A commitment to refrain from undertaking a certain act, such as launching a justifiable lawsuit, made by one party to convince another to engage into a contract (the forbearance of a right). Consideration is usually something of worth, such as the purchase price in money; it can also include personal services or exchanged property. It is the agreed-upon and paid price for a promise, or it could be a return promise.
The actual consideration for the contract is the mutual exchange of promises by buyers and sellers to legally obligate themselves to do something they were not legally required to do previously; that is, the sellers agree to sell a property for a certain price, and the buyers agree to pay that price to purchase the described property. As a result, simply promising to pay money is sufficient consideration, and an earnest money deposit is not required to create a legally binding contract. The following are the general rules:
→ A recital of consideration in a deed should be used as presumptive proof that something of value was offered in exchange for the transfer of realty. A “good” consideration (love and affection) is sufficient to sustain a gift deed, even though most contracts require a “valuable” consideration. The actual consideration does not have to be declared unless a fiduciary executes a deed; it can be proven by any other legal evidence.
→ In practice, the price paid for real estate is determined by looking up the transfer tax paid (if any) on the deed and calculating the taxable consideration.
→ A real estate licensee who is a party to naming a false consideration may face discipline unless the consideration is manifestly trivial.
→ A choice must be supported by actual thought.
→ The consideration for the use and occupancy of the premises in a lease is the periodic payment of rent over the rental term.
→ To support a contract, there must be present consideration. Betty, for example, saves Charley from a burning house. In return for Betty’s efforts, Charley offers to convey his farm to her in writing. Betty can’t have Charley’s pledge specifically enforced if he changes his mind. A mortgage is also not legitimate if it is granted to secure an existing debt without any new compensation, such as a time extension, as an inducement for the mortgage’s execution.
→ The adequacy of consideration to support a contract is rarely examined by courts. However, if the parties were not in an equal bargaining position and the party filing the case had not paid a fair and sufficient consideration, the court will dismiss the action for particular performance. For example, if the market value of the property in question is $200,000 (at the time the contract is executed), and a buyer (who did not disclose that he was a licensed broker) seeks particular performance of a purchase contract for $20,000, the court is likely to dismiss the action.
In cases involving an alleged fraudulent transfer under the Uniform Fraudulent Conveyance Act, the issue of adequacy of consideration also arises. Let’s say a seller sells a property a couple months before declaring bankruptcy. If the price was insufficient, the trustee in bankruptcy will be able to set aside the conveyance as fraudulent. In some circumstances, inadequacy of consideration is used to prove undue influence and that the buyer was not a “bona fide purchaser” for value as defined by the recording laws.
The exchange of money or services for property.
The compelling basis for entering into a contract under contract law. In exchange for a promise, something of worth is offered.
Anything of value offered in exchange for convincing another party to engage into a contract.
To join a land sales registration with an earlier registration, especially when the property is developed and sold in successive phases or increments, to unite, combine, or incorporate by reference, as in combining two mortgages on one property into a single loan; to combine two or more parcels of land (the reverse of the subdivision process); or to combine two or more parcels of land (the reverse of the subdivision process). A developer with a 100-acre tract could subdivide 50 acres into 100 half-acre units and register the subdivision with state and federal agencies. When the remaining 50 acres are developed, the owner can combine this new registration with the 50-acre subdivision that was previously registered and sell both portions under the same registration. Consolidated registration of subdivided lands is permitted under both state and federal (HUD) requirements.
When multiple parcels of land are combined, a new certificate of title is produced to replace all previous certificates.
A fixed percentage added to a debt’s face value. It evolves into the annual amount of money required to pay a specific net rate of interest on the declining balance and liquidate the principal debt within a specified time period; a method for calculating rate and term on an annual basis.
The required annual payment per dollar of mortgage money, which includes both interest and amortized principle. With each change in the interest rate and amortization term, the mortgage constant changes.
A typical index for adjustable-rate mortgages (ARMs). The one-year constant maturity rate, for example, is the average of the market yield on any existing U.S. Treasury debt with exactly one year remaining to ultimate repayment, regardless of initial term.
A loan in which all installments are made at the same time throughout the payback period.
Any aspect or condition of the built or natural environment that interferes with projected land usage.
Any constraint or impediment to the project.
The process of constructing a structure.
The lessor pays a lessee money or other financial incentives to cover the cost of preparing a structure for the lessee’s occupancy, in whole or in part. Partitions, wiring, lights, and ordinary carpets could all be covered by this budget. Known as tenant improvements.
A owner’s contribution to the construction cost and/or alterations required to make a facility ready for a tenant’s occupancy. This allowance may be a set amount or it may fluctuate depending on the kind of transaction.
