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REAL ESTATE Professionals
- INDIANA BROKERS
Included in this book:
A Home Buyer’s Guide to Credit
Scores
A New Look at Contract Law
Listing Agreements
Basics of Green Building for Real
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Table of Contents
Indiana Real Estate Continuing
Education for Brokers
33
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A HOME BUYER’S GUIDE TO CREDIT SCORES
Course Introduction
Thebesttimetoplantatreewas20yearsago.Thenextbesttimeisnow.
~ChineseProverb
ThisChineseproverbringstrueaboutcreditreports,too.Ideally,ahomebuyerhasbeenpreparingtobuyahomeforyears:savingahealthydown
payment, eliminating debt, and boosting their credit score as much as possible. Unfortunately, many buyers in the market have not had the
opportunitytodosuchthings,sowhatcantheydonow?
Being able to counsel people on improving their financial standing cannot only improve your service to current clients, it can also be used as a
marketingtooltoattractandhelpnewclients!
Keep in mind, you are not your client's financial advisor, but you are in a unique position to know what is ahead for them. While you
should not advise them on financial strategies, you certainly can provide them with tools and knowledge to make their own decisions.
This course will help you to better assist your clients by providing them with information that will be beneficial in the home buying
process.
WeencourageourcustomerstovisittheFAQssectionfoundherehttp://faqs.mckissock.com/forfurtherinformationregardingyoureducational
experiencewithMcKissock.Completewithstep-by-steptutorials,we’vedesigneditwithYOUinmind!
Learning Objectives
Uponcompletionofthiscourse,thestudentwillbeableto:
•
Summarizethebasicinformationaskedforandprovidedbyacreditreport
•
Discusshowtominimizetherisksofidentitytheft
•
Identifythefourbasictypesofcredit
•
DiscusshowFICO®creditscoresarecalculated
•
DescribehowFICO®creditscoresaffectconsumers
•
Identifyactionsconsumerscantaketoimprovecreditscores
•
Listtheexpenses,overandabovePITI,ofroutinehomeownership
•
Discussthebenefitsofahomebuyerusingafinancialtrackingtool
•
Estimatethepotentialclosingcostsforahomebuyer
Table of Contents
•
Chapter1:AllAboutCreditReports
•
Chapter2:CreditScores
•
Chapter3:UnderstandingtheFullCostofHomeOwnership
•
Chapter4:FinalExam
3
Youcanmailacopyoftheform
http://www.consumer.ftc.gov/articles/pdf-0093-annual-reportrequest-form.pdfto:
CHAPTER 1: ALL ABOUT
CREDIT REPORTS
AnnualCreditReportRequestService
P.O.Box105281
Chapter Overview
Atlanta,GA30348-5281
In this chapter, we will cover credit reports. What is contained in a
credit report? Which companies produce these reports? How can a
consumerobtainacopyofhisorherreports?Cancreditreportsbe
used to help protect against identity theft? These are common
questionsthatwillbeaddressedinthischapter.
Identity Theft
Identity theft is the act of obtaining key information from an
individual for the purpose of using his or her credit to make
purchasesorstealmoney.
Keywords
•
CreditReport
•
IdentityTheft
•
RevolvingCredit
•
Identity thieves can obtain personal information a number of ways,
including:
•
Taking credit card bills and bank statements from trash
cans
InstallmentLoans
•
Stealingwalletsorindividualcreditcards
•
FinanceCompanyAccounts
•
•
MortgageLoans
Reading credit card numbers over a person’s shoulder as
theyholdtheircardoutforapurchase
OptOut
•
Employeesofastorestealinginformation
•
CreditInquiries
•
•
Email “phishing” in which an individual sends out many
emails asking people to verify an account. They may be
askedforloginIDsandpasswords,socialsecuritynumbers,
homeaddress,phonenumbers,etc.
•
Summarizethebasicinformationaskedforandprovidedby
acreditreport
Thieves can take credit card offers from mailboxes, apply
forthecard,thentakethecardfromthemailbox(orsimply
checkingmailboxesforenvelopeswithcards)
•
Takingboxesofbankchecksfrommailboxes
•
Discusshowtominimizetherisksofidentitytheft
•
•
Identifythefourbasictypesofcredit
Sophisticated hackers can break into retailers' electronic
files and steal information, as what happened to the retail
chainTargetinlate2013
LearningObjectives
Uponcompletionofthischapter,thestudentwillbeableto:
•
People can help protect their information with a few easy steps,
including:
The Credit Report
The credit report is the basis upon
which potential borrowers are
assessed. This can affect interest
rates offered, possible extra points
a mortgage borrower may have to
pay, and even if the potential
borrower can be approved for a
loanatall.
•
Obtain the free credit reports once a year from all three
ReportingBureaus
•
Asktopickupchecksandbankcardsdirectlyfromthebank
•
Be careful when holding credit cards, so the numbers are
notvisible
•
ShieldthenumberpadwhenenteringPINnumbers
Anyone with a social security
number or tax ID in the United
States has the right to download
one free credit report from each of
the three big credit bureaus once
every 12 months. Many websites
will offer “free credit reports”, but
theyusuallyrequirecreditcardinformationandwillenrolltheuser
in a credit monitoring service complete with recurring monthly
charges until the consumer cancels. Figuring out how to cancel this
serviceisoftenverydifficultandtimeconsuming.
•
Check bank and credit card statements regularly to see if
thereareunusualcharges
•
Shred credit card bills and bank statements before
throwingthemaway
•
Opt Out of credit card offers by going to this website:
https://www.optoutprescreen.com/?rf=t,orcall(888)5678688
•
Keep the number of credit and
debitcardstoaminimum
This is why in 2003 the Fair and Accurate Credit Transactions Act
(FACT) was enacted to allow consumers to access their free credit
reports,onceayear,withnostringsattached.
•
Do not carry social security cards
and unnecessary credit cards in a
wallet
Anyone can go to www.AnnualCreditReport.com to instantly
download their free credit reports. If web connections or internet
security is a concern, consumers have the options of calling or
mailingaformtotheAnnualCreditReportService:(877)322-8228
•
Place all important documents in a
safeorlockbox
4
correct and to check to see if there has been identity theft. If you
would like to download the form, you can visit
https://www.experian.com/credit_report_basics/pdf/samplecreditr
eport.pdf.Note:Youcanscrollthroughthisdocumentbyclicking
inthewindowandusingyourscrollwheel.
Case Study: Target
During a period from November 27 through December 15, 2013,
hackerswereabletoobtainaccesstoTarget’sdigitalrecords(Target,
2013).Thesehackerswereabletogetcreditcardnumbersincluding
expiration dates and verification codes, debit card information,
names and addresses. This information was then sold to other
thieves on the internet. Unscrupulous people could obtain victims’
credit card information for less than $100, then charge against the
card until the card holder or Credit Company discovered the
fraudulentchargesandcancelledthecard.
The top of the report contains the name and contact information of
the subject individual. Next is a section on Potentially Negative
Items. This may include late credit items, bankruptcy, liens, and
court judgments. This section shows the source and amount of
indebtedness.
Ideally,therewouldbenothinginthissection,butifthereis,itisin
thebestinterestofthisindividualtogettheseitemspaid.
In response to this incident, Target offered 12 months of credit
monitoringforfree(includingcreditreportsfromallthreebureaus).
In this case, consumers did nothing reckless. The retailer had
excellentinternetsecurity,andyethackerswerestillabletobreakin
andtaketheinformation.
Next are Accounts in Good Standing. Having some debt is not
necessarilyabadthingonacreditreport.Beingabletomanagesome
debt in a responsible way establishes a credit history. This section
listsallsourcesofcreditgoingback5yearsormore.Manyofthese
accountsmaybeclosed,butwillstillappearonthecreditreport.For
openaccounts,theCreditLimit,CurrentBalance,and24monthsof
PaymentHistorywillbelisted.Asstatedearlier,thelast24months
are very important months on a credit report. Late payments over
thelast24monthsareincluded,andcodedas30DaysLate,60Days
Late,orOver 90 Days Late.Itemsaregenerallyreportedlateonce
thegraceperiodaftertheduedatehaspassed.
Targetwasextremelyproactiveinlettingconsumersknowaboutthe
infraction.Inothercases,victimsofidentitytheftmaynotknowfor
sometime.Manythievesdonotmakeoutrageouscharges.Theymay
simplychargegasandgroceries,whichmaygounnoticedforalong
time.
Anatomy of a Credit Report
If a mortgage borrower has the opportunity to spend 2 years
improving his or her credit report, one key component is to make
sureheorshepaysatleasttheminimumpaymentontimeforevery
accountheorshehas.
Credit reports are assembled and maintained by three major credit
reportingbureaus:
Experian:www.experiean.com
AlsoincludedonthereportisaHistory of Credit Inquiries.There
are many instances where companies will wish to check a credit
history.Sometimesthesecreditchecksaredirectlyauthorizedbythe
individual;othertimes,apersonhasnoideathathisorhercredithas
been checked. The credit checks are divided into two sections to
reflect this. The first section contains credit checks directly
authorized by the individual. This happens when someone applies
for store credit, or a loan, or even fills out an application to rent
housingandauthorizesthelandlordtodoacreditcheck.
TransUnion:www.transunion.com/
Equifax:www.equifax.com
Thereareafewothercreditreportingbureaus,buttheyarenotused
nearly as frequently as these three titans. These credit bureaus
collectinformationaboutaperson’scredithistory:creditcards,auto
loans,studentloans,mortgages,judgments,andsoon.Theymaintain
thiscredithistoryforyears,butthelasttwoyears(24months)isthe
timeframeofthemostimportance.
On the other hand, sometimes companies do credit checks without
the individual’s knowledge. This may commonly occur if an
individualdoesnot“optout”ofspecialoffers.
Ofparticularinterestarethefollowingsourcesofcredit:
Revolving Credit: Credit Cards and Retail Accounts (store credit
cards)
Thelastsectionhasthecontactinformationonfilefortheindividual,
along with his or her employer, and a section for the individual to
makeastatementaboutanythingonthecreditreport.
Installment Loans: Loans with regular payments, like car loans or
studentloans
Creditreportsgiveadetailedaccountofaperson’scredithistoryand
currentstanding.Inthepast,creditorswouldlookatanentirereport
to make their own judgments on the credit worthiness of a credit
applicant.Lookingatthesamplecreditreport,youmayhavenoticed
that it looks completely different than what your report may look
like.Thereissomuchvariationfrompersontoperson,itisdifficult
to have consistent standards when deciding on whether to grant
credit or not. Credit scores were developed to calculate a more
consistent measure of credit worthiness. They are not included in a
creditreport(andwillbecoveredinthenextsection).
Finance Company Accounts:Thesearehigh-interestloansthatare
generallyofferedtohigh-riskborrowers.Thesetypesofaccountsare
alsocommonlyofferedtoconsumerswhowishtofinancefurniture,
appliances, elective medical procedures, etc. They may have zerointerest “same as cash” offers if paid in full within X months. If a
borrower does not pay in full, the interest rates are significantly
higher than market rates. Having this type of credit is not generally
seenasafavorableitemonacreditreport.
MortgageLoans:Firstmortgagesandlargerhomeequityloans
One important benefit from obtaining the free credit reports once a
yearistochecktoseeifanyidentifytheftoccurred.Aretherecredit
accountsthatwereopenedfraudulently?Arecreditbalanceshigher
than expected? Have there been credit inquiries from organizations
unknowntotheindividual?
Chapter 1 Wrap-Up
This chapter covered the basics of a Credit Report, and how to
obtainafreereportfromeachofthethreemajorreportingbureaus
once a year. Next, we discussed the dangers of Identity Theft and
how to minimize the chances of it happening. Credit reports are
useful tools to check for identity theft and for monitoring the basic
types of credit (Revolving Credit, Installment Loans, Finance
Company Accounts, and Mortgage Loans). Finally, an easy way to
Opt Out of credit offers was covered, along with other ways to
minimizeCreditInquiries.
Sample Credit Report
Taking a look at a sample credit report from www.Experian.com
shows many things that can appear on a credit report. The credit
bureausarehighlyaccurate,buttheremaybesomeinaccuraciesor
inconsistencies in credit reports, so it is a good idea to obtain all
threeofthefreereportsonceayeartoverifythattheinformationis
5
companies.Thisisalsothescorethatconsumersseeiftheyrequesta
creditscore.
CHAPTER 2: CREDIT
SCORES
This score ranges from 300 – 850, with 300 being high risk/poor
rating,and850beinglowrisk/excellentrating.
More specifically, the scores are grouped into ranges for Excellent,
Good, Average, Poor, and Bad. We will go over those on the next
page.
Chapter Overview
Giventhelengthandvariabilityofcreditreports,therewasademand
for a more consistent, more efficient way to measure credit
worthiness. Thankfully, there is now a set of Credit Scores. These
scores take all the information in a credit report, put it into an
algorithm, and compute a credit score number, making credit
assessmentsmuchmoresimple.
FICO Scale
720–850:Excellent
•
CreditScore
It is estimated that slightly less than 50% of the population has an
excellent credit score. This is a group of people who have generally
been at their current job (or current line of work) for more than 2
years. These people pay at least the minimum payments on their
debtsontimeeverymonth.Thesepeoplegenerallycarryabalanceof
less than 30% of their available revolving credit (i.e. credit cards),
andtheydonotopennewcreditaccountsfrequently,orhavemany
creditinquiries.
•
FICOScore
•
CreditRatio
•
RevolvingCredit
•
InstallmentLoans
Inthischapter,wewillcoverCreditScores.Whatdotheymean?How
many different scores are commonly available? How are they
calculated?Whatcanaconsumerdotoraisehisorhercreditscore?
Keywords
LearningObjectives
Uponcompletionofthischapter,thestudentwillbeableto:
•
DiscusshowFICO®creditscoresarecalculated
•
DescribehowFICO®creditscoresaffectconsumers
•
Identify actions consumers can take to improve credit
scores
The Credit Score(s)
MostconsumershaveaCredit Reportthatispagesandpageslong.
