Principles and Practice Module 5 PowerPoint

1. Real Estate Principles &
Practices
Module 5
February 2015

2. Chapter 7
Real Estate
Contracts,
Agreements, and
Documents
February 2015

3. Key Terms
• Acceptance
• Assignment
• Consideration
• Counteroffer
• Material Breach
• Novation
• Offer
• Specific
Performance
• Statute of Frauds
• Tender
February 2015

4. Contract Classifications
• Express vs. Implied
• Unilateral vs. Bilateral
• Executory vs. Executed
February 2015

5. Status of Contracts
• Valid
• Void
• Voidable
• Unenforceable
February 2015

6. Contract Formation
• Five essential elements for a valid
contract:
– Contractual Capacity
– Offer
– Acceptance
– Consideration
– Lawful and possible objective
February 2015

7. Contractual Capacity
• The legal ability to enter a contract
• In Ohio, a person must be:
– At least 18 years old
– Mentally competent
February 2015

8. Offer
• Requirements of a valid offer:
– It must express an intent to contract
– It must have definite terms
• Termination of an offer:
– Lapse of time
– Death or incapacity of a party
– Revocation
– Rejection
February 2015

9. Acceptance
• Requirements:
– May be made only by the offeree
– Must be communicated to the offeror
– Must be made in the manner specified
– Must not vary the terms of the offer
February 2015

10. Consideration
• Something of value given to induce another to
enter into a contract
– Each party must give something to the other
– Something already done cannot be consideration
– Promising to do something that one is already
legally obligated to do (or promising to refrain from
doing something the law does not allow one to do)
is not consideration
– Value of consideration among the parties does not
have to be equal
February 2015

11. Lawful and Possible Objective
• The purpose or objective of a contract
must be lawful at the time the contract is
made
– When one person promises to pay someone
for committing an illegal act, their contract is
void
– Court may refuse to enforce a contract if its
objective violates public policy
• A contract objective must be possible for
anyone
February 2015

12. Statute of Frauds
• A law that requires certain types of contracts to be
in writing and signed in order to be enforceable
• In Ohio, this applies to a contract:
– That cannot be performed within 1 year
– For the sale of goods for $500 or more
– For the sale of personal property for $5,000 or more
– Made in exchange for a promise of marriage, a
promise to guarantee payment of another’s debt,
and a lease where the term is longer than one year
February 2015

13. Terminating a Contract
• Genuine assent
• Assignment
• Conditions
• Mutual agreement
February 2015

14. Genuine Assent
• Offer and acceptance as an expression of
mutual consent are not freely given as
mutual consent when either is the result
of:
– Fraud
– Undue influence
– Duress
– Mistake
February 2015

15. Assignment
• When one party transfers her rights or
interests under a contract to another
• In Ohio, all contracts are assignable
unless the contract states otherwise
– Except contracts for personal services (e.g., a
listing agreement)
• A contract cannot be assigned without
consent if the assignment would change
the other party’s duties or increase her
risks
February 2015

16. Conditions
• Provisions in a contract or deed that make
the parties’ rights and obligations depend
on the occurrence (or non-occurrence) of
particular events
• A condition may be waived by the party it
was intended to benefit or protect
• If a condition is included for the benefit of
both parties, neither party may waive it
without the other’s consent
February 2015

17. Mutual Agreement
• Two ways a contract can be terminated by
mutual agreement:
– Rescission
– Cancellation
February 2015

18. Performance and Breach of Contract
• If one party performs his side of the
bargain, the other party is required to
perform, too
• If one party fails to perform and the failure
is not excused, he has breached the
contract
– The other party is then not required to
perform
February 2015

19. Substantial Performance
vs. Material Breach
• Substantial performance
– When a promisor does not perform all of his
contractual obligations, but does enough that
the promisee is required to fulfill his side of
the bargain
• Material breach
– A breach of contract important enough to
excuse the non-breaching party from
performing his contractual obligations
February 2015

20. Time is of the Essence
• A clause included in many contracts
• Emphasizes that timely performance is an
essential part of the contract
– Failure to perform on time will be a material
breach
• If this clause is not included in a contract:
– Performance within a reasonable time after
the stated deadline is not a material breach
• Does not apply to real estate purchase
contracts
February 2015

