texas principles of 5hdo (vwdwh - 1
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Texas Principles of�5HDO�(VWDWH�- 1 -��,1)2*5$3+,&6��-
Topic No. Title Page No.
Chapter 3
3.1.2. Subdivisions 3
Chapter 4
4.1.2. Types of Agency 4
4.2.2. Fiduciary Duties 5
Chapter 9
9.2.2. Types of Contracts 6
9.3.2. Essential Elements of a Valid Contract 7
9.4.2. Discharge of Contracts 8
Chapter 10
10.1.2. PETE 9
10.2.2. Freehold Estates 10
Chapter 12
12.1.3. Types of Listing Contracts 11
TABLE OF CONTENTS
SUBDIVISIONS
SUBDIVISION:The act of dividing land, or a building into individual pieces, which can be sold and owned separately.
Land can be divided into individual plots or parcels.Buildings can be divided into individual apartments or units.
There are 4 primary types of subdivisions:Condominiums
Cooperatives
Time-Shares
Cluster Housing
Since a CONDOMINIUM is considered Real Property, each unit owner receives a DEED at closing.
EACH OWNER OWNS THEIR PARTICULAR UNIT
In addition to owning their particular unit, each owner has a shared interest in the building's COMMON AREAS
COMMON AREAS:Areas in a condominium that are used by all residents.
BUILDING LOBBY
HALLWAYS
STAIRS / ELEVATORS
POOL
LANDSCAPING
ROOF AND EXTERIOR WALLS
EXAMPLES OF COMMON AREAS INCLUDE:
CONDOMINIUMAn estate in real property wherein an owner owns an interest in a single apartment/unit, and a shared interest in the common areas of the building.
OWNER B
OWNER A
OWNER C
OWNER A
OWNER C
OWNER B
CONDOMINIUM BUILDING
COOPERATIVE BUILDING
CORPORATION THAT OWNS COOPERATIVE
BUILDING
Cooperative owners do not own their apartment unit or the cooperative building itself, but instead own SHARES OF STOCK in the corporation that owns the cooperative building.
SHARES OF STOCK
The SHARES OF STOCK are considered PERSONAL PROPERTY NOT REAL PROPERTY
While cooperative owners do not own their apartment unit, they are allowed to occupy the unit through a PROPRIETARY LEASE.
PROPRIETARY LEASE
COMMON CHARGES:A monthly fee associated with living in a condominium.
COMMON CHARGES TYPICALLY INCLUDE:
MANAGEMENT FEES
OPERATING EXPENSES
ADMINISTRATION FEES
TRASH AND SNOW REMOVAL
AMENITIES UPKEEP
CONDOMINIUM OWNERS PAY THE FOLLOWING IN ADDITION TO COMMON CHARGES:
MORTGAGE PAYMENT ON THEIR UNIT
PROPERTY TAXES ON THEIR UNIT
Condominium owners are required to pay COMMON CHARGES, in addition to their mortgage.
Cooperative owners are required to pay a MAINTENANCE FEE, in addition to their mortgage.
MAINTENANCE FEE:A monthly payment by a cooperative shareholder to the cooperative corporation.
COOPERATIVE OWNERS PAY THE FOLLOWING IN ADDITION TO MAINTENANCE FEES:
MORTGAGE PAYMENT ON THEIR UNIT
MAINTENANCE FEES TYPICALLY INCLUDE:
TAXES
INSURANCE
MORTGAGE ON THE BUILDING
MAINTENANCE OF THE PROPERTY
COOPERATIVEA form of ownership in which stockholders in a corporation occupy property owned by the corporation under a lease.
Time-shares are popular in the secondary home and vacation home markets.
2 Weeks Per Year
2 Weeks Per Year
1 Week Per Year
4 Weeks Per Year
3 Weeks Per Year
3 Weeks Per Year
1 Week Per YearTime-shares involve an 'interval ownership' in which each owner has a deed to the property.
An ownership stake in a time-share can be sold to another owner.
TIME-SHAREA right of occupancy in a time-share project (subdivision) which is coupled with an estate in the real property.
CLUSTER HOUSINGA planned subdivision in which a single large tract of land is divided into smaller individual plots, each of which includes a detached house.
Cluster housing is similar to a planned community in which the houses look similar.
The owners in a cluster housing may be bound by CC&Rs.
CC&Rs (Covenants, Conditions, and Restrictions)The basic rules establishing the rights and obligations of owners of real property within a subdivision, in relation to other owners within the same subdivision, for the purpose of operating and maintaining property commonly owned by the individual owners.