Inadditiontothelengthofthecreditreport,thereisagreatdealof
variation from person to person in terms of what appears on the
report.Itwasclearthathavingawaytoevaluateconsumers'credit
worthinessinaneasierwaywouldbeofgreatusetomanycreditors,
employers, landlords, insurers, lenders, etc. FICO did just that, by
generating a number to represent a consumer’s credit worthiness.
WecallthisTheCreditScore.
680–719:Good
This group contains approximately 15% of the population. These
people may be doing almost everything right, but have a lowered
score because of one or more minor issues. Perhaps one of their
credit cards has a high balance. They may have been late on a
payment in the last 2 years, or may have had a number of recent
creditinquiries.
What is FICO?
620–679:Average
FICO: Fair Isaac Corporation. This is a publicly traded corporation
thatprovidessoftwarethatutilizesinformationinacreditreportto
calculatecreditscores.
Itisinterestingthatthisgroupiscalledaverage.About65–80%of
Americanshavebettercreditscoresthanpeopleinthisgroup.Things
that people commonly do to end up in this category are to open up
newcreditaccounts.Perhapsthesepeopleliketosave15%offtheir
firstpurchaseatadepartmentstore,ortheywishtotakeadvantage
oflowintroductoryratesforbalancetransfersoncreditcards.These
people may have large debt loads from car loans or student loans.
Theymayalsohavetoomanycreditcardsand/orhavehighbalances
on those cards. Being late or missing minimum payments may also
contributetotheselowerscores.
There are a number of different credit scores available, but FICO
scoresareusedbyover90%ofcreditorsintheUnitedStates.
FICO actually calculates 49 different credit scores. The different
scores are designed to suit different needs. For example, the score
used to assess if a consumer should be granted a $500 store credit
card is different than that used when deciding to grant a car loan,
which is different than what is used by a mortgage lender. Each
credit reporting bureau has its own method of calculating scores
(althoughtheyareverysimilartooneanother).Thewayscoresare
calculatedarealsoupdatedfrequently,soitdoesn’ttakelongforso
manydifferentscorestobeavailable.
580–619:Poor
This group contains about 10% of Americans who likely have a
combinationoffactorslistedinthe“Average”categories.Thisgroup
ofpeoplemayhaveaverydifficulttimeobtainingcreditforcarloans
andmortgages.
ThebasicFICO®creditscoreistheonemostfrequentlyused.Thisis
the consumer credit score which is most used by credit card
6
Iftwoindividualsareapplyingforajointmortgageloan,whichcredit
scorewillbetheoneusedtocalculatetheinterestrate?
Below580:Bad
This group contains the bottom 10% of the population. This group
likelyhasacombinationoffactorsdescribedinthe“Average”group,
plus a foreclosure or bankruptcy on their report. Most credit issues
canbecleanedupovertime;however,foreclosuresandbankruptcies
tendtodamagecreditscoresformanyyears,ifnotpermanently.
a)Thehigherscore
b)Thelowerscore
c)Anaverageofthetwoscores
As of this writing, the graph on the right (from myfico.com)
representsthemostrecentdistributionofbasicFICO®creditscores
acrosstheUnitedStates.
d) Neither score, as mortgage rates are the same for all
borrowers
As a real estate licensee, you are probably hoping that a) is the
correct answer, but have a feeling that b) is the correct answer.
Mortgagelendershavebecomemuchmoreadversetoriskoverthe
lastfewyears.Theywillgenerallyweighthelowercreditscoremuch
moreheavilyandbasetheirmortgageratesonthescorethatislower
ofthepeopleapplyingjointlyforaloan.
The average (mean) FICO® score in the United States in 2012 was
689.
Luckily, for most Americans, it is possible to increase their credit
score with a few easy steps. Some credit scores can go up quickly,
while others may take a little more time to resolve. We will cover
these steps a little later, but first it is useful to know WHY we may
wanttoincreaseourcreditscores.
Takeaway: Refer to the example above. By providing knowledge to
yourclientsonhowtoraisetheirFICO®score(let'ssayfroma675
to700),youcouldhelpthemsave$70amonthand.4%intereston
theloan.That'sprettypowerfulconsideringyouarealreadyhelping
them find their dream home! This could be one more tool that you
couldaddtodevelopravingfansoutofyourclients.
How Do Credit Scores Affect Consumers?
Credit scores affect consumers in so many ways. Landlords,
employers, and creditors frequently look at these scores for their
current and potential customers. Having a favorable credit score
could mean the difference between being offered desirable rental
housing,job,orloan…ornot.
Mortgage Interest and the Debt-to-Income Ratio
Staying with the above example, we know that lenders base their
pre-approvalamountsonthedebt-to-incomeratio:
For the real estate licensee, a buyer’s credit score can be crucial to
determiningwhichpropertiesthebuyercanafford.Creditscorescan
affecttheloanamount,interestrates,requireddownpayments,and
ifapotentialbuyercanbeapprovedforaconventionalmortgageat
all.
MinimumMonthlyPaymentsonDebt÷MonthlyGrossIncome=Debtto-IncomeRatio
Thiscriticalratioshowstheborrower’sabilitytotakeonmoredebt.
Mortgage lenders generally will not lend more than what would
constitute28%ofaperson’smonthlygrossincome.Ifthereisother
debt,mortgagelenderswillgenerallynotoriginatealoanthatcauses
a borrower’s total debt-to-income ratio to exceed 36% (mortgage
plusotherdebts).
Thefollowingexamplewastakenfromhttp://www.myfico.com/and
reflects 30-year fixed mortgage rates on a $300,000 loan based on
Jan.31,2014marketrates.
Example:
As shown in the table previously, a person’s monthly mortgage
payment on a given property can vary dramatically based on his or
her credit score. The borrowers with higher credit scores are
chargedalowermortgagerate,whichmeanstheirmonthlypayment
islowerforanygivenloanamount.PeoplewithaFICO®scoreabove
760canborrowupto$360,000andhavetheirmonthlypaymentbe
the same as an individual with a FICO® score below 640 who
borrows$300,000.
$300,000loan,30-Yrfixedmortgage
Monthly
payment
FICO®score
APR
760-850
3.917% $1,418
700-759
4.139% $1,456
680-699
4.316% $1,487
660-679
4.530% $1,525
640-659
4.960% $1,603
620-639
5.506% $1,704
In other words, people with better credit scores can borrow more
money with a lower interest rate than those with less desirable
credit scores. People with excellent credit scores may be able to
affordamoreexpensivepropertythanthosewiththesameincome,
butlowercreditscores.
In addition to that, banks may require larger down payments from
thoseindividualswhoareseenasacreditrisk.Ifaborrower’scredit
scorewereimproved,heorshemaybeabletoborrowmoremoney
foralowerinterestrateandlessmoneydownonaproperty.Taking
afewstepstoimproveacreditscorecanbewellworthit!
Ascanbeseenhere,aborrowerwithapoorcreditscorewouldpay
$286 a month more than a borrower with an excellent credit score
ona$300,000loan!Nationalaveragesshowthatlendersmaycharge
more than 1.5% additional interest as a risk premium to those
individualswithlowercreditscores.
Anatomy of a Credit Score
Now that we see how important credit scores are to real estate
borrowers, you may be asking how these seemingly magical credit
scoresarecalculated.Thesimpleansweristhatnooneknowsexactly
how they are calculated. The credit bureaus and FICO® keep that
informationtopsecret,liketheformulatoCocaCola,orwhat’sinthe
Special Sauce on a Big Mac. We know what the ingredients are; we
justdon’tknowthepreciseamountsofeach.
What if a married couple is applying for a mortgage loan together?
What if one spouse has an excellent score, and the other has an
averagescore?
7
These are common questions that are difficult to answer without
knowing the exact formulas used by the credit reporting bureaus.
Many experts deduce that not only does the overall credit ratio
matter,butalsotheindividualcreditratios.
Thisiswhatwedoknow(accordingtomyfico.com):
For example, if a consumer has a retail account for a local
departmentstorethathasaratioof95%,itcouldsignificantlyimpair
acreditscore;evenifthecreditlimitforthisoneaccountis$500,but
theconsumerhasatotalof$25,000ofavailablecreditandanoverall
creditratioof10%.
Let’s look at two different consumers with similar credit accounts,
butdifferentdistributionofbalances:
Whenlookingatthesecategories,keepinmindthatthelast2years
(24 months) is the most critical period of time. Information dating
back many years is kept on a credit report, and foreclosures and
bankruptciescandamagecreditfromanywherebetween7yearsand
permanently. For most credit events, the previous 24 months is the
periodoftimethatisusedinordertocalculateacreditscore.
Visa
Charles
Charlene
2000/5000=40% 200/10000=2%
MasterCard
3000/5000=60% 100/5000=2%
Sears
10/1000=1%
1020/1000=102%
Wearegoingtobelookingateachoneofthesefactorsalittlemore
closelyonthenextfewpages.
TotalBalance
$5,010
$1,320
AvailableCredit
$11,000
$16,000
Payment History - 35% of Credit Score
OverallCreditRatio
5010/11000=
45.55%
1320/16000=
8.25%
This category is weighted the most
heavilyandincludesfactorssuchas:
AverageofCreditRatios 33.67%
•
Didtheamountspaidatleast
covertheminimummonthly
payments?
•
Areaccountsuptodate?
•
Werethere“slowpays”?(paymentspastduedates)
•
Weretheremissedpayments?
35.33%
Comparing Charles and Charlene, we see two different borrowers.
Despite the fact that Charles has charged 45% of his total available
credit, Charlene may have a similar average credit ratio! Charlene
oweslessandhasahigheramountofavailablecredit,shehasused
alloftheavailablecredit(plusalittlemore)onherSearscard.This
onesmallcardpullstheaverageofallcreditratiosup-eventhough
Charlenehasusedonly8.25%ofhertotalavailablecredit.
Why would one small card make the “Average of credit ratios” look
slightly worse than someone who has a higher balance on multiple
cards? The fact that Charlene has a high credit ratio on one card
showsthatCharlenemaynotbeabletohandlecreditwisely.
Withrevolvingcredit,theminimummonthlypaymentmustbepaid
on time each month. Unlike some loans, borrowers cannot make a
doublepaymentonemonth,andthenskipthenext.Ifaconsumeris
not able to make the minimum monthly payment on time every
month,itisagoodideatocallthecreditcompanyandtrytosetupa
betterpaymentplan.
It is unclear how having credit cards with no pre-determined limits
affectstheseratios.Theydofactorin,butitishypothesizedthatthe
currentbalancemaybeusedasthecreditlimitincalculatingcredit
ratios.
Amounts Owed - 30% of Credit Score
Some people may wish to reduce the number of open credit cards
and cancel some they no longer wish to use. Consumers should be
very careful about closing accounts that have positive balances. If
such an account is closed, then the credit limit immediately goes to
$0, which will affect the credit ratio, making it appear that the
consumerisoverhisorhercreditlimitonthataccount.
“Amounts owed” is a complex set of
criteria. The actual dollar figure owed is
onlyonefacetofthisportionofthecredit
score. While the total amount owed is
certainly important, a critical component of this category is the
CreditRatio.Simplystated,creditratioisthecreditbalancedivided
bythecreditlimit:
Anotherimportantfactoristhenumberofopenaccounts.
Saving10or15%offapurchaseforopeningaretailcreditcardmay
sound good; however, doing so hurts credit scores – having a small
number of accounts can help to build a credit history. Having more
than 3-5 open accounts shows that the borrower may be a serious
creditrisk.Eveniftheopenaccountshavesmallorzerobalances,too
manyopencreditaccountsisharmfultoacreditscore.
CreditBalance÷CreditLimit=CreditRatio
For example, if a consumer had a $5,000 credit limit, and held a
$2,000balance,hisorhercreditratiowouldlooklikethis:
2,000÷5,000=.4,or40%
CreditRatio
•
<30%=LowRisk(Ideal)
Length of Credit History - 15% of Credit Score
•
30-49%=MediumRisk
•
50-75%=HighRisk
•
100%ormore=VeryHighRisk
How long has the consumer had credit
accounts? How old is the average
account?Howoldisthenewestaccount?
If a consumer frequently opens and closes credit accounts, it is
detrimental to their credit score. To optimize this category, credit
accounts should be 5 years old or older. Taking advantage of an
Whatifaconsumerhasmorethanonecreditcard?Whatifthecredit
carddoesnothaveapre-setlimit?Whatiftheconsumerhas“maxed
out”onecreditcard,buthaszerobalancesonothercards?
8
introductorycreditcardoffertotransferbalancesmaysavemoney,
butitcouldhurtacreditscore.
Specific Events that Reduce Credit Scores
Consumers may need to take out new loans to buy a car or finance
dentalbracesrequiringnewaccountstobeopened.Ifatallpossible,
consumers interested in maximizing their credit score are best off
attempting to keep longstanding credit cards open, rather than
ditching them for new accounts. More about new credit cards is
coveredinthenextsection.
So many extremely responsible people have credit scores that may
notaccuratelyreflecttheircreditworthiness.Wemayunwittinglydo
some of the following things that may ultimately hurt our credit
scores:
Rather than rushing to open a new credit card with a low
introductoryinterestrate,trycallingcreditcardcompaniesthathave
openaccountstonegotiateinterestrates.Ithasbeenestimatedthat
creditcardcustomerspayhundredsofdollarsonaveragetoacquire
anewcustomer.Companiesmaybewillingtogotogreatlengthsto
keepexistingcustomers!Aquickphonecallmayresultinareduced
interestrate,orevenmatchinga0%balancetransferoffer!