21. Tendering Performance
• When a party offers to perform his side of
a contract
• Anticipatory repudiation is when one
party to a contract informs the other before
the set time of performance that he does
not intend to perform as agreed
– The other party may then immediately file a
lawsuit for breach of contract without making
any tender offer
February 2015

22. Remedies for Breach of Contract
• Compensatory damages
• Liquidated damages
• Specific performance
• Rescission
February 2015

23. Real Estate Contracts
and Agreements
• Listing agreements
• Buyer agency agreements
• Purchase contracts
• Options
• Leases
• Land contracts
February 2015

24. Listing Agreements
• Employment contracts between a seller
and a real estate broker
• Commission rate/amount of commission
must be negotiated between seller and
broker
– It is a violation of federal and state antitrust
laws for brokers to set uniform commission
rates
February 2015

25. Types of Listing Agreements
• Exclusive right to sell
• Exclusive agency agreement
• Open listing
• Net listing
February 2015

26. Purchase Contracts
• Contracts in which a seller promises to convey
title to real property to a buyer in exchange for
the purchase price
• Serves three purposes:
• It is the buyer’s offer
• It is the receipt for the earnest money deposit
• It is the contract between the buyer and seller (in
some parts of the state where escrow closings are
common, the contract may also serve as the
escrow agent’s instructions)
February 2015

27. Purchase Contract Requirements
• At the very least, it should identify the:
– Parties
– Property
– Interest to be sold
• Ideally, it will state:
– What is and is not included in the sale
– The total price
– The method of payment
February 2015

28. Options
• Contracts that give one party the right to
do something, without obligating him to do
it
• A unilateral contract
• Most common is an option to purchase
• Supported by consideration (optionee
pays the optionor for the option right)
February 2015

29. Option Requirements
• Must be in writing and signed
• Should be as specific as possible
• A separate purchase contract may not be
necessary if the option document also
serves as the purchase contract if and
when the option is exercised
• Right of Preemption:
– A right to have the first chance to buy or lease
property if the owner decides to sell or lease it
February 2015

30. Leases
• Contracts in which one party pays the other rent in
exchange for possession of real estate
– A conveyance of a leasehold estate from the fee
owner to the tenant
• Must:
– Contain necessary elements for a valid contract to
be enforceable and legal
– Be in writing if term will last for more than one year
– Be attested and acknowledge if term is for more
than three years
February 2015

31. Types of Leases
• Gross lease
• Net lease
• Percentage lease
• Land lease (aka ground lease)
February 2015

32. Land Contracts
• Real estate installment agreements for
which the buyer makes payments to the
seller in exchange for the right to occupy
and use the property
– No deed or title is transferred until all, or a
specified portion of payments have been
made
• Seller holds title to land as security
• The buyer’s present interest here is called
equitable title
February 2015

33. Chapter 7 Quiz
1.) Mike signed a listing agreement with Wendy to sell
her home. The listing agreement specifically stated in
paragraph four that Mike could put a "For Sale" sign in
the yard and show the home. Can Mike market the
home in other ways?
a. no, since the listing agreement did not specifically mention
that he could
b. no, unless he wants his license suspended
c. yes, because the listing agreement gave him express
authority to do so
d. yes, because the listing agreement gave him implied
authority to do so
February 2015

34. Chapter 7 Quiz
2.) Mike later learns that Wendy was only 17
years old when she signed the listing
agreement, but had a birthday last week
and is now 18. The listing agreement is
a. valid.
b. void.
c. voidable by Mike.
d. voidable by Wendy.
February 2015

35. Chapter 7 Quiz
3.) Given the circumstances in
question #2, what should Mike do?
a. have Wendy execute a new listing agreement now
that she is 18
b. have Wendy’s parents also sign the listing
agreement
c. resign the listing (with Wendy’s approval) now that
she is 18
d. turn himself in to the Superintendent of Real Estate
for disciplinary action
February 2015

36. Chapter 7 Quiz
4.) After Mike gets Wendy's listing straightened
out, his client, Tyler, decides to put an offer on
the property. What is the first thing Mike should
give Wendy?
a. Tyler’s earnest money deposit
b. Tyler’s offer
c. Tyler’s signed Agency Disclosure form
d. All of the above should be given to Wendy
simultaneously.
February 2015