TYPES OF AGENCY
A Universal Agent is the broadest form of agency.
An example of a Universal Agent is a Power of Attorney
1 UNIVERSAL AGENTAn agent who is authorized to perform all acts or duties his/her principal is empowered to perform.
POWER OF ATTORNEY:A written instrument whereby a principal gives authority to an agent. The agent acting under such a grant is sometimes called an attorney in fact.
GENERAL AGENT2An agent with full authority over one property of the principal.
3
Unlike a Universal or General Agent, a Special Agent performs limited duties and whose relationship with the principal is not meant to be continuous.
In the case of a real estate broker, Special Agency is created through the signing of the Listing Contract, and ends when the contract is fully performed.
CREATION OF AGENCY
EXAMPLE:A common example of a general agent is a real estate licensee acting as a property manager for a building owner.
A general agent is given the authority to perform several tasks on a continuous, long-term basis.
There Are 3 Types of Agents:(1) Universal Agent
(2) General Agent
(3) Special Agent
Agency Can Be Created In 2 Ways:
(1) Express Agency
(2) Implied Agency
REAL ESTATE BROKERS/SALESPERSONS operate as a Special Agent.
EXAMPLE:
While Express Agency can be created through an oral contract, the Statute of Frauds requires most real estate contracts to be in writing.
In addition, it is often difficult to enforce an oral contract in the court of law.
Whenever possible, agents should use written contracts!
EXPRESS AGENCYAn agency relationship created by an ORAL or WRITTEN agreement between principal and the agent.
1
IMPLIED AGENCYAgency that exists as a result of the ACTIONS of the parties.
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The most common example of Express Agency is a written Listing Contract between a Broker and Principal.
EXAMPLE:
Mary owns a multi-family building, which has several vacancies.
Mary's friend, Mark, is a licensed real estate salesperson.
Mary asks Mark if he could help her fill the vacancies by advertising her apartments on his broker's website.
Mark agrees, and after advertising the vacancies, Mary eventually secures a tenant.
EXAMPLE:
Unlike Express Agency, there is no formal contract between the parties when Implied Agency is created.Instead, the actions of the parties indicates they have an agreement.
SINGLE VS DUAL AGENT
While Mary didn't have an express agreement with Mark, the fact that she asked Mark to help her by performing a common duty of a real estate agent (marketing an apartment), and Mark agreed to do so, it could be determined that an implied agreement was in place.
SPECIAL AGENTAn agent with limited authority to act on behalf of the principal.
In most transactions, the broker or salesperson is acting as a Single Agent.
They either serves as the Listing Agent (Seller's Agent), or the Buyer's Agent.
AGENT represents either the SELLER or BUYER
SINGLE AGENTAn agent who works only for the buyer or the seller.
DUAL AGENTAn agency relationship in which the agent acts concurrently for BOTH of the principals in a transaction.
SELLER (OR BUYER)AGENT
AGENT
SELLER
AGENT represents BOTH the BUYER and SELLER
BUYER
DUAL AGENCY MUST BE FULLY DISCLOSED TO ALL PARTIES!
FIDUCIARY DUTIES
FIDUCIARYA person in a position of trust and confidence, as between a Principal and an Agent. An Agent as a fiduciary owes a certain loyalty which cannot be breached under the rules of agency.
All agents owe their clients FIDUCIARY DUTIES
FIDUCIARY DUTYThat duty owed by an Agent to act in the highest good faith toward the Principal and not to obtain any advantage over the latter by the slightest misrepresentation, concealment, duress or pressure.
To Remember the FIDUCIARY DUTIES Owed By An Agent, Use the Acronym:
C.O.A.L.D.
Care
Any acts that violate the Fair Housing Laws
Prohibiting the broker to disclose material facts about the property
EXAMPLES OF ILLEGAL INSTRUCTIONS:
EXCEPTION:Agents do not have to obey any illegal instructions!
The property can only be shown during set hours
The seller's identity cannot be revealed to prospective buyers
The broker cannot reduce the asking price
EXAMPLES:
Agents are required to obey instructions given by the Principal.
Obedience
Agents should only offer/perform services for which they have an expertise.
Agents are required to meet the standards of skill, care, and diligence in all of their transactions.
(Also known as Reasonable Care and Skill)
EXAMPLE:A commercial building owner wants to hire an agent to lease all of the vacant office space in the building.
While this may lead to several lucrative commissions, the agent is only experienced in residential leasing.
The agent should decline the offer and instead refer a more experienced agent in commercial leasing.