•
Opennewcreditcardaccountstotransferbalancesto
lowerratecards
•
Closeoldaccountssothattheaverageageofopenaccounts
islessthan5years
•
Applyforafewloans,hopingtoshoparoundforthebest
rate
•
Openretailcreditaccountstoreceivediscounts
•
Keepoverallcreditbalanceslow,buthaveoneaccountwith
ahighcreditratio
•
Closeacreditcardaccountbeforepayingoffthebalancein
full
•
Havemanyopencreditaccounts–eveniftheyhavezeroor
lowbalances
•
Notmakingpaymentsontime--skippingamonth,paying
late,orpayinglessthantheminimummonthlypayment
•
Allowingadisputedchargegotocollections,ratherthan
correctit
New Credit - 10% of Credit Score
This category not only includes new
accounts, but also includes the number of
credit inquiries, even if no new account is
opened.
Someofthemorepopularwayspeopleunknowinglyhurttheircredit
scoresinclude:
•
Openingupretailstorecredittogetintroductoryoffers
(like10%offfirstpurchase)
•
Shoppingaroundforloansonhomesorcars
•
Mailingin“pre-approved”creditoffers
•
Applyingtorentnumerousapartmentsthatrequestacredit
check(landlordsmustobtainwrittenpermissionbefore
pullingacreditreport)
Specific Actions to Improve Credit Scores
Herearesomewaystoimproveacreditscore:
Anytimeanewcreditaccountisopenedoracreditinquiryoccurs,a
consumer’screditscoreisreduced.
Types of Credit Used - 10% of Credit Score
This category is a delicate balance (pun
intended).
In order to maximize a credit score, the
consumershouldhaveexperiencewithadiversemixofthedifferent
types
ofcredit,butheorsheshouldnothavehighbalancesinanyoneacco
unt,oroverall.
Thetypesofcreditavailableinclude:
•
Revolving Credit: Credit Cards and Retail Accounts (store
creditcards)
•
Installment Loans: loans with regular payments, like car
loansorstudentloans
•
Finance Company Accounts:thesearehigh-interestloans
that are generally offered to high-risk borrowers. These
typesofaccountsarealsocommonlyofferedtoconsumers
who wish to finance furniture, appliances, and elective
medicalprocedures.Theymayhavezero-interest“sameas
cash” offers if paid in full within X months. If a borrower
does not pay in full, the interest rates are significantly
higher than market rates. Having this type of credit is not
generallyseenasafavorableitemonacreditreport.
•
MortgageLoans:Includesfirstmortgagesandlargerhome
equityloans
•
Besuretomakeatleasttheminimummonthlypayments
ontimeeverytime
•
Donotletcreditaccountsgotoacollectiondepartmentor
besoldtoacollectioncompany
•
Limitthenumberofopencreditaccountstobetween3and
5accounts
•
Keepcreditbalanceslow(orzero)onallopenaccounts
•
Trytokeepoldcreditcardaccountsopen
•
Keepcreditinquiriestoaminimum
•
Donotclosecreditaccountsuntilthebalancesarepaidoff
infull
Chapter 2 Wrap-Up
ThischaptercoveredthebasicsofFICO®creditscores.Wecovered
the range of possible credit scores and how they can affect a
borrower’s monthly payment. Credit scores are calculated by
evaluating Payment History, Amounts Owed, Length of Credit
History,NewCredit,andTypesofCreditUsed.Thischapterwrapped
up with some common events that may lower a credit score and
sometipsonhowtoimproveacreditscore.
9
In the last few years, a number of user-friendly websites have
evolved to meet the growing demand to know where our money
goes. National Public Radio recently did a feature on these sites:
http://www.npr.org/2011/05/18/136394339/sites-that-helptrack-your-spending-and-saving.
CHAPTER 3:
UNDERSTANDING THE FULL
COST OF HOME OWNERSHIP
Hereisalistofsitesdiscussedinthefeature:
•
https://www.mint.com/
Chapter Overview
•
https://money.strands.com/
Manybuyersaresavvyenoughtolistentotheirlenderwithrespect
totheirmonthlyPITIpayments(PITI=Principal,Interest,Taxes,and
Insurance). However, this amount is not the complete picture.
Properties need regular maintenance. Utility costs are usually
significant, and it is vital to be prepared for a major expense, like
needinganewroof,furnace,septicsystem,andsoon.
•
https://www.buxfer.com/
An internet search will offer a number of other, similar financial
tracking and budgeting resources. The sites all have different
strengths and weaknesses, so reading about which fits a person’s
individualneedsisimportant.
A prepared buyer is one who knows exactly where he or she
currentlystands,howtogetwhereheorsheisgoing,andwhatcosts
toexpectalongtheway.Thischapterisbrokenupinto3parts:
1.
Gettingahandleoncurrentfinances
2.
Beingreadytopayclosingcosts
3.
Estimatingareasonablebudgetforhomeownership
Mint
For this course, there will be a quick overview of www.mint.com to
showtheusefulnessofspendingtrackingandbudgeting.Thissiteis
free,butwillshowadsandofferstothosewhosignup.
Step1:Openanonlineaccount
LearningObjectives
Step 2: Gather all account information including bank accounts,
creditcards,andloans
Uponcompletionofthischapter,thestudentwillbeableto:
Step3:Enterinformationontheaccounts
•
Listtheexpenses,overandabovePITI,ofroutine
homeownership
Step 4: Login to the site to manually edit transactions that are not
categorized
•
Discussthebenefitsofahomebuyerusingafinancial
trackingtool
Step5:Setmonthlybudgetforspendingcategoriessuchasgroceries,
gas,rent/mortgage,utilities,etc.
•
Estimatethepotentialclosingcostsforahomebuyer
Step6:Watchtheonlineaccountcloselyforamonthorso
Step 7: Gain a deeper understanding of how money is spent and
saved
Getting a Handle on Current Finances
Thesesitestrytomakethisprocessinterestingandfun.
Somanypeopleunderstandtheconceptofpropertyownershipand
know that the property they wish to purchase (be it a home or
investment property) may be more expensive than their current
situation. Too many people hope that cutting back on restaurant
meals, entertainment, and those oh-so-yummy double macchiatos
willenablethemtocomfortablyaffordthepropertytheywishtobuy.
For example, if a mint.com user enters account information on
retirementaccounts,automobilevalues,andevenrealestateowned,
mint.com will calculate their net worth. Real estate values are
updated regularly through http://www.zillow.com/(they are not
formalappraisals,justroughestimates).Anotherbenefitofmint.com
and similar sites is that they may seamlessly link to tax software,
making tax preparation a little easier (turbo tax in the case of
mint.com).
Significant investments, such as real estate purchases, come with
risks. Does the buyer’s budget REALLY afford them the opportunity
tobuythepropertytheywant?Shouldtheybelookingatsomething
moremodest?Perhapstheydon’trealizethattheycouldcomfortably
affordsomethingmoreexpensivethantheyoriginallythought.
After Financial Tracking
Getting a full understanding of spending patterns is crucial to
assessingtheaffordabilityofanewpropertypurchase.
Oncesomeoneunderstandshisorherspendingpatterns,itiseasier
to make adjustments in order to set goals, such as paying off credit
card debt and saving for a down payment and closing costs on a
property.
Tracking spending is much easier to talk about than to actually do.
Some people are very good at using accounting software, building
spreadsheets,orkeepinggoodnotes.Eventhebestspreadsheetcan
miss key items, so there are a number of services designed to track
spending.Thekeyistofindonethatwillsecurelylinkallaccounts.
Being Ready to Pay Closing Costs
The property buyer may have an account with a bank that offers
spending tracking services. The account holder may simply need to
enterinformationonotheraccounts(suchasloansandcreditcards).
Closing costs may come as a big shock to many property buyers.
According to http://www.bankrate.com/, average closing costs
acrosstheUnitedStatesrangefrom$2,119inWisconsinto$2,919in
Hawaii. These rates are simply the loan origination and processing
fees. They do not include home inspections, property tax, and
insurance escrows, recording fees, title searches, and deed
preparation(amongothers).
Track Spending and Create Budgets
Thekeytoonlinespendingtrackingsitesistofindonethatwilllink
allaccountswhileprovidingahighlevelofsecurityandfunctionality.
Manybanksofferthisservicetotheiraccountholders.Somebanks'
trackingapplicationsareeasierthanothers.
10
A recent article in Zillow.com describes common closing costs:
http://www.zillow.com/wikipages/List-of-Closing-Costs-and-Fees/
CurtainCosts
Acommonruleofthumbisthatclosingcostsareoftenabout5%of
the purchase price of the property. This varies greatly and the best
way to estimate closing costs is to apply for a mortgage and obtain
the required Truth in Lending Statement, which will itemize the
closingcosts.
Rarelydoesapropertybuyertakepossessionofapropertyanduseit
asis.Thereareusually“curtaincosts.”Thesearecostsincurredbya
new owner in order to make a property comfortable for his or her
needs.Ofcourse,curtainsareacommoncurtaincost,butmuchmore
expensiveitemsarealsointhiscategory,suchaswashersanddryers,
lawnmowers,arearugs,furnishings,landscaping,andsoon.Thisisa
categorywhichiseasytooverlookwhenbudgeting!
Closing costs do not include earnest money deposits or down
payments. These should be budgeted separately and vary widely
depending on buyer and seller preferences and mortgage loan
products.Somerequiremorethanothers.
EmergencySavings
EstimatingaReasonableBudgetforPropertyOwnership
With real estate ownership, expensive maintenance and repairs are
commonplace.Inanidealsituation,anemergencyfundshouldbein
place before the sale. These funds can be used for unexpected
emergencies,likeabacked-upsepticsystem,aswellasforhardships,
likelossofajob.
Alltoooften,propertybuyersdon’thaveafullsenseofaproperty’s
ownershipcostsuntiltheyhavetakenownershipofit.
PITIPayments
Ofcourse,buyerswhoareapprovedformortgageloansaregivenan
estimate of their PITI payment (PITI: principal, interest, taxes, and
insurance). PITI payments tend to be relatively stable, but do go up
overtimeastaxesandinsurancepremiumsincrease.
Financial gurus like Dave Ramsey suggest an emergency fund of
$1,000,plus3-6monthsofexpenses,whileSuzeOrmansuggestsan
emergencyfundof8months’worthofincome.
Utilities
Regardlessofwhichfinancialadvisoryoulistento,mostwillsuggest
anemergencyfundtokeepapropertyowneroutofforeclosure.
Property disclosures often have utility estimates for heating and
cooling. It is often wise to call the fuel provider directly to verify
theseamounts.Buyersshouldbeawarethatbuildingsthathavebeen
vacant prior to sale may have been winterized, or kept at a
temperaturethatisnotcomfortableforhabitation,soactualheating
and cooling costs could be much higher. Many fuel companies are
willingtoprovideafewyears’worthofusageamountsanditusually
doesn’thurttoask!
Pulling it all Together
Combining the system to track spending with a solid estimate on
property ownership costs will give buyers a realistic sense of
affordability and brace them for the costs they may face. Many
financial tracking tools include a function to budget. Once the full
property ownership costs are estimated, the buyer can add a “goal”
to his or her spending account. Many real estate professionals
suggest that homebuyers should estimate the full cost of home
ownership.Ifthesecostsaremorethantheyarecurrentlyspending
torent,thebuyersshouldputtheexcessintoasavingsaccountand
live that way for a while. The same principle holds true for people
buying other types of property as well (such as vacation or
investmentproperty).
Electricity costs vary dramatically from resident to resident. Some
people are very good at conserving energy and “phantom loads”
(energydrawnwhenappliancesarepluggedin,butnotinuse).Other
building residents may leave lights, air conditioning, and other
electronicsrunningmuchmorefrequently.
WaterandSewer
Some properties are on public water and sewer. A trip to the local
municipalofficescanhelptogetthesecosts.Havingpublicwaterand
sewer does not mean that the municipality will pay to maintain the
entiresystems.Pipeswithinthebuilding(s)andouttothestreetare
usually owned by the property owner. If a buried pipe needs
replacement,thatcanbeasignificantexpense.
Takingthefollowingstepswillhelpthepropertybuyerhaveasolid
foundationonwhichtobuildhisorherinvestments:
Other properties may be on private well and/or private sewer
(septic, cesspool, etc.). In the case of private water and sewer, a
thorough inspection can help to estimate the operation costs and
likelihood that the system may need extensive repairs or
replacementinthenearfuture.
1.
Boostcreditscores
2.
Trackspending
3.
Collectrealisticcostsofpropertyownership
4.
Budgetforthechangeinexpenses
Chapter 3 Wrap-Up
UnexpectedExpenses
This chapter was short, but very important. Too many buyers think
they have a full understanding of their income and spending, when
they could use more thorough information. Today, there are
wonderful financial tracking tools that are eye-opening even to the
most budget-minded person. Combining this information with a
credible estimate of closing costs and a complete forecast of
ownership costs can help a buyer become truly prepared for
property ownership. The final step is to add additional costs of the
property ownership with monthly financial tracking to see if the
purchaseismoney-wise.
As mentioned above, a good home or
building inspection is vital to
anticipating future maintenance
expenses. Keep in mind that these
inspectorsareusuallynotcontractors,
so it is often useful to follow up with
contractor estimates after a home
inspection is complete. In new
construction, many buyers assume that the building is in top
condition, with no inherent flaws. Building inspections on new
construction frequently uncover issues. Just because a building is
newdoesnotmeanabuildinginspectionisunwarranted.
Home inspectors may not see everything (they do not have x-ray
vision),sohavinganemergencyaccountforunanticipatedexpenses
isimportant.
11
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A NEW LOOK AT CONTRACT LAW
Course Introduction
Thiscourseprovidesauniquelookatcontracts,fromthehistorytotheevolution,fromdefinitionstotypes,andfromSaleandPurchasetoLoan
AssumptionAddendum.Inthefirstchapter,studentswillstudythehistoryandoriginsofcontractlawandthereasoncontractsareimportant,as
wellasreviewtheUniformCommercialCode,theStatuteofFrauds,mutualassent,offers,andtypesofcontracts.Chaptertwocoverstheessential
elementsofacontract,suchasmutual assent, consideration, legal object, and capacity to contract.Thischapteralsohighlightsoperationoflaw,
interpretationofcontracts,breachofcontract,andremediestoabreach.Chapterthreeisthefinalchapter,whichdetailscommontermsassociated
with contracts, the format of a contract, and practice of law. The last part of chapter three provides examples of different contracts for
students.Thechapterendswithafinalexam.