37. Chapter 7 Quiz
5.) Wendy decides to accept Tyler's offer, so
she signs the offer and gives it to her agent.
At this point, which statement is TRUE?
a. Because of the mailbox rule, Wendy and Tyler are
in contract.
b. Wendy and Tyler have a binding contract.
c. Wendy can still withdraw her acceptance until
Tyler is notified of the acceptance.
d. Wendy has made a counteroffer.
February 2015

38. Chapter 7 Quiz
6.) When a seller makes a counteroffer,
the buyer
a. does not have any responsibility to accept
it.
b. has a three-day right of rescission before
there is a binding contract.
c. may not make another offer or
counteroffer.
d. must agree to his original offer if the seller
later decides to accept the terms of the
original offer.
February 2015

39. Chapter 7 Quiz
7.) Which will terminate an offer?
a. The agent dies.
b. The broker’s license is suspended for
15 days and 10 of those days are
waived.
c. A counteroffer is made.
d. No earnest money is deposited.
February 2015

40. Chapter 7 Quiz
8.) Stacy contracted with Biff (a big, burly
guy) to "coerce" her neighbor into signing an
easement release she has been after for the
past five years. Which statement is TRUE?
a. Stacy and Biff’s contract is void due to
unlawful purpose.
b. Stacy and her neighbor’s contract is voidable
due to duress.
c. both a and b
d. neither a nor b
February 2015

41. Chapter 7 Quiz
9.) Which is the best type of listing agreement for the
real estate agent and why?
a. The exclusive agency, because then only the agent’s
brokerage may collect a commission on the sale of the
property.
b. The exclusive right to sell, because the broker is
guaranteed a commission no matter who sells the
property.
c. The net listing, because the agent can make an unlimited
amount of money over and above what the seller wants to
get from the property.
d. The open listing, because increased competition will cause
the agent to work harder to make sure he is the one who
gets paid.
February 2015

42. Chapter 7 Quiz
10.) Listing agreements are NOT
required to
a. be in writing to satisfy the License Law.
b. comply with the rules of contract law.
c. contain the Ohio Division of Real
Estate’s address and telephone number.
d. have an expiration date.
February 2015

43. Chapter 7 Quiz
11.) A counteroffer represents a(n)
a. acceptance.
b. change.
c. new offer while keeping the first offer
in primary position.
d. new purchase contract.
February 2015

44. Chapter 7 Quiz
12.) A novation is a(n)
a. amendment to a contract.
b. assignment of a contract.
c. assumption of a contract.
d. new contract.
February 2015

45. Chapter 7 Quiz
13.) Under a novation, the original party
a. is relieved of liability.
b. remains primarily liable.
c. remains secondarily liable.
d. shares liability equally with the new
party.
February 2015

46. Chapter 7 Quiz
14.) Under an assignment, the original
party
a. is relieved of liability.
b. remains primarily liable.
c. remains secondarily liable.
d. shares liability equally with the new
party.
February 2015

47. Chapter 8
Deeds and Ownership
February 2015

48. Key Terms
• Acknowledgment
• Attestation
• Chain of Title
• Clouds on the Title
• Co-Ownership
• Deed
• Donative Intent
• Equitable Title
• Government Survey
System
• Lot and Block
Description
• Marketable Record
Title
• Metes and Bounds
Description
• Ownership in
Severalty
• Title
February 2015

49. Deed vs. Title
• Deed
– An instrument that conveys the grantor’s interest, if any,
in the real property
– Document used by the owner of real property to
transfer all or part of his interest to another
– Evidence of title
• Title
– The actual lawful ownership of real property
– Refers to holding the bundle of rights conveyed
– Not a document but rather a theory dealing with
ownership
February 2015

50. Equitable Title
• An interest in property created on the
execution of a valid sales contract,
whereby actual title will be transferred by
deed at a future date (closing)
– Not the same as having title but the person
who holds equitable title still enjoys certain
rights and privileges
• Land contracts pass equitable title
February 2015

51. Requirements for a Deed
• Competent grantor’s signature
• Identifiable grantee
• Words of conveyance
• Description of the property
• Consideration
• Acknowledgment of the grantor before a
notary public
• Delivery and acceptance
February 2015

