Real Estate Transactions I
Professor Manning – Fall 2008
I.Chapter 5 – Purchase-and-Sale Agreements: Following the Money (p. 105 – 116)
A. The Purchase Price:
(1) Earnest money – A deposit paid (often in escrow) by a prospective buyer (esp. of real estate) to show a good-faith intention to complete the transaction, and ordinarily forfeited if the buyer defaults. • Although earnest money has traditionally been a nominal sum (such as a nickel or a dollar) used in the sale of goods, it is not a mere token in the real-estate context: it may amount to many thousands of dollars.
(2) Down payment – the portion of a purchase price paid in cash (or its equivalent) at the time the sale agreement is executed (i.e. at the closing).
B. Financing Contingencies;
(1) Common Financing Terms:
· Principal is the amount borrowed / Interest is the amount the lender charges for loaning the money, usually expressed as a percentage of the principal. (a “5.25 % loan, means the lender will charge 5.25% interest based on the principal amount.)
· Points or discount points refers to a kind of interest paid in a lump sum at closing (If the lender quotes 2 discount points, the borrower will pay 2% of the loan as a closing cost.)
· Monthly payment includes principal and interest due from the borrower to the lender each month.
· Amortization is the term during which the principal will be repaid. Commonly, loans for houses are amortized over 30 years or 15 years. Although this sub-prime debacle involves all kinds of different types of amortizations.
(2) Drafting a Financing Contingency
· Financing contingency: a provision in a contract that allows a buyer to void the contract if she is unable to obtain financing. A financing contingency may:
– be quite specific (a 5.5% loan in the amt of $250,000 amortized over 30 years)
– leave acceptable financing in the buyer’s discretion; or
– it could call for the buyer to accept any available financing.
II.Ch. 6 – Purchase-and-Sale Agreements: The Subject Property (p. 117 – 144)
(1) An inspection is a visual analysis of the accessible portions of the home and its component systems, such as plumbing, electrical, roofing, structural, and HVAC systems.
· The names of inspectors can be obtained from The National Institute of Building Inspectors (www.nibi.com) or American Society of Home Inspectors (www.ashi.com).
· Buyers will want to make sure inspectors carry liability (errors and omissions, “e&o”) insurance in an appropriate amount
· Errors and Omissions Coverage – a professional liability policy covering the policyholder for negligent acts and omissions that may harm his or her clients.
B. Predicates of Liability for Sellers of Defective Houses;
(1) Buyers in most states can sue sellers in tort for misrepresentations or for concealing known, material, latent defects.
· In most states, like SC, sellers of homes have statutorily mandated seller disclosures of defective conditions. These statutes most often supplement, but do not supersede, common law disclosure requirements. Courts and commentators disagree on whether sellers should be able to waive comm
btract the insurance proceeds from the purchase price.
(3) SC Contract on this Issue – Paragraph 15: Risk of Loss – In case the property herein referred to is destroyed wholly or partially by fire or other casualty prior to delivery of deed, Buyer and Seller shall have the option for ten (10) days thereafter of proceeding hereunder, or of terminating this Agreement.
(4) Almost all commentators and a growing number of jurisdictions believe the risk of loss should fall on the seller unless the buyer is in possession. This thought is based on a contract based theory, that the party in possession is in the best position to insure the property and prevent the loss.
· Uniform Vendor and Purchaser Act, adopted in 12 states, takes this position.
(5) Doctrine of Merger: stands for the proposition that the contract for the conveyance of property merges into the deed of conveyance; therefore, any guarantees made in the contract that are not reflected in the deed are extinguished when the deed is conveyed to the buyer of the property.
· The merger doctrine traditionally applies only to covenants of title. The parties may by contract abrogate the doctrine and provide that some or all terms of the contract survive the closing and delivery of the deed.