WeencourageourcustomerstovisittheFAQssectionfoundherehttp://faqs.mckissock.com/forfurtherinformationregardingyoureducational
experiencewithMcKissock.Completewithstep-by-steptutorials,we’vedesigneditwithYOUinmind!
Learning Objectives
Uponcompletingthiscourse,studentswillbeableto:
•
Differentiatebetweenanoralcontractandawrittencontract
•
DescribetheStatuteofFrauds
•
Identifytypesofcontracts
•
Createavalidcontractandinterpretcontracts
•
Reviewessentialelementsinacontract,anddefineeachessentialelement
•
Recognizeabreachofcontract
•
Definecommontermsassociatedwithcontracts
•
Usetheproperformatofacontractandutilizethisformat
•
Recognizespecificcontracts,suchasContractforSaleandPurchase,Third-PartyFinancingAddendum,SellerFinancingAddendum,and
Lead-BasedDisclosure
Table of Contents
•
Chapter1:BackgroundofContractLawandDefinitions
•
Chapter2:EssentialElements,Discharge,andEnforcement
•
Chapter3:RealEstateSalesContracts
13
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CHAPTER 1: BACKGROUND
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Course Introduction
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harmonica. When he goes and meets with the harmonica maker in
town andagreesto trade 10 fish for a harmonica, then he has
entered into another contract. The base premise of this scenario is
thatofferandacceptanceequalsanagreement(contract).
originalcontractmaybecomeblurred,andwemayhavetogobackto
review the terms as outlined, and how these were sealed or
consummated. For example, was it signatures on the contract, or a
simplehandshake-ournexttopic.
When he returns with the 10 fish and receives his harmonica in
return,hehasfulfilledthetermsofthiscontract.
Just a Handshake?
Soundseasyright?
Whatstartedassomethingverysimplebetweentwopeopleandwas
consummated with a handshake has now grown into a massive
industry as states have passed laws (statutes), courts have made
rulings, and administrative agencies have imposed rules and
regulations on the agreements between (and often among)
individuals,individualsandentities,andentities.Aslawshavegrown
morecomplex,moremoneyhasbeenspentonlawyerstoensurethat
a contract is in compliance with the laws. Often people – and even
somebusinesses–eitherthinkthatthey“knowitall”orseektosave
money and skip consulting with an attorney at the formation of the
contract.
Why We Need Contract Law
What happens when the fisherman returns with his 10 fish and the
harmonicamakerclaimshedidn’tsay10regularfish,butrather10
BIGfishandthefishhehasbeengivenaretoosmall?Whathappens,
as in this illustration, when there is a disagreement or a dispute
about the agreement between the parties to the contract (the
fishermanandtheharmonicamaker)?
Thisiswherecontractlawwasborn.
Unfortunately, too many times, this becomes a “penny wise and
pound foolish” approach as time, stress, and expense is invested to
solve problems which often could have been prevented with the
proper counseling up front. This need for additional representation
oftenstemsfromthesimplerulesofcontractenforceability,typically,
that they are often contingent on two primary variables (1) the
parties willingness to keep them enforced - abide by terms of the
contract,(2)thelawagreeingthatthetermsareenforceable(legal).
Thusthesecondpremiseandthepotentialforlegalrepresentation.
Advancements of Contract Law
While simple, informal agreements may have been (and, in some
cases,maystillbe)adequateforanumberofdifferenttransactions,it
soon became abundantly apparent that misunderstandings could
easily arise. In fact, one of the parties may even be dishonest and
misrepresent what he is willing to do. People learned through trial
anderrorthattoavoidtheseissues,someformalitieswereneeded.
Therefore, the question arises “is just a handshake enough”? Most
states in the U.S.A. have enacted laws that protect parties to a
contract as they relate to the “type of contract”, including a
handshake.Prominentamongthesearethe“StatuteofFrauds”,and
legislature that ties into the “Uniform Commercial Code”, both of
which will be discussed later in our lesson. The concise answer is
that even though all contracts aren’t necessarily required to be in
writing,itisbesttotakeacautionaryapproachandprotectyourself
and your agreement by making sure that the complete terms of the
agreement are in writing and signed by the parties engaged in the
contract.
Overtimemankindlearnedafewbasicwaystomakethecompletion
ofagreementsrunmoresmoothlyandbecomemutuallybeneficial:
Writeitdown:Whateveritisthat’sagreedto,it’sagoodideatoput
it in writing. The world’s oldest sales contract was discovered in
Turkeyin1994and,asofthetimeofthiswriting,isdisplayedinthe
MardinMuseum.Thecontractwascarvedintoastonetablet(c.700800 BC) and contained a specific description of the property being
sold, “the orchard of his three sons by the river north of the city of
Nabulu.” [http://www.mediterraneanews.com/worlds-oldest-salescontract-discovered-in-turkey-and-displayed-in-mardin-museum/]
Clickfile://localhost/hyperlink/
www.youtube.com:embed:1n1Uos6N3EYtoviewabriefvideo
relatedtothistopic.
Thecontracteliminatesconfusionastowhatexactlywassold,thisis
thefoundationofthelegaldescriptionwhichisacriticalpartofreal
estate contracts today. In fact, as we will learn later, real estate
contracts became so important that a special law was enacted that
requiredthatthesepurchasecontractsbeinwriting.
From a Baseball Player to a Client
Clarify who is involved:This ancient contract also included the
name of the seller, ‘Sarre’ and the name of the buyer ‘Istarin’. This
clarifies the parties involved in this agreement and protects the
rightsofthebuyerandseller.
Before December of 1975, major league baseball players had BIG
problems and very few rights and the teams they played for had
SMALL problems and full control. A player’s union boss named
Marvin Miller changed this by modifying the terms for players
forever with a concept called “free agency.” This was just a simple
clauseaddedtoprofessionalbaseballplayer’scontractsthatallowed
them the right to play for the team that made them the best offer;
i.e.,themostmoney.
Once this contract is completed, the buyer has the right to possess
andoccupytheproperty.Ofcourse,thesellerlosestheserights,but
is free from any obligation to pay taxes or other expenses of the
propertyortomaintaintheland.Andusuallythesellerhadreceived
somethingofvalueinexchangefortheproperty.
Healsointroduced“independentarbitration”whichmeantthatinthe
event of disputes between players and teams, the matter would be
decided by an independent third party arbitrator and not the
baseballcommissionerwhowashiredbytheteamowners.
Get witnesses:The ancient tablet from 700B.C. also included seals
fromfourotherswhowitnessedthesale.
Thisisimportantbecausethewitnessescantestifytotheactualfact
ofwhathappened.Itisespeciallyimportantifthecontractisanoral
contract. Without witnesses, it is often impossible to prove the
contractterms.
According to a November 27, 2012 online Sports Illustrated article,
publishedatthetimeofMiller’sdeath:
“Aboveall,the‘reserveclause,’standardineverycontract,statedthat
ateamcouldrenewaplayer'scontractwithouttheplayer'sapproval
fortheperiodofoneyear.Theowners,however,interpretedthisto
mean that the clause could be renewed indefinitely each year,
effectivelytetheringaplayertoateamuntiltheclubsawfittotrade
or release him. When Miller examined the standard player contract
As man’s needs and wants became more advanced, so did the
contracts in order to satisfy these needs. As an example, to further
the illustration of the fisherman and the student, let’s say that a
current take on this illustration becomes a reality - namely “Give a
manafish;youhavefedhimfortoday.Teachamantofish,andhe
will sit in the boat and drink beer all day.” Now, the terms of the
15
To illustrate this, consider some of the more outlandish recent
contracts for celebrity hirings, commonly referred to as “riders”.
Examining some of these riders you will notice all types of exotic
requests and far out demands, everything from M&Ms with only
certain colors, to personal chefs and yoga instructors. The one
common denominator in all of these contract “riders” is a detailed
descriptionofmaterialsorservicesrequested.
heconcludedthatitwas"oneoftheworstlabordocumentsI'veever
seen.’”
Readmoreathttp://www.si.com/moresports/2012/11/27/marvin-miller-obituary
Hisactionspermanentlychangedhowcontractsarenegotiatedinall
professional sports and he is credited with the explosive growth of
team revenue and player salaries. Not only does this example
illustratetheimportanceofcontractprovisions,butitalsohighlights
that when parties have uneven negotiating power, it is very
importantthattheproperprofessionalassistancebeengaged.
2.
There are two dates that are very important in all contracts. One is
thedatewhenthecontractissigned;theotheristhedatewhenthe
agreeduponactionistotakeplace.
This is just one example of how contract law can morph and alter
what was previously viewed as maybe “one dimensional”, thus
impacting the parties involved in various ways. As an example, it is
believed that performance often is enhanced during what sports
terminology refers to as a “contract year” - the year for potential
renewal and negotiations. This can easily relate to some of the
componentsinacontractandhowperformanceisanticipatedbased
oncontractprovisions.Withthisevolutionincontractclauses,some
haveasked-“whatisthefutureofcontractlaw”?Ournexttopicwill
answerthisquestion.
Many times the date the contract is signed and the date the agreed
uponactiontakesplaceisthesamedate,butinthecaseofrealestate
contracts, those two dates can be very different. When you buy a
house,yousignacontracttocloseonthehomebyaspecifieddate.If
youdon’tcompletethepurchasebythatdate,thecontractislikelyto
bevoidandyouloseyourchancetobuytheproperty.
Commonly utilized in commercial real estate are also dates that
impactthecontractindifferentways;
Lease Commencement Date:Thedateinwhichtheleasegoesinto
effectbylegallybindingthepartiestoallofthetermsofthelease.
What is Future of Contract Law?
RentCommencementDate:Thedatethetenantbeginstopayrent.
It is difficult to see an end to something that has been woven into
humansociety,soitsfuturesurelyisonethatcanonlybedetermined
by the imagination of the human mind. Think about what we now
know from a recent Supreme Court ruling that a company or
individual cannot patent the DNA of plants, animals, or people.
(Visithttp://www.pbs.org/newshour/rundown/supreme-courtrules-natural-dna-cant-be-patented/formoreinformationaboutthis
decision.)
Date of Occupancy:For legal purposes, the date granted by local
municipal agencies to lawfully occupy the space, and open for
business.
EffectiveDate:Aspecificdatereferencedintheleasethatbecomesa
benchmarkforspecificobligationstocommence.
EarlyOccupancy:Aperiodoftimewhereinatenanthastherightto
occupy the premises (usually without cost) prior to the
commencementdateofthelease.
Thisisimportantbecauseitjustshowsthetypeofideasthatpeople
are coming up with in terms of property and ownership. If you can
imagine it, you may be able to find a way to buy or sell it with a
contract. This is in addition to the fact that recent technology now
makes the transfer of goods and services nearly endless when it
comestogeography,addingtothepotentialgrowthofcontractlaw.
3.
What is a Contract?
Whatisacontract?Wecanlookinthedictionaryforsomeanswers.
con·tract/'käntrakt/
1:
a binding agreement between two or more persons or
parties;especially:onelegallyenforceable
•
abusinessarrangementforthesupplyofgoodsorservices
atafixedprice<makepartsoncontract>
•
theactofmarriageoranagreementtomarry
Who Can Sign a Contract and by What Means?
An adult should not sign a contract with a minor. When someone
undertheageof18signsacontract,thecontractisconsideredtobe
“voidable” at the minor’s discretion. This means that if the minor
wants out of the contract, the minor can usually do so (there are
some exceptions to this). However, teenagers have been known to
work part time jobs or function as interns with employers who
require them to sign employment agreements (which are contracts
that specify the employee’s and employer’s duties and
responsibilities in the employment relationship). Under these
circumstances,anattorneyfamiliarwiththeissueswhichmayarise
shouldalwaysbeinvolved.
2:adocumentdescribingthetermsofacontract
3:thefinalbidtowinaspecifiednumberoftricksinbridge
4:anorderorarrangementforahiredassassintokillsomeone<his
enemiesputoutacontractonhim>
Astheabovedefinitionsoutline,youcanseethatacontractcanbea
goodthing,likeanagreementtopurchaseanewcaroranewhome!
Oracontractcanalsobeabadthing,likeamobbosshiringahitman
tokillsomeoneinarivalgang!
What constitutes a signature? In this ever expanding technological
world, it comes as no surprise that new formats for signatures,
including use in contracts, are evolving. In 2000, the Uniform
Electronic Transactions Act (UETA) and ESIGN, the Electronic
SignaturesinGlobalandNationalCommerceActwereadoptedatthe
Thereareafewthingsthatallcontractshaveincommon:
1.
16
Consideration(whichusuallyisintermsofmoney)mustbe
specified. This applied whether the contract is oral or in
writing. Even if and especially when contracts are created
forprobonoornopayarrangements,thereshouldstillbea
provision that says there is no money due. This prevents
thepartycompletingtheworkfromclaimingtheydidn’tget
paid when the work was completed. Normally, when
consideration is stated in terms of money in the contract,
thisprovisionestablisheshowmuchsomeoneistobepaid.
To illustrate this further, recall the earlier mentioned celebrity
“riders”. The celebrity is given consideration for work performed,
moneytofulfillthecontract,nomatterhowoutlandishtherequests
ofthe“rider”.
Merriam-Websterdefinesthewordcontractas:
•
Importantdatesmustbespecified.
The details of the agreement must be described as
accuratelyaspossiblebythepartiesinvolved.
state and national level, respectively. The Acts legalized the use of
electronicrecordsandelectronicsignaturesforbusiness.
most people will recognize what you mean by "verbal contract", for
maximumclarityitisoftenbesttorefertoitasan"oralcontract".