A contract between the owner and the contractor in which the contractor commits to build the owner’s building (or other described project) in accordance with the contract terms and within a given timeframe in exchange for a mutually agreed-upon consideration to be paid by the owner.
The whole project cost, with usual overhead and profit, that must be paid.
the total of labor and material costs, as well as contractors’ overhead and profits, incurred in the construction or improvement of a property
Prior to the commencement of construction, a number is presented that estimates the overall cost of the project.
Advances on a building loan on a regular basis.
A type of construction in which the sheet material or wooden panel is applied dry.
When the structural sections of a building are made of wood, or when a wooden frame is utilized to support the structure, it is called a wooden frame construction.
A loan granted by a commercial bank to a builder to be used for the building of renovations on real estate, typically lasting six months to two years.
A short-term or interim loan used to finance the costs of construction on a building or development project, with loan proceeds issued in installment payments while work advances (called draws). As a result, the outstanding loan balance grows in lockstep with the value of the collateral. Interest is usually not charged on borrowed funds until the incremental construction draws are advanced. One or more long-term permanent loans, such as those taken out by individual condominium unit buyers, will take out (pay off) the construction loan after the project is completed. These loans typically have a loan-to-value ratio of 75 percent of the appraised value. Commercial banks and savings and loan associations are the most common providers of building loans.
A loan for the purpose of constructing a home, usually with a duration of less than three years. They’re usually based on prime rates and are just paid interest with a balloon payment payable at the loan’s maturity.
Loans used to cover the price of erecting the building or structures.
A short-term loan obtained for the purpose of building sponsorship.
Developers use this person to manage day-to-day building activity.
A legal inference, such as constructive eviction or constructive notice.
Behavior by the landlord that makes it so hard for the tenant to enjoy the rented space that the tenant has no choice but to leave and end the lease without having to pay any more rent. This idea comes from modern property law, which now says
Any interference by the landlord with the tenant’s possession of the leased premises, rendering them unfit for habitation. In this instance, the renter is not responsible for any subsequent rent payments.
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Despite no evidence of dishonesty or intent to deceive, the law declares a breach of a legal or equitable duty false because of its tendency to deceive others. When a broker has a responsibility to speak, such as when a listing broker fails to reveal a known major foundation problem not easily visible on a routine examination, the broker may be prosecuted with constructive fraud.
A legal presumption that a person is accountable for knowing certain facts that may be discovered by due diligence or a public record inquiry. The appropriate recording of a document serves as constructive notice of the document’s existence and contents to the rest of the world. Possession of property also gives the party in possession constructive notice of their rights.
Rights under an unrecorded deed, contract for deed, lease-option, and adverse possession are examples of rights of parties in possession. Constructive notice, also known as legal notice, differs from actual notice, which is gained by express or direct knowledge throughout the course of a transaction.
When a fact is a subject of public record, the legal assumption is that everyone knows about it.
A legal doctrine that allows notice to be attributed even if a party is completely unaware of the facts. According to recording statutes, recording a document in the public record constitutes constructive notice to the rest of the world.
The unrestricted right to receive money is the same as the actual receipt of that money, according to a tax law principle. For tax purposes, receiving a demand promissory note is the same as receiving money. As a result, if a person has the right and ability to receive payment, which includes profit or income, that profit is taxed when that right exists, regardless of when payment is actually made.
A financial adviser, for example, is someone who gives guidance in a specialized area. A real estate consultant who provides services similar to those of a real estate broker must be licensed by the state.
The Dodd-Frank Act established a consumer protection agency primarily responsible for rulemaking, supervision, and enforcement of federal consumer financial protection laws, including combining certain disclosures that consumers receive under the Truth in Lending Act, Regulation Z, and Regulation X of the Real Estate Settlement Procedures Act. It is a separate entity within the Federal Reserve.
The finished result of the manufacturing process.
An index that compares the current price to the price of a representative “market basket” of consumer goods in a given year.
The Bureau of Labor Statistics (BLS) of the federal Department of Labor prepares a statistical measure of changes in consumer goods prices. As of August 2009, the BLS had restricted reporting to three categories: food, energy, and all products except food and energy.
The CPI is divided into two categories: the CPI for all urban consumers (CPI-U) and the CPI for urban wage earners and clerical workers (CPI-W). For 1982-1984, the government established a base index of 100. The CPI-U was 230.379 in August, and the CPI-W was 227.056. The CPI is frequently used as a criterion in business lease rent changes.
The U.S. Department of Labor’s Bureau of Labor Statistics publishes a monthly index that shows the cost of a variety of consumer products and services.
An index that measures the change in prices of goods and services over time, providing a gauge of inflation.
To finish something. Usually, a sale of real estate is finalized when the deed, money, and conveyance documents are given to the buyer and the transaction is recorded.