Agents may be liable for any financial losses incurred by their clients due to the agent's negligence!
oyalty
isclosureD
Present every offer to the Principal
Present all known information about the offer/buyer
The Agent Should:
Agents must disclose all pertinent information to their client.
This includes presenting ALL offers to the client.
Even if the seller gives the broker permission to reveal confidential information, the agent should obtain the permission in writing!
EXAMPLE:
A homeowner recently accepted a new job out-of-state and must sell their existing house as soon as possible.
The seller's agent CANNOT reveal this information to prospective buyers, unless given permission by the seller.
If prospective buyers knew the seller was very motivated to sell, they will most likely make offers below (or even well below) the asking price.
Because of their fiduciary relationship, agents cannot reveal any confidential information they may know about the seller to prospective buyers.
Agents must work in the best interests of their client. This includes putting their client's interests above their own.
Revealing confidential information may give the buyer an unfair advantage in the negotiations.
L
This fiduciary duty refers to financial accounting.
Agents must account for all funds they receive on behalf of their clients.Agents must also keep accurate records of all receipts and expenditures regarding their client's funds.
Accounting
Agents must NEVER commingle funds!
COMMINGLING:To mingle or mix, for example, a client’s funds in the broker’s personal or general account.
TYPES OF CONTRACTS
BILATERAL / UNILATERAL CONTRACTS
BILATERAL CONTRACT:
A contract between two or more parties in which each party promises to do something
UNILATERAL CONTRACT:A contract in which one party promises to do something if the other party performs a certain act, but the other party does not promise to perform it
UNILATERAL CONTRACT IN REAL ESTATE:
EXAMPLE OF UNILATERAL CONTRACT:
An owner puts up flyers to help find their missing dog. The owner is willing to pay a $1,000 reward to whoever finds the dog.
This is a type of unilateral contract since the owner only has to pay the reward if their dog is found.
Open Listing
BILATERAL CONTRACTS IN REAL ESTATE:
Independent Contractor Agreement
Exclusive Agency Contract
Exclusive Right to Sell Contract
Lease
Purchase Sale Contract
EXPRESS / IMPLIED CONTRACTS
EXPRESS CONTRACT:A contract that has been put into words, either spoken or written
An agreement that has not been put into words, but is implied by the actions of the parties
According to the Statute of Frauds, most real estate contracts must be in-writing
REAL ESTATE CONTRACTS THAT MUST BE IN-WRITING:
Exclusive Agency Contract
Exclusive Right to Sell Contract
Purchase Sale Contract
Independent Contractor Agreement
Lease (1 Year Or Longer)
Leases with a term of less than 1 year may be oral
EXAMPLE OF IMPLIED CONTRACT:
When a person sits down and orders food at a restaurant, it is implied the person will pay for the food they ordered
EXECUTORY / EXECUTED CONTRACTS
EXECUTORY CONTRACT
EXECUTORY CONTRACT:A contract in which something remains to be done by one or both of the parties
An agreement that has been fully performed
EXAMPLE:
After the terms of the contract have been agreed upon, the contract is signed by both parties. The contract is considered EXECUTORY.
EXECUTED CONTRACT
After the closing is finalized, and the funds and title are transferred, the contract is considered EXECUTED.
Neogtiating Process Closing Process
VALID / VOID / VOIDABLE / ENFORCEABLE / UNENFORCEABLE
IMPLIED CONTRACT:
Mary is negotiating to purchase David's house
EXECUTED CONTRACT:
A contract that is legally binding and enforceable
VALID CONTRACT:
A contract that has no legal force or effect
VOID CONTRACT:
A contract that may be voided by the parties without legal consequences
VOIDABLE CONTRACT:
Purchase Contract
Listing Contract
Independent Contractor Agreement
EXAMPLE:Any contract that includes ALL of the essential elements of a valid contract.This includes:
Lawful Objective
Consideration
Offer and Acceptance
Legally Capable Parties
EXAMPLE:Any contract that is missing ONE OR MORE of the essential elements of a valid contract.A contract is void if it is missing ANY of the following:
EXAMPLE:A typical valid sales contract can become voidable if it includes a contingency.A contingency can include:
Mortgage Contingency(the buyer must obtain a mortgage in order to close on the transaction)
Inspection Contingency(the buyer may back out of the contract if they find significant defects during the property inspection)
Property Sale Contingency(the buyer cannot close on the transaction until they sell their existing property)
EXAMPLE:An oral contract used to purchase a property is unenforceable since the Statute of Frauds requires all real estate purchase contracts to be in writing
A contract that appears to meet the requirements for validity but would not be enforceable in court
UNENFORCEABLE CONTRACT:A contract in which the parties may be legally required to perform