Hereisalinkrelatedtothistopic-
Eventhoughallcontractsaren’tnecessarilyrequiredtobeinwriting,
most legal experts would agree that it is best to err on the side of
cautionbymakingsurethatthetermsoftheagreementarewritten
outandsignedbyallparties.
http://www.uniformlaws.org/ActSummary.aspx?title=Electronic%2
0Transactions%20Act
Oral vs Written
Uniform Commercial Code
Thehistoryofcontractlawisaverysimpleone.Someoneverywise
oncesaidwhat’sunderstooddoesn’thavetobesaid.Verballystating
termswashowmenwouldenterintocontractsforgenerations.For
instance, a man would make a verbal agreement with his neighbor
thatheandhisfamilywouldhaveaccesstogetwaterfromhiswell.
They would confirm their agreement with a handshake and that
wouldbetheendofit,nopaper,nopen,andnosignatures.Thisoral
agreementusuallylasteduntilthesetwomenperishedORdecidedto
changetheirminds.
TherearetwotypesofpropertyinEnglishcommonlaw:
Maybeyouhaveneverthoughtaboutitthiswaybefore,butmarriage
isoneofthemostpopulartypesofcontractsintowhichpeopleenter.
It starts with a proposal of marriage by one of the two parties to
enter into a marriage as husband and wife. This is an oral (verbal)
offer.
When the other party says YES to the offer of marriage, they have
enteredintoalegalcontract.Ifthestatedoesn’trequirethiscontact
to be in writing in order for it to be enforced in court if a dispute
arises,thisoralagreementislegallybindingandenforceable.
Immovableproperty.Thisisknownasrealproperty.Land,
of course, is considered to be immoveable. Items
permanently affixed to the land, such as houses, garages,
fences, and driveways, are also considered to be real
property.
2.
Movableproperty.Thisisalsoknownaspersonalproperty.
While there are exceptions, generally personal property is
notaffixedinanywaytotherealproperty.Anindividual’s
car, clothing, or pots and pans or a company’s office
supplies, desks, and photocopy machines are all personal
property. Mortgages, intellectual property rights (such as
patents and copyrights) are all considered to be personal
property.
TheUniformCommercialCode(theUCC)wascreatedtoallowall50
states a common set of rules for doing business and deals
withpersonal propertywhich is part of the flow of commerce. Just
think about how complicated it would be if every state had its own
specialsetofrulesandformswhichwouldneedtobeused.Atruck
driver delivering goods across the Midwest would need to have a
manualandasetofformsforOhio,Illinois,Wisconsin,Indiana,and
on and on. Everyone dealing in interstate (between the states)
commercewouldneedtobealawyerandcarryafilingcabinet!The
UCCeliminatestheseproblems.Writtenasa“modellaw”byagroup
of experts, it was then promoted to all the states in hope that each
would adopt it as part of their state statutes. This effort has been
very successful. This code was first published in 1952 and has
becomethestandardofinterstatebusinessnationwide.
Asamatteroffact,therehavebeencaseswheremenhaveproposed
marriage and then for whatever reason did not marry the woman
and found themselves in court fighting over the engagement ring.
The courts have ruled over and over again that the woman has a
righttokeeptheringbecausethemanfailedtocompletehisverbally
contracteddutywhichwastomarrythewoman.Thiswasportrayed
hilariously in the 2001 Sigourney Weaver and Jennifer Love Hewitt
comedyHeartbreakers. In this film the lead characters are a mother
and daughter con artist team who, by their understanding and
manipulation of contract law, trick men into marriage and then
divorce.
TheUCCwascreatedto:“tosimplify,clarify,andmodernizethelaw
governing commercial transactions…” Articles 2 (sales) and 2A
(leases) deal with contract formation, repudiation, and breach.
(Louisiana, a state based on civil, rather than common, law has not
adoptedsomesectionsoftheUCC).
Ontheothersideofthisspectrumliesreferencestothepitfallsofnot
havingcontractsinwriting.Forinstance,in1937theshortbiography
“The Great Goldwyn”, a bio of Samuel Goldwyn - the 20th century
film producer, he was quoted as saying that "Averbalcontractisn’t
worth the paper it’s written on". That's a simple but effective
referencetothefactthatitcanbeverydifficult,ifnotimpossible,to
provethatanoralcontractexists.
Even though the UCC does not relate directly to real estate, the
principles employed have application in varied ways to contracts.
How so? A contract involves at least two parties. This translates to
interaction, the agreed upon terms. Therefore, the principles of the
UCC are often a function of the business procedures and general
protocol that have application to how we interact with others and
howthelawappliestotheseinteractions.
Absent of specific proof of the terms of the contract, the engaged
parties may be unable to enforce the contract or may be put in
situationswheretheyhavetosettleforlessthanwhatwasoriginally
agreed upon. Where possible, even when it appears there is not an
opportunity to draft up a formal contract, it is good practice to
alwaysmakesomesortofrecordinwriting,signedbybothparties,
toformalizethekeytermsofthecontract.
Youcantakenoticeofhowdifferentscenarioswouldbeaffectedby
theseprincipleswhenitcomestothesetcategorieswheretheUCCis
followed.
These facts notwithstanding, under most normal circumstances,
termsoforalcontractsarestillenforceable,typicallyhingingontwo
key variables. (1) If the terms of an oral contract can be proved
sufficientlyaccordingtolocalstatutes,or(2)thetermsareadmitted
bytheotherpartytothecontract.Insuchinstances,anoralcontract
iseverybitasenforceableasonethatisinwriting.
Uniform Commercial Code Cont'd
TheUCCcoversthefollowingcategories:
GeneralProvisions:Thissectioncoversthedefinitionsandmeanings
forimportanttermssuchas“Agreement”anditsdistinctionfromthe
term“contract”.
Pleasenotethat,insomeinstancesanoralcontractcanbereferredto
as a "verbal contract". The term "oral" in this context, is defined as
"spoken"whiletheterm"verbal"canalsomean"inwords".Usingthe
latterdefinition,allcontractsaretechnically"verbal",becausewords
wereeitherspoken,written,orexpressedotherwisetospelloutthe
terms.Ifyoumeantorefertoacontractthatisnotwritten,although
1.
Sales:Thissectioncoverscriticaltopicssuchasformalrequirements,
firmoffers,andgeneralobligationsofpartiesinasalestransaction.
Leases:Section2AoftheUCCisanextensionofthesalessectionas
many of the sub categories are similar. This section covers the
17
formationandconstructionofaleasecontractandtheeffectoflease
contract,suchastitletoandpossessionofgoods.
legislation that prevents harm due to fraudulent activity that takes
placesurroundinganagreement(contract).
Negotiable Instruments: This section contains the definition of a
negotiableinstrumentas,“anunconditionalpromiseorordertopaya
fixed amount of money, with or without interest or other charges
describedinthepromiseororder.”
TheStatuteofFraudsaccomplishesthisbyrequiringalloftheparties
to an agreement to sign a written contract. Doing this can, in most
cases, clarify the terms of the agreement, reduce litigation, and
provide evidence that a deal was even made. Keep in mind that a
handshakeagreementisrarelyrecordedbyvideomeans,sohavinga
written contract agreement will help to solidify any claim that an
agreementwasmade.
Bank Deposits: Defines the many methods that an individual or a
companycandepositmoneyrelatedtoacommercialtransaction.
Funds Transfers: Is defined as, “an instruction of a sender to a
receiving bank, transmitted orally, electronically, or in writing, to
pay,ortocauseanotherbanktopay,afixedordeterminableamount
ofmoneytoabeneficiary.”
VeryfewpeoplemayknowthatmusiclegendTupacShakurwasfirst
signed to his label Death Row Records on a million-dollar contract
written on a napkin. Since this piece of paper that’s usually used to
wipe mustard off mustaches had the requirements specified by the
StatuteofFrauds,itwasandstillisperfectlylegal.
Letters of Credit: Defines an issuer’s rights and obligations and
provides explanations and descriptions of key individuals such as
adviser,applicants,andbeneficiaries.
In summary, the Statute of Frauds does not cover every type of
contract; it only requires that certain contracts be in writing to be
enforceable. Each state which has adopted its own version of the
“statute of frauds” can cover as many or as few types of contracts
whichthelegislaturedeemsappropriate.Thesestatuteswillprevent
someonefromfalselyclaimingthattheyhaveanenforceablecontract
unless they have the appropriate completed paperwork with dates
andsignatures.
BulkTransfersandBulkSales:Definestheassets,claims,auctioneer,
andotherimportantpartiestoacommercialbulksale.
Warehouse Receipts, Bills of Lading and Other Documents of Title:
Defineswhomayissueawarehousereceipt;dutyofcare,andbillsof
ladinginformation.
Investment Securities: Defines the activities and entities such as
clearingcorporations,entitlementholders,brokers,andmore.
Some states have other requirements, so a check must always be
made of your particular state’s Statute of Frauds. Other Legislation
RequiringContractsToBeInWriting.
Secured Transactions: Defines certificate of title, chattel paper, cash
proceeds, registered organizations, secondary obligators, and more.
(Chattelisanotherwordformoveableproperty.)
FormoredetailrelatedtoTheStatuteofFraudscheckouttheselinks
http://nationalparalegal.edu/public_documents/courseware_asp_file
s/contracts/DefensesToFormation/StatuteOfFrauds.asp
Itiseasytorecognizehowtheaforementionedcategorieswherethe
UCCapplieswouldhavesignificantrelevanceintheworldofcontract
law. The UCC helps direct functions that are common during most
transactions.KeepinmindthateachStatedetermineshowtheywill
includetheprinciplesoftheUCCintheirindividuallawcode.
http://contracts.lawyers.com/contracts-basics/contracts-statute-offrauds.html
http://legal-dictionary.thefreedictionary.com/Statute+of+Frauds
While not having a direct impact on the physical property (real
estate), the principles often help frame State laws (contracts). An
easy way to think of the UCC application is in the form of business
transactions(termsagreedupon),nottherealestate-theact,notthe
property.
Mutual Assent
Mutual assent is simply agreement, often termed “meeting of the
minds”,bybothpartiestoacontract.Mutualassentmustbeproven
objectively, and is often established by showing an offer and
acceptance.Whentwoormorepeopleand/orentitiesdecidethatit
is in their best interest to enter into a contract, they must first
mutuallyagreetothisfact.Bothpartieshavetoagreetothesimple
idea that they both are on the same page in terms of whatever it is
thattheyplantoaccomplish.We’llbediscussinghowimportantitis
thatacontracthaveanofferandanacceptancewhichclearlyreflects
a“meetingoftheminds”betweentheparties.
Helpfullinksthatarerelatedtothistopic,includingadownloadable
“app”-
https://www.sba.gov/category/navigation-structure/startingmanaging-business/starting-business/understand-business-law-7
http://download.cnet.com/UCC-Uniform-Commercial-Code-LawSeries/3000-18495_4-75955094.html
A woman wants to sell her high end bicycle so she puts an
advertisement in the newspaper“high end(manufacturers
name)bicycle for sale(and lists the asking price)”. When someone
responds,hefirstmakesitcleartoherthatitishisintentiontobuy
thebicycleoutright.Ifsomeonerespondstoheradandwantstobuy
herhouseoristryingtosellHERsomething,thentheyarenotonthe
samepageandanyoffermadebythebuyerfortheseitemswilllikely
be quickly rejected. Keep in mind that her advertisement is not an
offer;itisaninvitationforaninterestedpartytomakeanoffer.
Statute of Frauds
In 1677 the Parliament of England passed an act that required
importantcontractssuchaswills,grants,assignments,orsurrender
ofleasesorinterestinrealpropertytobewritten,signed,anddated.
TheoriginalStatuteofFraudshas24sectionsandcoverseverything
from what to do when rent equals two thirds of the value of the
improved land to“what action may not be brought unless there is a
writtennoteormemorandumsignedbythepartybeingcharged.”
However,whensomeonecallsandmakesitclearthathisintentionis
tobuythebicyclebysayinghewouldliketotakealookatitfirstand
sheagreesbyschedulingadateandtimetomeettheyhavetakenan
importantsteptoa“meetingoftheminds”(mutualassent).If,after
their discussion about the pertinent facts of the bicycle, the
prospectivebuyermakesanofferandtheprospectiveselleraccepts
the offer (and it is clear that what is being bought and sold is that
bicycle)thenmutualassenthasbeenachieved!
Thismeansifthereisn’tadequateevidence,thenthecontractcould
be found to be null and void by a judge. This protects smart
businesspeople and punishes those who don’t pay attention to
details.
Ifanindividualorbusinessenteredintoacontractanddidnotobtain
asignatureorproofoftheexecutedagreementasexplainedbythis
ancientlaw,thentheycouldenduplosingtheirinvestment.
Thesescenariosfulfillthetwo-wayagreementbetweenpartieswith
the intent to form a contract. Mutual assent takes the form of offer
and acceptance, referred to as the aforementioned “meeting of the
In modern times, The Statute of Frauds carries much of the same
“weight”.Ascurrentlyconstituted,TheStatuteofFraudsisapieceof
18
environment in which the parties are dealing in good faith, are
informed, and are somewhat flexible. Thus, initial asking prices as
well as offers which are far outside this range will be viewed as
outlandish.Buyerswhomakea“lowball”offerwhentheaskingprice
is fair risk insulting the seller who may react by refusing to deal
furtherwiththatbuyer.
minds”. It signifies the moment at which an agreement is reached,
andassumesthatallotherlegalrequirementsareinplace.
Offer
In 1966 G.H. Treitel defined “offer” in his bookThe Law of
Contractas“anexpressionofwillingnesstocontractoncertainterms,
made with the intention that it shall become binding as soon as it is
acceptedbythepersontowhomitisaddressed",the"offeree".
Sometimes a price that would otherwise be fair may be too high if
circumstancesinthemarketchange.Sellersmaybemoreflexiblein
negotiations based on too much supply or too little demand. This is
why the big car dealers always have their huge end of the year
“MEGA-BLOW-OUT”salesinDecemberwhentheyhavetogetridof
theoldinventory.Ifyoumakeabelowaskingpriceofferatthispoint,
theywouldbemorelikelytoacceptit.