Insurance that protects your home’s tangible assets, such as electronic products like plasma TVs and stereo systems, furniture, drapes, and carpets. Certain products, such as high-priced laptops, may necessitate supplementary insurance.
Close by; bordering or abutting; near, coterminous (having the same boundaries). Many state subdivision laws describe a subdivision as any land consisting of two or more lots, contiguous or not, sold as part of a common advertising and selling promotional plan. Condominium property does not have to be continuous (for example, if it includes a parking lot across the street), but it must be in the same general vicinity. Contiguous owners must give up some of their privacy for the sake of the community’s overall well-being. Owners whose properties are adjacent to commercial companies and railroads, for example, may experience acceptable discomfort.
A partial release condition in a mortgage may often require that a partial release be granted only on a parcel that is adjacent to a parcel that has already been freed. The term “contiguous” should be properly defined so that the release clause is not contested on the basis of ambiguity and vagueness.
Properties that are close by and in close proximity.
A contract clause that requires the execution of a specific act or the occurrence of a certain event before the contract becomes binding. A buyer will frequently submit a purchase offer contingent on securing finance or rezoning. In this scenario, the seller should make certain that the contingency is specific and unambiguous, with a clear cutoff date; otherwise, the buyer may be able to keep the seller’s property indefinitely while attempting to obtain finance or rezoning. Any contingency clause incorporated for their benefit may be waived by the parties. For example, even if the buyer was unable to secure the zoning the original contingency in the contract for sale, the buyer might force the seller to sell the land. Contingency indicates a commitment to use one’s best efforts to achieve it.
If a contingency is phrased excessively broadly, such as “contingent on my determining whether it is a fair bargain or not,” the entire contract is deemed “illusory” and unenforceable by any party due to a lack of “mutuality of obligation.” If the sale is contingent on a “acceptable” inspection or an attorney’s evaluation of the lease, the courts will strive to enforce good faith and reasonableness criteria so that a party cannot back out simply because their plans have changed.
An option is not the same as a contingent sale. The optionee has complete control over whether or not to execute the option. The buyer must buy on the occurrence or non-occurrence of a defined event, such as loan qualification, under a contingency.
Not only is the financial contingency the most commonly utilized, but it is also the most contentious. A well-written contingency statement can nonetheless generate issues. Assume a financing contingency stated that the offer was contingent on the buyer obtaining a first mortgage loan commitment for $ 167,500 with interest not to exceed 5% per year and a term of not less than 30 years, and monthly payments for principal and interest not to exceed $800. 18 plus 1/12 the estimated annual real property taxes and annual insurance premium. Buyers agreed to get a loan in good faith and with due diligence. Buyers qualified for the loan, but refused to take it due of an interest rate escalation clause included by the lender. Even if a court allows some flexibility in the financing commitment, the inclusion of an escalation clause is a material deviation from the terms of the offer to purchase, and thus the buyer is not in breach of contract if he or she refuses to complete the purchase; the buyer is entitled to a refund of the deposit money. However, a buyer who qualified for financing on the terms given in an offer but later got divorced or changed circumstances to the point where he or she was no longer qualified at the time of closing may have difficulties defending a case for contract enforcement. A careful seller can include a language that says “the buyer’s execution of any loan paperwork shall be deemed an acceptance of such loan and a waiver of this contingency.”
There are some requirements that must be completed before a contract can be legally binding.
A money set aside to cover unexpected expenses.
A listing in a multiple listing service that has exceptional or special characteristics; the letter C is occasionally placed in front of the MLS number to indicate this. Shorter-than-average listing term, an unusual structure, or a short sale are all possible contingencies.
A third-party responsibility is one that is undertaken by a third party. If the original obligor defaults, the obligation will fall to the third party.
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A “run to date” update of a title search. A preliminary title report is issued by the title company shortly after a sales contract or an offer to purchase is signed or escrow is initiated in a normal transaction. The title company is typically required to continue the search until the final documents are recorded by monitoring the public record to ensure that no intervening rights in the property have arisen. The grantee’s title will be shown in the final title report. The continuance is normally paid for by the buyer.
Most states require real estate and appraiser licensees to complete a certain number of educational programmes before their licenses can be renewed or reinstated.
An instrument that determines whether or not a circuit can conduct electricity.
A clause in a shopping centre agreement that requires major tenants to keep their stores open during the lease period. Both the landlord and the other tenants gain from this clause.
A fictitious line on the ground with all of its points at the same height above or below a specified datum.
The variation in height between two neighboring contours.
A topographic map depicts the lay of the land in a given area by connecting points of equal elevation at predetermined intervals, depending on the scale employed.
A contract between two or more parties that establishes or alters a legal relationship, usually by an offer and acceptance.