52. Types of Description
• Government survey system (aka
rectangular survey system)
– References principal meridians and base lines
• Metes and bounds method
– Has a point of beginning (POB) and uses
compass directions, distances, monuments,
markers, and pins
• Lot and block method
– Uses recorded plats/plat maps
February 2015

53. Government Survey
February 2015

54. Types of Deeds
• Warranty deeds
• Deeds without warranties
• Transfer on death deeds
February 2015

55. Warranty Deeds
• Carry warranties of clear title and the
grantor’s right to convey title
– General warranty deeds
– Limited warranty deeds
February 2015

56. Deeds without Warranties
• Quitclaim deeds
• Bargain and sale deeds
• Fiduciary deeds
February 2015

57. Transfer on Death Deed (Affidavit)
• Now called a Transfer in Death
Designation of Beneficiary Affidavit
• May be a deed/affidavit with or without
warranty and works like a payable on
death bank account
February 2015

58. Ownership
• Two basic kinds of ownership of real
property:
– Ownership in severalty
– Co-ownership
February 2015

59. Ownership by Associations
• Corporations
• General partnerships
• Limited partnerships
• Limited liability companies (LLC)
– Real Estate Investment Trust (REIT)
• Syndicates
February 2015

60. Condominiums
• Properties developed for co-ownership, where
each co-owner has a separate interest in an
individual unit and an undivided interest in the
common areas
– Grounds, recreational facilities, lobby, hallways
– A porch outside of a unit is called a limited common
area (owned be all members but used exclusively by
one member)
• Residents must follow bylaws filed and recorded
by developers for the unit owners association
February 2015

61. Condominiums
• Encumbrance and transfer
– Each owner may mortgage his unit and undivided
interest in common areas
– If a lien holder forecloses, only that unit and its
undivided interests are affected
– Property taxes levied against each unit separately
• Timesharing
– Co-owners have the exclusive right to possession
of the property for specified periods each year
cont.
February 2015

62. Cooperatives
• Buildings owned by corporations
– Title held by corporation formed for that
purpose (owned in severalty)
• Residents are shareholders and each
receives a proprietary lease on an
individual unit and the right to use the
common areas
– If any resident fails to pay his share, the entire
cooperative may be threatened with
foreclosure
February 2015

63. Co-Ownership by Individuals
• Any form of ownership in which two or
more people share title to real property
– Also called co-tenancy or concurrent
ownership
• Undivided interest gives each co-owner
the right to possession of the whole
property, not just a fraction of it
February 2015

64. Tenancy in Common
• Most common form of co-ownership
• Two or more people each have an
undivided interest in the entire property
– No right of survivorship
February 2015

65. Statutory Survivorship Tenancy
• A main form of co-ownership used in Ohio
• Each co-tenant has an equal undivided
interest in real property
– And the right of survivorship
• Also called joint tenancy with the right
of survivorship
February 2015

66. Joint Tenancy
• A form of co-ownership not as well
established in Ohio as in other states
• Similar to a statutory right of survivorship
tenancy:
– Each joint tenant as equal undivided interest
in the property
– Each has the right of survivorship
– When a tenant conveys his interest, it simply
terminates the right of survivorship as to that
interest
February 2015

67. Four Unities
• For joint tenancy, all four unities (aka
equalities) must be present (PITT):
– Unity of Possession
– Unity of Interest
– Unity of Time
– Unity of Title
February 2015

68. Tenancy by the Entireties
• Abolished by the Ohio General Assembly
in 1985
– Some court decisions interpreting the statute
were controversial
• Those created between 1971 and 1985
may still exist so agents should be familiar
with the concept
February 2015

69. Recording
• System makes it possible to determine
who holds an interest in any property
• Protects real estate buyers and lenders
against secret conveyances and
encumbrances.
• Any legal document that affects title to real
estate can be recorded, and most should
be
February 2015

70. Recorder’s Office
• Must file document at the county
recorder’s office and pay recording fee
– Document said to be “filed for record”
– Recorder places document on public record
(in recorder’s office or online)
February 2015

71. Notice
• Actual notice
– When someone actually knows about something
• Constructive notice
– When one ought to know about something, even though
he does not actually know about it
– The laws holds that everyone has constructive notice of
recorded documents
• Inquiry notice
– There is some indication of a claim/circumstance that
would lead a person to be alerted to a possible problem
February 2015