It is the offer which starts the chain of events which may lead to a
contract. Let’s revisit our potential bicycle transaction. After the
woman (the seller) meets with the potential buyer and answers his
questionsandshowshimherbicycle,thenextquestioniswhetheror
not there will be an offer. Typically, the offer should come from the
buyer or the individual responding to whatever was listed as
availableforsale.However,theoffercouldcomefromanyone,even
theselleroftheitem.
Types of Contracts
Thereareatleasteightdifferentwaysofcategorizingcontracts.The
list below is not mutually exclusive. A contract can be an express,
bilateral, and voidable contract; thus, all contracts will fall into
multiplecategorieswhicharelistedbelow:
Howcouldthesellerendupastheofferor(thepartywhoismaking
theoffer)?Assumethatwhilethemanislookingatthewomen’shigh
end bicycle, she begins to admire the jet ski which he is pulling
behind his truck on a trailer. She could make him an offer and say
thatshewillgivehimthebikeifhegivesherhisjetski.Inthiscase,
thatwouldmakeherthe“offeror”andhimthe“offeree”.Ifheagrees,
theycanmoveforward.Assumingthatallotherrequiredelementsof
a contract have been satisfied, they can proceed to exchange the
itemsastheypromised,andtheirdealisdone.
Express Contracts:Express contracts use words. Whenever the
terms of the agreement are either in writing or oral, then it is an
expresscontract.
Implied Contracts:Implied contracts are formed based upon the
behavior of the parties. No words, either oral or in writing, are
exchangedtoformthecontract
Ifhedeclinesherofferoftheexchangeofajetskiforthebicycleand
instead evaluates the materials and their estimated value and gives
themtothebicycleownerastowhatisacceptableinthistrade,then
he has made a counteroffer. A counteroffer does not constitute
acceptance,andinmostcaseswilltypicallybetreatedasarejection
oftheoriginaloffer.Forexample,ifthejetskiownercounteroffersto
tradethebikeforthejetskiandanadditional$1000.00wheredoes
this leave the original offer? In this situation it commonly acts as a
rejection of the original offer, and if the bike owner accepts the
counteroffer, a contract may be completed. However, if the bike
owner rejects the counteroffer, the jet ski owner will not ordinarily
beentitledtoenforcethepriorcontractterms.
Anexampleiswhensomeonerentsahomeandheorshesignsaoneyear lease but at the end of the lease that person just keeps paying
thesamerenteverymonthandthelandlordacceptsit.Assumingthat
there is nothing in the lease which permits this to happen (i.e., a
provision which automatically converts the one-year lease to a
month by month lease), the landlord and the tenant have entered
intoanimpliedcontractwhichallowsthetenanttocontinuetolivein
thehome.Theyhaven’twrittendownthenewtermsoftheleasebut
it is understood by their behaviors that as long as the tenant pays,
thelandlordwillpermithimorhertostay.
Executed and Executory Contracts:A contract can be either
executory or executed at any given time. Either it is completed as
agreed,whichmeansitisexecutedoritisstillinprogresswithmore
worklefttobecompleted.Inthiscase,itiscalledexecutory.
It’simportanttounderstandthatacounterofferextinguishesallprior
offers;thus,ifthemanlaterdecideshewantstotradehisjetskifor
the bicycle, he is only able to have the woman consider this if he
makes another counteroffer specifying this arrangement. His
opportunity to accept the woman’s original offer of a trade passed
whenhemadethecounteroffer.
Bilateral and Unilateral Contracts:Most contracts require two
parties,bothofwhichhaveassumeddutiesandobligationsunderthe
contract. For example, a real estate contract would be a bilateral
contractasbothbuyerandsellerhaveagreedtoperformunderthe
contract. It doesn’t matter how many buyers and sellers are
participating under the contract. The important thing is that two
parties have promised to perform. In the case of a real estate
contract,thebuyerpromisestobuythehomeandthesellerpromises
tosellthehome.
If she replies to his counteroffer by saying that the terms of which
she is asking for the bike are firm (in other words, a straight trade
withnoadditionalfunds),shemayeitherrejecthisofferorshemay
counterofferwithdifferenttermsalltogether.Ifsherejectshisoffer,
then he has three choices: he can either make a new offer - the
originalstraighttrade(whichheknowsthatshewillaccept),makea
lower offer (which, depending on whether she positioned her last
responseasarejectionoracounteroffer,wouldeitherbeanewoffer
oracounteroffer),orwalkaway.
However,thereareinstanceswherethereisonlyonepartyinvolved.
This is the case where someone may post a sign saying, “lost dog”
and offers a reward for the return of the dog. If someone finds the
dogandreturnsit,therewardwhichispostediswhatispaidtothe
rescuerofthedog;thereisnonegotiation.Onlytheownerofthedog
has agreed to perform under the contract by paying the stated
reward; those reading the flyer are under no obligation to hunt for
the dog. Since only one party has promised to perform, this is a
unilateralcontract.
Themanwouldfeelbetteraboutbuyingthebicycleforthepriceshe
isdemandingifhebelievesthatitisworthmorethansheisasking.
However,themanwouldnotfeelsogoodaboutbuyingthebikefor
theaskingpriceifhethinksit’sworthlessthansheisasking.
Theofferisdrivenbythedynamicsofwhatbuyersandsellerswant.
Thus,whetheritisbicyclesorrealestate,thebuyerswanttobuyat
thelowestpricewhichtheycannegotiateandthesellerswanttosell
atthehighestpricewhichtheycannegotiate.Butnegotiationsdon’t
takeplaceinavacuum.Boththebuyersandthesellerswilllikelydo
theirhomeworkastowhatafairpriceis.Usuallyitisnotaspecific
number, but a number within a range in which both the buyer and
sellerwillfindacceptable.Todothis,negotiationsmusthappeninan
Unconscionable Contracts:Thisisoneofthereasonswhychildren
are not permitted to sign contracts. When someone agrees to
extreme terms that no thoughtful, knowledgeable individual would
accept,hehasenteredintoanunconscionablecontract.Whilecourts
willnotsavesomeonefrommakingabaddeal,courtswillintervene
whenitisobviousthatagreatlyunfairagreementforonepartyhas
resultedbecausethebargainingpowerofthepartiesaresolopsided.
19
Suppose your elderly grandmother signs a contract to sell her
beautifulhomefor$500tosomecrookwhoislyingtoher.Thisisan
unconscionablecontract.
Adhesion Contracts:These contracts are “take it or leave it”
contracts. One party has drafted the document. If the other party
wants the good or service, the purchaser must sign the contract
without making any changes. Contracts of adhesion are commonly
used by home builders who are selling newly constructed homes to
buyers. Usually these builders will not permit any negotiation or
amendmentstotheirstandard(“boilerplate”)language.
Recognizeabreachofcontract
Thiscouldbeassimpleasaverbalcommentandacknowledgement
bytwopartiesthattheywillenterintodiscussionsthatcouldleadto
aformalcontractoranagreement.
When a woman decides that she wants to renovate her kitchen and
calls up three contractors to give her quotes, she is sharing her
objectivewithallthreecontractors.
Theunderstandingisthattheywillsubmitproposalstorenovateher
kitchenandshewillreviewandchooseoneofthebidsbasedonher
requirements.Sheisinvitingthecontractorstomakeanoffer.Once
the contractors submit their bids, she will review them. If she finds
onethatmeetshercriteria,shewillaccepttheoffer.Atthatpointand
assumingthatallotheressentialelementsofcontractformationare
present, she now has a legally enforceable agreement - a contract –
withthepersonorbusinesswhichshehasselected.Thereismutual
assent which is demonstrated by a “meeting of the minds”… the
selectedcontractorhasproposedtheservicesandpriceswhichmeet
herneedsandshehasconfirmedthisbyacceptingthebid.
Somerealestatecontractscontainconditionscalled"contingencies.”
For example, a common contingency is a home inspection
contingency. If the structure’s condition does not meet the
purchaser’s requirements, the contract no longer has mutual assent
and,asaresult,becomevoid.Onceacontractisvoid,itisnolonger
legallyenforceable.
Usually in a typical contract scenario, two or more parties come
togetherandnegotiate.Throughtheprocessofofferandacceptance,
the parties will reach a “meeting of the minds” and thus mutual
assent (mutuality) – a basic element of a valid contract – will be
realized. One important reason to put contracts in writing, even
when the Statute of Frauds doesn’t require it, is to confirm that
mutual assent has been achieved. Written contracts will usually
reflect if there is a misunderstanding about what the parties have
agreeduponandcanbeusedasevidenceifadisputearises.
Review
You have completed chapter one! In this chapter, we discussed the
background of contract law and looked at some definitions. We
reviewed oral contracts in comparison to written contracts and
discussed the Uniform Commercial Code, statute of frauds, mutual
assent,andoffers.
There are some circumstances which can interfere with mutual
assent. Sometimes unintentional innocent or negligent
misrepresentation may occur which causes a party to be misled
withoutanyintenttodeceive.Inmoreseriouscases,mutualassentis
not achieved because fraud (intentional misrepresentation) is
involved. If one or more of the parties has agreed to the contract
under these conditions, the chances are that the contract will be
declaredtobevoidandunenforceable.
CHAPTER 2: ESSENTIAL
ELEMENTS, DISCHARGE,
AND ENFORCEMENT
An example of fraudulent activity is “slam selling,” which is both
illegal and immoral. Telemarketers call their potential customers
hopingtoestablishmutualassentresultinginacontractforsale,but
whentheycan’t,theysometimesgetdesperateandjustclaimasale
anyway.Soon,theunsuspectingpersonstartsgettingasubscription
to some magazine which she never wanted and ironically, will have
to call and “cancel” the subscription she NEVER ordered.If she
doesn’t,shewillsoondiscoverabillinhermailboxforthemagazines
shehas“ordered.”
Overview
Humanbeingsareobligatedbyourverynaturetoperpetuallyenter
into agreements with each other. These agreements are nothing
other than obligations that two or more parties make with one
anothertoaccomplishsomeobjective.
If this consumer understood the essential elements of a valid
contract,shewouldrealizethatacontracthadneverbeenformed!
Anotherexamplethatwarrantscautioniswherebusinesseswillput
a standard contract boilerplate or template before an independent
contractorconsideredforhire.Theindependentpotentialemployee
is then expected to sign the contract with no further discussion. At
thisparticularpointthelawisclear,alegalcontractexistsonlywhen
onepartymakesanofferandtheotheracceptsalltermsofthatoffer.
In this example, the contractor is still free to counter any of the
points in the contract and return a counter offer to the potential
employeruntilanagreementhasbeenreached.
In order for the contracts to become enforceable under law, they
must contain certain elements or they could be declared void and
unenforceablebyajudgeintheeventofadispute.
LearningObjectives
Uponcompletionofthischapter,studentswillbeableto:
•
Before two parties can enter into a contract they must first
understandwhattheywishtoaccomplish.
Valid, Void and Voidable Contracts:Every contract requires
mutual assent (“meeting of the minds”), competent parties,
consideration, and a legal object (purpose) for the contract to be
valid.Ifacontractlacksanyofthesefourbasicelements,thecontract
is void. Contracts which are voidable are valid contracts which can
become void if certain conditions or circumstances occur. For
instance, a voidable contract is formed whenever an adult makes a
contractwithaminor.Aslongastheminordecidestohonorit,the
contract is valid; however, at any time, the minor can declare that
thereisnocontractbyindicatingthatheorshenolongerwishesto
beviewedasacompetentparty.
20
Review essential elements in a contract, and define each
essentialelement
Creating a Valid Contract
Aleatory Contracts:When parties enter into a contract with terms
that are uncertain to occur, they have created an aleatory contract.
Insurance contracts are the best example of these. When someone
buys an auto insurance policy they sign a contract that says the
companywillpayfordamagesONLYintheeventofanaccident.
•
•
The law typically cites that in the majority of circumstances most
contractsmustcontaintwoelements:
Createavalidcontractandinterpretcontracts
•
All parties must agree about an offer was made by one
partyandacceptedbytheother.
•
Something of value must be exchanged for something else
ofvalue.Thiscanincludegoods,cash,services,orapledge
toexchangetheseitems.
benefit/detrimentway,it’seasytoseethatthebenefittotheselleris
the money (the $500,000) and the detriment is that the seller no
longer owns the home. The buyer’s benefit is that he has the home
andhisdetrimentisthathenolongerhasthe$500,000.
Considerationalsoincludesfacetsofthetermsthemselves.Theymay
deal with how much of the product will be provided, the schedule
and method of delivery, the anticipated duration in which delivery
will be made and other related items. Term examples may also be
those that include the purchaser's outlined price per item and
whether or not there is a possible discount made available
dependent on ordering of bulk quantities. These are just a few
potential scenarios where, regardless of the specific terms, a legally
bindingcontractmustincludeconsiderationfromandforallparties.
Essential Elements
Thefouressentialelementsare:
MutualAssent
As stated in our first section, mutual assent is simply agreement,
often termed “meeting of the minds”, by both parties to a contract.
Mutualassentmustbeprovenobjectively,andisoftenestablishedby
showing an offer and acceptance. Mutual assent requires that a
“meeting of the minds” had occurred. This is reached through
negotiation – through the process of offer and acceptance. Without
an offer there wouldn’t be a valid contract because one party must
demonstrate interest in something of concern to another party.
UnlessrequiredbytheStatuteofFrauds,theoffermaybewrittenor
verbal.
LegalObjectorLawfulObjective
In order for a contract to be valid, the “object” or purpose of the
contract must be legal and not against public policy. Courts have
ruled that domestic and social agreements are unenforceable.
Example: Sara can’t sue Jessica because Jessica wore Sara’s favorite
dresstoanightclub.Contractsthataremadeforanillegalpurpose
are also void. A contract with a friend to supply alcohol to a
restaurantwhichisnotpermittedtosellliquorisvoid.
An offer must include, at minimum, the name of the individual or
entitythatismakingtheoffer,thepricethatistobepaidtotheother
seller,andadateforperformanceunderthecontract.
Simply put, courts will not enforce contracts that are illegal or that
violate public policy. The law considers contracts such as these as
void,invalidandunlawful.Withtherecentexpansionofgamblingin
manystates,anexamplemightbeatemplateforagamblingcontract.