EXAMPLE:Any valid contract that offers a legal remedy in the event that the contract is not fulfilled, such as a typical purchase contract
ENFORCEABLE CONTRACT:
ESSENTIAL ELEMENTS OF A VALID CONTRACT
CONTRACTAn agreement to do or not to do a certain thing
Contracts Must Have Four ESSENTIAL ELEMENTS:
EXAMPLES OF CONTRACTS IN REAL ESTATE
Listing Contract
Purchase Contract
Independent Contractor Agreement
Deed
Mortgage
1) CAPABLE PARTIES
2) CONSIDERATION
3) LAWFUL OBJECTIVE
4) OFFER AND ACCEPTANCE
CAPABLE PARTIES: All parties must have the legal capacity to contract
Legal Capacity Includes:
18 Years Of Age Or Older
Sound Mind / Mental Capacity
1
18+
Other Competent Parties Include:
Persons acting on behalf of a corporation
Power of Attorney
Fiduciary given the authority to contract
Emancipated minor
2 CONSIDERATION: Anything given or promised by a party to induce another to enter into a contract
MONEY is commonly used as Consideration in a real estate contract
Other Types Of Consideration:
3 LAWFUL OBJECTIVE: The contract must have a legal purpose
A Promise to do something
Love and affection
Contracts that do not have a legal purpose are considered void
Types Of Illegal Objectives:
Personal services
To commit a crime, a tort or a fraud
To promote corruption in public life
To defraud the revenue
To hard public safety
4 OFFER AND ACCEPTANCE: Also known as mutual consent or a meeting of the minds
OfferorThe person making the offer
OffereeThe person receiving the offer
An Offer Must:
Have an exact price
Acurrately describe the property
Be clear in character
DISCHARGE OF CONTRACTS
THERE ARE 4 PRIMARY WAYS A CONTRACT CAN BE DISCHARGED:
(1) Agreement of the Parties
(2) Full Performance
(3) Impossibility of Performance
(4) Operation of Law
1 AGREEMENT OF THE PARTIESThe parties to a contract can simply agree to terminate the contract
Executory Contract Executed Contract
Before a contract is executed, the parties have the option to terminate the contract if all parties agree
New Executory Contract
NovationThe substitution or exchange of a new contract for an old one by the mutual agreement of the parties
AssignmentA transfer of benefits and obligations within a contract to a 3rd party who is not originally a party to the contract
Assignee
Executory Contract
AssignorOne who transfers their interest in a contract to another party
One who receives the interest in a contract from another party
The assignee is now liable for the contract
FULL PERFORMANCEAn executed contract occurs when all parties fully perform the terms of the contract
Full performance is the most common form of discharge
Executory Contract Executed Contract
EXAMPLE:If the buyer and seller agree to make a change to the sales contract, the existing contract can be mutually terminated for a new contract between the parties.
This is a form of novation.
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IMPOSSIBILITY OF PERFORMANCE
EXAMPLE:When a property closing is completed, and the funds and title have been transferred, the sales contract between the buyer and seller is considered fully performed or executed
Impossibility of performance is often used as a defense for breach of contract.
It occurs when it becomes impossible for one or more parties to perform their duties of the contract
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The following are considered grounds for impossibility of performance:
One or more of the parties gets injured or passes away
The property gets destroyed
The government passes a law that makes the contract performance illegal
EXAMPLE:A homeowner hires a contractor to build an addition to their house. Soon after, the owner learns that proposed addition is against the local zoning laws, and therefore cannot be built.
It will then be considered impossible for the contractor to perform his obligations of the contract, and the contract can then be terminated.
4 OPERATION OF LAWOperation of law describes how the rights and liabilities of parties may be changed by the application of law.
EXAMPLE:
If a person dies without a will, their heirs are determined by an operation of law.
EXAMPLE:An individual files for bankruptcy.
Any debt obligations the individual possesses through existing contracts may be terminated.
PUBLIC LAND USE CONTROLS
PETEUse the acronym to remember the government powers in real property
Eminent Domain
Taxation
Police Power
Use the acronym
Zoning
The right of any political body to enact laws and enforce them, for the order, safety, health, morals and general welfare of the public.
Escheat
Police Power does NOT include compensation to the owner
Building Codes
The RIGHT of the government to acquire property for necessary public use by condemnation.
The owner MUST be fairly compensated
CondemnationThe actual ACT of the government taking property
Example
Example
Eminent domain may be exercised to make way for a new highway
The right of the government to tax real estate to pay for services and programs supported by the government
Real estate taxes may be used to pay for roads, sidewalks, public parks, etc.