72. Race/Notice Rule
• Ohio follows this rule:
– Two grantees race each other to the recorder’s
office and whoever records a deed first wins
– The first to record the deed has title to the
property, unless he had notice of an earlier
conveyance
• Protects only subsequent good faith
purchasers
– If gift recipients do not record their deeds, they
lose their interest in the land
February 2015

73. Marketable Title Act
• An owner with an unbroken chain of
recorded titles going back at least 40
years has a marketable record of title
– Root of title is the deed that, 40 years ago,
was the most recently recorded
• Intended to improve marketability of title
and simplify the title search process by
extinguishing certain old, dormant claims
against title
February 2015

74. Torrens System
• An alternative to the recording system:
– Landowner registers property with state Torrens
registrar
– Careful title search/survey of property are performed
– Registrar issues a Torrens certificate; original kept in
the registrar’s office; property owner receives
duplicate certificate
– When owner sells the property, she must surrender
duplicate certificate to the registrar
• Rarely used due to expensive initial registration
process
February 2015

75. Chapter 8 Quiz
1.) A deed is
a. the actual ownership of rights to
real estate.
b. better than title.
c. a document that must be recorded.
d. evidence of title, if any.
February 2015

76. Chapter 8 Quiz
2.) A grantor acknowledges a deed
before a
a. federal official.
b. lender representative.
c. notary public.
d. witness.
February 2015

77. Chapter 8 Quiz
3.) In Ohio, a deed is required to
have
a. acknowledgement by the grantee.
b. consideration.
c. the property address.
d. two witnesses.
February 2015

78. Chapter 8 Quiz
4.) Equitable title is
a. actual lawful ownership of real
property.
b. evidence of title.
c. an interest in real property created by
the execution of a valid sales contract
or land contract.
d. an instrument that conveys ownership
of real property.
February 2015

79. Chapter 8 Quiz
5.) Alice and Conrad bought a house and received a
general warranty deed. Later, they discover that the
previous owner’s wife did NOT release dower. The
easiest way to take care of this is to have the
a. owner execute a quitclaim deed.
b. owner and his wife execute another general
warranty deed.
c. owner and his wife issue a wild deed.
d. wife execute a quitclaim deed.
February 2015

80. Chapter 8 Quiz
6.) Why are documents recorded?
a. to give actual notice
b. to give constructive notice
c. to give inquiry notice
d. to give legal notice
February 2015

81. Chapter 8 Quiz
7.) The Marketable Title Act says that
proper title is established by
a. buying adequate title insurance.
b. making sure that no wild deeds exist.
c. searching the public records for 40
years.
d. an unbroken chain of title deeds dating
back 40 years to the root of title.
February 2015

82. Chapter 8 Quiz
8.) ABC Corporation wants to sell some of its
land. The broker needs to
a. find out how many stockholders there are to
determine if land is being held in severalty or in co-
ownership.
b. get a corporate resolution authorizing the land to
be sold and appointing him as broker in order to
sell the land.
c. get an employee of the company to sign the listing
agreement.
d. all of the above
February 2015

83. Chapter 8 Quiz
9.) Bill, Bob, and Ben bought a home for
$90,000, with each putting in $30,000. How
did they take title?
a. joint tenancy with right of survivorship
b. Severalty
c. tenancy by the entireties
d. tenancy in common
February 2015

84. Chapter 8 Quiz
10.) Jim, Jack, and Joe bought real property
together. Jim died and his 1/3 share went
immediately to Joe and Jack. How did Jim,
Jack, and Joe own their real property?
a. severalty
b. statutory survivorship tenancy
c. tenancy by the entireties
d. tenancy in common
February 2015

85. Chapter 8 Quiz
11.) Betty owned real property with her daughters,
Bonnie and Beatrice. When Bonnie died suddenly,
her husband did not get the property, even though
her will said that all her worldly possessions would
go to him. Instead, it went to her daughters, Bonnie
and Beatrice. How did Betty, Bonnie and Beatrice
own the property?
a. co-owners of a common area
b. joint tenancy with the right of survivorship
c. tenancy in common
d. undivided interest tenancy
February 2015

86. End Module 5
February 2015