If executed in a state where gambling is not legal, if the illegal
agreementhasnotbeenperformed,neitherpartyhastherighttosue
theotherfordamagesortorequireperformanceoftheagreement.If
the agreement has been performed, neither party can sue the other
fordamagesortohavetheagreementsetaside.
An offer can contain as many additional terms, conditions, and
provisionsasdesiredbythepotentialbuyerbutitmustanswerthe
followingquestionsinordertobeconsideredvalid:
•
Whoisbuying?
•
Whatisbeingoffered?
•
Whenistheproposedclosingdate?
A contract may also involve the performance of several promises,
some of which are legal and some illegal. The legal parts of the
agreementmaybeenforcediftheycanbejudiciouslyseparatedfrom
thepartsthatareillegal.However,iftheillegalpartswouldbesuch
astoaffectthewholeagreement,thelegalpartsoftheagreementwill
notbeenforced.
Inordertohavemutualassent,theoffer(oracounteroffer)mustbe
accepted.Foranacceptancetobeeffective,itmustbecommunicated
tothepartytowhomtheacceptanceisdirected.
Let’s consider our example from Chapter 1. Suppose the man made
anofferof$5,000onthehighendbicycle,forwhichthewomanhad
been asking $8000. He would specify his identity, the amount of
$5,000, and suggest when the money would be exchanged for the
possession and title (ownership) of the bicycle. Now the ball would
beinthebicycleowner’scourt.Shecaneitheraccepttheoffer(which
would fulfill the requirement of mutuality), reject the offer, or
counter the offer. If she accepts the offer, she must communicate to
thebuyerthatshehasaccepteditinorderforthecontracttobefully
formed,assumingthatallotherelementsaresatisfied.
Courtshaveshownthatwhereverpossible,acontractagreementwill
be interpreted as being lawful. This translates to the understanding
that if an agreement is susceptible to two interpretations, one legal
and the other illegal, the Court will generally use the legal
interpretation.Thisistrueunlessitisclearthattheinterpretationas
toillegalityisveryclearlyindicated.
CapacitytoContract(CompetentParties)
Only certain individuals are permitted to sign on behalf of their
employersinordertoacceptacontract.Forinstance,areceptionist
at JP Morgan Chase cannot sign a satisfaction of mortgage simply
because she works there. Only the specified authorized individuals
(usuallyofficersofthecorporation)maysigncontracts on behalf of
the company. When the officers sign, they should always be sure to
use their titles to reflect that they are signing on behalf of the
corporation.
Consideration
Inorderforacontracttobevalid,somethingmustbeexchangedor
pledged in order to signify the validity of the agreement. Often,
consideration is the money which is paid for whatever the item is
that is being purchased. However, it is better to think of
consideration as a mutual exchange of promises by the parties.
Anotherwaytolookatconsiderationisbyanalyzingthebenefitand
detrimentwhicheachpartyexperiencesinthetransaction.
The capacity requirement also requires that competent parties sign
contractsinorderforthecontracttobevalid.Keepinmindourprior
discussionaboutvoidablecontracts.Minorsmaysignacontract,but
thecontractwillbevoidableattheminor’sdiscretion.Thosewhodo
not have the required legal mental capacity aren’t considered to be
competent to enter into a contract. Thus, those who have been
adjudicated to be insane, those who are so impaired by drug or
alcoholusethattheydonotunderstandthenatureoftheiracts,and
those who have dementia or Alzheimer’s disease and who are not
experiencingalucidperiodatthetimewhentheysigncannotlegally
contract.Acontractmadewithoneoftheseindividualsisvoid.
Thus, real estate contracts are not valid unless consideration is
stated in the contract. This consideration can be “valuable
consideration” (money or property) or “good consideration” (love
and affection). The statement of consideration in a real estate
contract usually says something like this: “The Seller, Jane Doe,
agreestosell,andtheBuyer,JohnSmith,agreestobuy,ontheterms
and conditions which are specified in this contract on the property
locatedat…”
Let’s look at an example. A buyer agrees to purchase a home for
$500,000. While the $500,000 may be viewed as the consideration,
that is only a part of the story. When consideration is viewed in a
Itshouldbenotedthatthebarfordrugandalcoholimpairmentasa
reason for a lack of capacity has been set very high to avoid those
21
whohavehadafewdrinksorasmallquantityofdrugstousethisas
an excuse to disavow a contract which they are later unhappy for
making.
consideration(moneyorproperty).Usually,though,considerationis
valuable consideration as the parties wish to exchange something
valuableforsomethingelsethatisvaluable.
SupremeCourtcasesfrom1990forwardthathavehadabearingon
howmentalcompetencyissuesarehandledinstatecourts.
Let’sreferbacktothewomansellingthebicycle.Ifsomeonemakes
anoffertobuyherbicyclefor$8000andwilldeliverthecheckand
takepossessionandownershipofthebicycleonnextThursdayand
the woman accepts this offer, they have reached an agreement to
proceed with the transaction. The promises which they have
exchanged - $8000 for the bicycle – is the consideration for the
contract,whichmaybeoralorinwriting(aslongasthetransaction
isnotcoveredontheUCC,whichmayrequirethatitbeinwriting).
Cooperv.Oklahoma,517U.S.348(1996)
http://caselaw.findlaw.com/us-supreme-court/517/348.html
Oklahoma law presuming defendant is competent to stand trial
unless he proves incompetence by clear and convincing evidence
violates due process because the rule allows the State to try a
defendantwhoismorelikelythannotincompetent.
While valuable consideration should have a value that can be
objectively determined, courts rarely inquire into the adequacy or
sufficiency of the consideration amount unless there is suspected
fraudorduressinvolvedinthetransaction.
Rigginsv.Nevada,504U.S.127(1992)
http://caselaw.findlaw.com/us-supreme-court/504/127.html
As stated earlier, consideration is not a one-way street! Often we
think that only the buyer provides consideration in the form of a
purchase price. Now we know that the seller must also provide
something of value – the promise for a promise – so that the
requirementofconsiderationcanbefulfilled.Thisisusuallywhatthe
seller is selling; the promise that the seller will transfer ownership
fortheitembeingsoldinexchangeforthepurchasepricebeingpaid
bythebuyer.
Due process allows a mentally ill inmate to be treated involuntarily
with antipsychotic drugs where there is a determination that the
inmateisdangeroustohimselfandothersandthatthetreatmentis
inhismedicalinterest,butforcingantipsychoticdrugonaconvicted
prisonerisimpermissibleabsentafindingofoverridingjustification,
andatleastasmuchprotectionasalsoprovidedtopersonsdetained
for trial. It was error to order that defendant be administered
antipsychotic drugs during the course of trial over his objection
without findings that there were no less intrusive alternatives, that
the medication was medically appropriate, and that it was essential
forthesakeofdefendant'ssafetyorthesafetyofothers.
Sometimes,considerationisstatedintermsofmoneywhichistobe
paid in installments. Often these contracts specify that in the event
thebuyerdoesnotperformasagreed,heorshelosestherighttobuy
theitem.Thiscanhappenincontractswhichcoverrealpropertyas
wellasthosewhichinvolvepersonalproperty.
Medinav.California,505U.S.437(1992)
http://caselaw.findlaw.com/us-supreme-court/505/437.html
1.
The Due Process Clause permits a State to require that a defendant
claiming incompetence to stand trial bear the burden of proving so
byapreponderanceoftheevidence.
Godinezv.Moran,509U.S.389(1993)
http://caselaw.findlaw.com/us-supreme-court/509/389.html
The standard of competency for pleading guilty or waiving right to
counsel is the same as the competency standard for standing trial:
whetherthedefendanthas“sufficientpresentabilitytoconsultwith
hislawyerwithareasonabledegreeofrationalunderstanding”anda
“rationalaswellasfactualunderstandingoftheproceedingsagainst
him,”Duskyv.UnitedStates,362U.S.402(1960)(percuriam).
Sellv.UnitedStates,539U.S.166(2003)
Anexampleofarealpropertyinstallmentsituationisthatofaland
contract(alsoknownasacontractfordeed).Thebuyerandsellerof
the property sign a contract which describes the details of how the
considerationwillbecalculatedandpaid.Duringtheyearswhenthe
payments are being made, the seller retains the title and holds the
deedandthebuyerisgivenpossession.Onlywhenallpaymentshave
beenmadedoesthebuyerreceivethedeed.However,insomestates
(and in the traditional view of a land contract), if the buyer can no
longer fulfill the obligation of the payments, the buyer will lose not
onlyallthepaymentswhichhehasmade,butwillalsobeforcedto
leave the property. (This harsh rule, called forfeiture, has been
eliminatedinmanystatesandmodifiedinothers.)
http://caselaw.findlaw.com/us-supreme-court/539/166.html
TheFifthAmendmentDueProcessClausepermitsthegovernmentto
involuntarily administer antipsychotic drugs to a mentally ill
defendant facing serious criminal charges in order to render that
defendant competent to stand trial, but only if the treatment is
medicallyappropriate,substantiallyunlikelytohavesideeffectsthat
may undermine the fairness of the trial, and, taking account of less
intrusive alternatives, necessary significantly to further important
governmentaltrial-relatedinterests.
Indianav.Edwards,554U.S.164(2008)
http://caselaw.findlaw.com/us-supreme-court/554/164.html
More on Legal Object
TheUnitedStatesConstitutionpermitsStatestoinsistthatthosewho
are competent enough to stand trial but still suffer from severe
mental illness to the point they are not competent to conduct trial
proceedingsbythemselvesberepresentedbycounsel.
As stated earlier, when two parties agree to enter into a contract,
theymustdosoinordertoachieveanobjectivewhichisnotillegal.
Thus, the accomplishment of the purpose must be legally
enforceable.
More on Consideration
If a contract is not made to accomplish a legal and lawful objective,
then it doesn’t comply with one of the four basic requirements of a
contractandwouldthereforebeconsideredvoid.
Quid Pro Quo in Latin means“something for something.”In contract
law,considerationisnecessarytoformacontract.Considerationcan
be either good consideration (“love and affection”) or valuable
22
Apersonalpropertycontractwhichinvolvesconsiderationpaid
in installments is one used for “lay-a-way” purchases. Decades
ago,beforethepopularityofcreditcards,someconsumerscould
onlypurchaselargeitems,likeappliancesandfurniture,ifthey
could spread out payments over time. Due to recent economic
conditions, this approach has found new popularity. Stores like
K-martnowallowtheircustomerstoplaceitemsthattheywant
to buy on hold and make payments on a scheduled basis until
they have it paid off. The customers are required to sign an
agreementthatsaysiftheydonotfollowthepaymentschedule
andpayofftheitemsbyacertaindeadline,theylosethemoney
whichtheyhavealreadypaidanddonotgettheitems.Whenthe
buyercompletesthecontractasagreedtheyreceivedtheitems
theyselected.
paymentsunderthepromissorynotearemade,thecollateralwhich
isevidencedbythemortgageisnolongerneededtosecuretheloan.
For example, if Barbara hired Justin to pilot her jet and he didn’t
showup,shecouldnotsuehimforfailuretoperformacontractifshe
knewthathewasnotalicensedpilotwhenshehiredhim.Why?The
reason is that the law requires certain professions be licensed in
order to protect the public from unqualified persons. These include
professions such as pilots, doctors, lawyers, stock brokers,
commercial truck drivers, real estate brokers, and veterinarians.
Contracts made with those who are not properly licensed to do the
work which requires a license will usually be void. While the
unlicensed person may still be subject to criminal or other civil
actions,itisunlikelythatthepartywhohiredtheunlicensedperson
canmaintainanactionagainsthimifthepartyknewthathewasnot
properlylicensed.
After the sale of a property (or a refinance of a loan), the
mortgagee/lender will issue a paper known as a “satisfaction of
mortgage.” This satisfaction of mortgage document is evidence that
the original promise to pay as agreed has been completed and
thereforethemortgagecontractisnowdischargedandwillnolonger
“encumber” the property. (It should be noted that this document
shouldalwaysberecordedtoprovideevidenceinatitlesearchthat
thepropertyisnowfreeofthemortgagelien.)
The following events would lead to a discharge of the original
contract:
Hereisanotherexample:Ifawomanknowinglyhiresherunlicensed
best friend to find a buyer for her house and agrees to pay her a
commission when a ready, willing, and able buyer is found, and the
sellerlaterfindsattheclosingthatherfriendhasnotcompletedall
thenecessarystepsforthecompletionofthetransaction,shecannot
sueherfriendunderthecontractforfailuretoperformbecauseher
friend does not have the proper licensing to sell the home for
compensation. Her friend, however, may still be subject to civil suit
orcriminalchargesfortheunlicensedpracticeofrealestate.
Contracts made to obligate someone to commit a crime, such as to
hack into someone’s wireless network, steal cars for compensation,
oranyagreementintendedtoobstructwiththedueprocessoflaw,
are void. For instance, if a lawyer makes a deal with his girlfriend’s
cousin to falsely testify as a witness for his client in exchange for
$5000,thiscontractisvoidandcannotbeenforcedbythecourtsas
thecontractwouldinterferewithdueprocess.
Agreements that impose unreasonable or unfair obligations on a
partyarealsoconsideredvoid.Forexample,ifachefofarestaurant
signs a non-compete clause with his employer that he cannot work
for another establishment in the same town for 20 years or within
200 miles of the restaurant’s location, this provision will not be
viewedashavingalegalobjective.Non-competeclausesincontracts
must be reasonable as to both time and distance. Unless the
employer’s circumstances are very unusual or the skills of the
employee are extraordinarily special, courts tend to invalidate
contracts with non-compete provisions which last longer than two
yearsorhaveadistanceofgreaterthan50miles.
1.
Performance of the contract. When a contract is fully
performed,alltheworkhasbeencompletedasagreed,andthe
contractisnolongerneeded.
2.
