for occupants.
RESPA/TRID: LE within 3 business days; CD within 3 business days before closing; kickbacks prohibited unless services performed and disclosed.
FHA/VA loans: distinct programs with insurance/guarantee structures; mortgage insurance premiums (MIP) or funding fees may apply.
For FHA/VA, down payment requirements and loan limits vary by program and location; seller concessions may apply.
The Closing Disclosure is the primary final document for loan terms and settlement costs and is used in place of HUD-1 for most loans.
Prorations ensure fair sharing of taxes, rents, and interest between the seller and buyer at closing.
ext{LTV} = rac{ ext{Loan amount}}{ ext{Sale price}} \ ext{Daily Cost (365-day method)} = rac{ ext{Annual cost}}{365} \ ext{Daily Cost (30-day month)} = rac{ ext{Monthly cost}}{30} \ ext{Closing Disc. Pages: Page 2 (Loan Costs and Other Costs), Page 3 (Summaries of Transactions)}