Example
Occurs when property reverts back to the State when an individual dies without a will and without heirs
An individual who dies without a will is said to have died "intestate"
FREEHOLD ESTATES
FEE SIMPLE ESTATEalso known as a: FEE SIMPLE ABSOLUTE or FEE ESTATE
Absolute ownership of real property in which the owner is entitled to the entire property with unconditional power of disposition during the owner’s life and descending to the owner’s heirs
THE HIGHEST FORM OF OWNERSHIPIn a fee simple estate, the owner holds the full bundle of rights to the property
FEE SIMPLE DEFEASIBLE ESTATEAn estate subject to being lost if certain conditions occurThese conditions are typically stated in the deed
FEE SIMPLE DETERMINABLEFEE SIMPLE SUBJECT TO A CONDITION SUBSEQUENT
2 TYPES OF FEE SIMPLE DEFEASIBLE ESTATES
" THINK THE FULL BUNDLE OF STICKS "
An estate that will end automatically when the stated event or condition occurs. The interest will revert to the grantor or the heirs of the grantor
A defeasible fee title recognizable by the words "but if"
ExampleMary grants her property to James "but if" James moves out, the property will revert back to Mary or her heirs
LIFE ESTATEA freehold estate created for the duration of the life or lives of certain named personsA life estate cannot be inherited
ExampleDavid grants his property to the State to "only be used as a park"When the State stops using the property as a park, the property reverts back to David or his heirs
Example
Mark grants his property to Lisa for the life of Lisa.After Lisa passes away, the property reverts back to Mark (or another individual specified by Mark, known as the Remainderman)
PARTIES TO A LIFE ESTATE
GRANTORA person who conveys title to real property by deed.
LIFE TENANT (GRANTEE)A person receiving a life estate.
REMAINDERMANA person who has a future interest in a life estate.Specified by the grantor.
Grantor grants property to life tenant for the life of a specified individual
After the specified person passes away, the property may be transfered to the remainder man
ESTATE IN REMAINDER
ESTATE IN REVERSION
After the specified person passes away, the property may be transfer back to the Grantor
REMAINDERMANLIFE TENANTGRANTOR
TYPES OF LISTING CONTRACTS
There Are 4 Primary Listing Contracts You Should Know:
(1) Exclusive Right to Sell Agreement
(2) Exclusive Agency Agreement
(3) Net Listing
(4) Open Listing
LISTING CONTRACT:A contract in which a property owner employs a real estate broker to market the property described in the contract.
Even if the Principal finds the buyer, the Agent is still entitled to a commission
AGENT
BUYER
PRINCIPAL AGENT
EXCLUSIVE RIGHT TO SELL AGREEMENTA Listing Contract given to only one broker who is entitled to the commission if anyone sells the property during the term of the Listing Contract.
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The Agent is entitled to a commission when:
The Broker finds a buyer
An agent working under the Broker finds a buyer
A Cooperating Broker finds a buyer
The Agent is NOT entitled to a commission when:
The Principal finds the buyer themselves
OPEN LISTING
A listing contract given to one or more brokers in which the broker procuring a sale is entitled to the commission but imposes no commission obligation on the owner when the owner sells the property.
3(Also known as a NON-EXCLUSIVE LISTING)
PRINCIPAL
PRINCIPAL
An Open Listing does not offer an exclusive to any one agent.
Instead, any agent who helps secure a buyer is entitled to the commission.
This type of listing offers the least amount of protection and incentive to agents, which is why they are rarely used.
NET LISTINGA listing which provides that the agent may retain as compensation for agent’s services all sums received over and above a net price to the owner.
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An Open Listing offers the LEAST AMOUNT OF PROTECTION to the broker
An Exclusive Right to Sell Agreement offers the MOST PROTECTION to the broker
EXAMPLE:David hires a broker to sell his house.They agree to a listing price of $350,000.
According to a Net Listing, the broker's commission will equal any amount above the listing price.
The broker ultimately finds a buyer who is willing to purchase David's house for $390,000.
LISTING PRICE
$350,000 $40,000
SALE PRICE: $390,000
BROKER COMMISSION
The broker's commission will equal $390,000 (the sale price) minus $350,000 (the listing price)
Net Listings are ILLEGAL in most States!Net Listings are illegal in most States as it may lead to brokers taking advantage of homeowners
EXCLUSIVE AGENCY AGREEMENTA listing contract which is given to one Broker (exclusive), who is entitled to a commission if they, or any other Cooperating Broker, secures a buyer.
However, the Principal does NOT have to pay a commission if they secure the buyer themselves.
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