A formal and legally binding agreement between two or more parties that creates responsibilities that must be met.
A legally binding agreement between competent persons who agree to perform or refrain from undertaking specific activities in exchange for a compensation. In essence, a contract is an enforceable promise.
There are numerous forms of contracts in real estate, including contracts for sale, options, mortgages, leases, contracts for conveyance, escrow agreements, and loan commitments. Each of these contracts must meet the minimal conditions outlined in the following paragraphs.
Competent parties: Any contract must include at least two legitimate parties. As a result, Juan cannot consent to deed property to himself. He may, however, pass property to himself and Martina as tenants in common. Both parties must have at least minimal contracting capacity. Minors cannot deed property they own because they lack the capacity to impart property; such a deed would be voidable by the minor (in some states, it is automatically void). A minor, on the other hand, has the limited competence to engage into a legitimate contract to purchase property from an adult; such a contract would be enforceable by the minor against the adult, but would be voidable by the minor if he elected not to complete the purchase during his minority. A fiduciary and a company must have the proper authorization to enter into a contract. When a party to a contract dies, the heirs and assigns of the deceased may be obligated by the deal, depending on the terms of the contract.
Writing: Unless otherwise required by law, oral contracts are just as legitimate as written contracts. However, real estate contracts, with the exception of leases of one year or shorter, must be in writing to be enforceable. All key contract conditions must be thorough and certain, so that the entire agreement is set forth in writing and nothing material remains to be agreed upon in the future. Until the contract is signed, everything is negotiable. Once signed, the contract is no longer negotiable. To change the contract conditions, the parties must give and accept new consideration.
If the contract involves real property, the property must be accurately specified so that the parties may identify the subject matter of the contract. A thorough legal description should be included in each deed, mortgage, or lease assignment. Most contracts for sale include a good description of the property (location, size, and tax map number), but not a detailed legal description.
Meeting of the minds: There must be a genuine offer and an unconditional acceptance of that offer, so that the seller understands the conditions of the buyer’s offer and the buyer understands the manner of acquisition of the designated property.
Consideration: The contract must be supported by consideration; that is, both parties must be forced to do something they were not previously bound to do. Most contracts require a valuable payment, such as a promise to pay money. A gift deed, on the other hand, is legitimate if it mentions a good, rather than a valuable, consideration, such as “for love and affection.”
A contract must contemplate a valid purpose in order to be enforceable. Thus, a contract to lease a building for an unlawful gambling casino is unenforceable, as is a listing contract to pay a commission to an unlicensed person. A usurious contract is not entirely enforceable.
Signature: A party must sign a contract in order to be bound by it. In a typical real estate transaction, both the buyer and the seller sign the contract for sale.
If there is any uncertainty in a contract, the courts will interpret it most rigorously against the party who drafted it. For example, because the broker creates the listing contract, it is interpreted quite rigorously against the broker. Thus, if there was any uncertainty about whether the listing was an exclusive agency or an exclusive right to sell, the courts would interpret it as an exclusive agency.
It is not necessary for one legal document to represent the contract of the contracting parties, yet it may be advantageous to avoid any disagreement about whether a contract was created. Sometimes the elements of a contract (the offer and acceptance) emerge from various correspondence between the parties, thus a single formal contract is never actually signed. However, all parties must agree on all key provisions in the contract and should not leave anything to later negotiation. If this occurs, the “contract” may be interpreted as early conversations rather than an actual contract.
Some contracts may be discharged due to impossibility of fulfillment. For example, if the promisor of a personal service contract dies, the contract is usually discharged. As a result, a contract with a well-known architect to create a specific structure would very certainly be voided if the architect died. However, if the work and/or services can be performed by others, such as in a plumbing contract, the obligation will survive the promisor’s death and bind the promisor’s estate. Real estate contracts are typically binding on the deceased’s heirs and assigns. The court may discharge a contract if it believes the terms would be difficult for a reasonable person or organization to perform.
The most important aspect of every contract is that both parties completely understand their agreement. Poorly drafted documents, particularly those containing lengthy legal jargon, are open to multiple interpretations and frequently result in litigation. In most cases, the parties engaged in a real estate transaction would be wise to retain the services of an experienced real estate attorney to design a contract that appropriately reflects the parties’ true intentions. It should be noted that a broker who prepares legal contracts may be charged with the unlawful practice of law.
Managing the contractual parties’ legal relationships and duties.
All legal duties between the parties must be resolved and fulfilled.
The agreement between two parties, as well as all supporting materials that aid in defining, altering, or modifying the agreement and its associated circumstances in real estate development ( drawings, specifications, change orders, addenda). The phrase is used in the American Institute of Architects’ (AIA) standard form documents, such as those between the owner, architect, and general contractor.
Real Estate Glossary C [Part 7]