Accord and satisfaction.Accordmeansthatacreditor,suchas
thelenderofarealestateloan,agreestoanarrangementwhich
isdifferentthantheoriginalone.Thisagreementisthe“accord.”
When consideration offered by the borrower for the accord is
paid to and accepted by the lender, this is the “satisfaction.”
Whenthishappens,theoriginalcontractisdischarged.
3.
Novation. There are times when the parties agree that a new
contract needs to be substituted for the original one. This
process is called a novation. It is also a novation if the parties
agreetosubstituteanewpartyforanoriginalparty.
4.
Assignment.Inthecaseofanassignment,therightsandduties
under the original contract are transferred to another party.
Unless released, the new party must perform the terms and
conditions of the original party just as if he were the original
party. While this is not a discharge of the contract, it is a
dischargeofoneoftheoriginalparties.
5.
Release.Professionalathletesarereleasedfromtheircontracts
routinely as this is the prerogative by the team in professional
sports. When a party is released from a contract, no further
obligationsfromeitherpartyaredue
6.
Setoff.Whentwopartiesenteradisputeandbothpartieshave
validclaimsagainsteachother,theseadverseclaimscanreduce
orcanceleachother.Forexample,amanfilesalawsuitagainst
hispartnerformoneyheisowedbutacknowledgesthathealso
owes his partner money. The court would look at both the
debtorandcreditor’sclaimsandmaydeterminethattheamount
owedbytheonepartyissetoffbythatowedbytheotherparty.
7.
Rescission of the contract.If there was an “undo button” in
contractlaw,itwouldbecalledrescission.Theideaistoreturn
the parties to where they were before they entered into the
contract.Thiscanbedonebyajudgeorbyanewagreementof
thecontractpartiesthemselves.Whenthecontractisrescinded,
itnolongerexists.
8.
Extinguishment.Once a creditor receives full payment for a
debt and the creditor releases the debtor, the contract which
evidenced the debt is extinguished. Extinguishment can be
reached in two ways: by matter of fact such as in receiving a
document affirming the satisfaction from the creditor or by
matteroflawsuchasanactbyajudgevoidingamortgagewhich
had attached to a property which has been found to no longer
comply with the terms of the mortgage, such as a discovery of
thepresenceofcontaminatedsoil.
9.
Misunderstanding.Mutual assent (“meeting of the minds”) is
necessaryintheformationofthecontract.Sometimes,however,
there may still be misunderstandings due to a flawed offer and
acceptance process. If there is a legitimate misunderstanding
aboutanysubstantiveprovisionofthecontract(forexample,it
is not clear who is to perform the work, who is to be paid, or
Discharge of Contracts
When a valid contract is fully performed (i.e., all provisions have
been satisfied), it is discharged. The general rule is that the parties
must perform precisely all the terms of the contract in order to
dischargetheirobligations.
There are some situations when a provision may “survive the
contract.” In these instances, a party (or parties) may still need to
abide by a particular provision. An example of this may be a
confidentialityprovisioninalistingorbuyerrepresentationcontract.
Even though the broker may have fulfilled his obligations under
theseemploymentcontracts(thecontractisfullyexecuted),theduty
of confidentiality remains forever unless it has been otherwise
modified.Thus,therequirementinthesecontractsforthebrokerto
keepallconfidentialinformationwhichthebrokerhaslearnedabout
his client during the time of representation a secret is still fully
enforceable under the contract long after the property has sold and
thebrokerhasmovedontotherepresentationofotherclients.
In residential real estate, one of the most beloved forms of a
dischargeofcontractisasatisfactionofmortgage.Keepinmindthat
a mortgage is a contract between the mortgagor (the party who
pledges the property as collateral for the loan; usually this is the
borrower) and the mortgagee (the party who has accepted the
property as collateral; usually this is the lender). When all the
23
(b) The Tenant Improvement Allowance must be used for
construction of leasehold improvements within and upon the
Premises (the “Tenant Improvements”). The Tenant Improvements
willNOTincludepersonalpropertyitems(suchasdecoratoritemsor
services), art work, plants, furniture, equipment, or other trade
fixturesnotpermanentlyaffixedtothePremises.
howmuchtheamountofthepaymentistobe),thecontractcan
bedischargedduetothismisunderstanding.
10. Impossibility of performance - extinction of subject
matter.Ifthesubjectmatterofthecontractnolongerexists(for
example, the house in a real estate contract has burned down
prior to closing), the contract would be discharged due to
extinction.
(c)PaymentoftheTenantImprovementAllowanceshallnotbemade
until:(i)alltheTenantImprovementsarecomplete,(ii)theCityhas
issuedaCertificateofOccupancyorasignedfinalinspectionreport,
(iii) “as-built” drawings showing all of the Tenant Improvements as
actually constructed have been provided to Landlord, (iv) Tenant
executesanddeliverstoLandlordacertified,writtenstatementthat
alloftheTenantImprovementshavebeencompletedinaccordance
with drawings approved by Landlord, (v) all required AIA forms,
supporting final lien waivers and releases executed by Tenant’s
space planner, the general contractor and all subcontractors and
suppliers in connection with the Tenant Improvements have been
receivedbyLandlord,and(vi)Tenanthasopenedforbusiness.
11. Defeasance.Aclausecouldbeaddedtoacontractthatrequires
it to be discharged under specified conditions. An example
would be a provision in a contract for deed (a land contract)
which would provide that the seller would transfer the title to
thepropertytothebuyeronceaspecifiednumberofpayments
hasbeenmade.
12. Inabilitytoperform.Ifoneorbothofthepartiesareunableto
fulfill his or her obligations under the contract, it is no longer
enforceable. If a seller finds that he can no longer sell the
property even though he has signed a contract, it may be
discharged due to this inability. Most real estate purchase
contractsprovidethatthecontractwillbecancellediftheseller
cannot produce good and marketable title within a certain
number of days. This might happen when the title search
uncoversaneasementofwhichthesellershadnotbeenaware,a
surveydiscoversthatahomehasbeenbuiltthreefeetcloserto
theroadthanallowedbythebuildingset-backline,orwhenan
oldunrecordedsatisfactionofmortgagecannotbefoundandthe
lenderhasgoneoutofbusiness.Ineachoftheseinstances,there
isa“cloud”onthetitle.Ifitcannotbecleared,aclosingwillnot
takeplaceandthecontractwillbedischarged.
Upon reasonable satisfaction of any such objections, Landlord shall
pay any remaining portion of the Tenant Improvement Allowance
duetoTenantwithin10businessdays.Notwithstandinganythingto
thecontrarycontainedherein,TenantmustsubmittheImprovement
Documentation to Landlord on or before the date that is 180 days
after the Commencement Date. If Tenant fails to timely submit the
Improvement Documentation to Landlord, then any unused portion
of the Tenant Improvement Allowance shall be automatically
forfeited.Timeisoftheessencewithrespecttothisprovision.
The court of law will typically weigh matters equally regardless of
typeofcontractinvolved,residential,orcommercial.
13. Impossibilityofperformance-deathofaparty.Ifoneorboth
of the parties of a contract dies, the contract cannot be
performed;therefore,itwillbedischarged.
Performance of Contracts
14. Bankruptcy.Ifapartyfilesbankruptcyandliststhecontractas
part of these proceedings, then it would be discharged by the
courts. However, there are certain contracts which cannot be
dischargedbybankruptcy.
When a business or an individual enters into an agreement and
forms a contract, they are making a promise to perform to the
reasonable expectation of the other party, complying as closely as
possibleinthemannerdescribedinthecontract.
15. Bylapseoftime.Iftoomuchtimehaspassed,acontractcanbe
discharged. This sometimes happens in real estate contracts.
Generally, “time is of the essence” in these contracts; thus, all
timeframesanddeadlinesareexpectedtobestrictlyfollowed.If
theclosingdateismissed,thecontractisdischarged.(However,
it is very likely that the binder/earnest money/good faith
deposit may be retained as liquidated damages by the seller if
themissedclosingwasaresultofthebuyer’sactionsorinaction.
If the contract is one with a builder for new construction, a
closingdatemissedasaresultofthebuyer’sfaultmayresultin
amonetarypenaltyspecifiedinthecontract.)
When Pepsi hired Beyonce to perform at the Super Bowl halftime
show, they had to perform first by paying her money to book the
performance. She then performed in a manner consistent with the
expectationoftheotherpartytohercontract,Pepsi.However,ifshe
hadfailedtoshowuporifshehadcomeoutonstageandwasunable
tosing,shecouldhavebeensuedforlackofperformance.
Thereareanumberofactswhichboththesellerandthebuyermust
do under a real estate purchase contract. Below are just a few of
theseresponsibilities:
Sellers must perform by allowing a buyer access to the property so
that they can inspect the land and buildings for defects. The seller
musthaveatitlesearchcompleted,havethenewdeeddrafted,and
makeanyrepairsspecifiedinthecontract.
16. Byneglectingtogivenotice.Insomecontracts,theremaybea
requirement to provide some type of formal notice. If not
provided,thecontractmayceasetohaveanyaffect.
In commercial real estate, a common discharge of obligations often
revolves around reimbursing additions to leased space, sometimes
calledT.I.(tenantimprovements).Thescenariocommonlyunfoldsas
thelessee(tenant)finishesimprovementonleasedspace.Thelessor
(landlord) will be asked to reimburse the lessee according to the
contractual obligations. The lease contract remains in effect, while
oneoftheobligationsoftheleasetermsisdischarged.
The buyer must perform by providing a binder deposit (good faith
deposit) that is acceptable to the seller, securing any necessary
financing, arranging for inspections (property inspection, woodboringinsectinspection,etc.),and,ofcourse,buyingthepropertyas
contracted.
Operation of Law
Thefollowingleaseclausesaretypicalofthoseleadingtoadischarge
of obligations as they apply to the repayment of the tenant
improvements:
There are circumstances in which a contract may have been fully
performed, but the property may still be lost to the purchaser as a
result of “operation of law.” These are various statutes and court
decisions which apply to real property which are rooted in English
commonlaw.
(a) Upon the written request of Tenant after completion of the
Tenant Improvements, Landlord shall reimburse Tenant the cost of
completing the Tenant Improvements, the amount of the Tenant
ImprovementAllowance.
24
As a result of entering into contracts, parties are subject to certain
rightsandliabilitiesregardlessoftheiroriginalintent.
drive home the point that WORDS MATTER! Even when a form
contractisused,thewordsinsertedintheblanksareveryimportant,
especially as these will be given the most weight in interpretation.
Finally,everyoneinvolvedinthecontractshouldcarefullyreadevery
wordbeforeitissigned.Inarealestatetransaction,thebuyerneeds
to be careful that what is written includes everything the buyer
wantsinhisoffer;thesellerneedstobecautiousthatwhenaccepting
theoffer,therearenomisunderstandingsastowhatthebuyer’soffer
means.Asellershouldbeencouragedtoquestionanythingaboutthe
buyer’sofferthatseemsunclear.Thetimeforclarificationispriorto
acceptance.
If a group buys a beach-front condo, they now have rights as the
ownertooccupyandusetheproperty,buttheyalsohavetheliability
of paying property taxes. If they fail to pay the property taxes, then
eventuallytheywilllosethepropertybecauseoftheseunpaidtaxes
duetooperationoflaw.
Thedeathofapropertyownermayalsosubjectthepropertytoafate
which was different than the owner’s intent was at the time of its
purchase.Whensomeonedies,thedeceasedperson’spropertygoes
through a process which is based upon state law called probate. All
stateshaveaformofownershipwhichwillallowforrealpropertyto
be passed directly to a spouse (or to another individual) without
goingthroughprobate.Ifthisplanninghasnottakenplace,thenthe
real property will be distributed based upon the state’s statute
regardingwhatthesurvivingspousereceivesandwhetherornotthe
deceaseddiedwithoutawill(intestate)orwithawill(testate).Ifthe
deceased died without a will, the state’s statute will determine the
hierarchyofrelativeswhowillreceivetherealandpersonalproperty
which remains after the deceased’s debts have been paid and the
spousehasreceivedhisorhershare.Ifthedeceaseddiedwithawill,
theprobatecourtwillfollowthetermsofthewill.
Breach of Contract
Abreachisabreakingoftheprovisionsofthecontract.Ifanyofthe
agreed-upontermsorconditionsofthecontractareviolatedwithout
a legally-protected reason (such as a contingency which is not
satisfied which allows one of the parties to withdraw from the
contract), the non-breaching party can sue the breaching party for
money damages and/or an equitable remedy (such as specific
performance).
Adverse possession is another way in which title is conveyed by
operationoflaw.Eachstatehasspecificrulesandtimeframesasto
what is required for a successful claim of adverse possession.
Generally,onewhowishestoclaimownershipbyadversepossession
willneedtoshowthathehasoccupiedthepropertyinacontinuous,
open,hostile,exclusive,andnotoriouswayforthestatutoryperiodof
time. If the adverse possessor can prove this in court, then title
(ownership)willbetransferredtohim.
If Brett Favre leased the eastern part of his ranch to Michael Irving
forhunting,andMichaeldecidedtohuntonthewesternpartofthe
ranch, he would be in breach of contract as he would have violated
thetermsoftheagreement.However,ifBrettfailedtoallowMichael
access to the eastern part of his property after making this
agreement, then Brett would be in breach of contract for failing to
perform.
In contract disputes, a court will eventually need to determine the
result of a breach of contract claim unless an alternative resolution
method has been selected. These methods – mediation and
arbitration – help to reduce the caseload in the courts. With
mediation, a trained, usually state-licensed, third party mediator
helps the parties come to an agreement. If they do, a contract
betweenthepartiesiswritten.Thiscontractisusuallynotabletobe
later appealed to a court. Arbitration, which is usually “binding,” is
oftenspecifiedinthecontract.Wheremediationallowsthepartiesto
discusstheirdifferencesandcometoanagreement(ifpossible),an
arbitrator (who is often an experienced attorney or retired judge)
makes the decision. If the parties agree in advance that the
arbitrationisbinding,thearbitrator’sdecisioncannotbeappealed.
Interpretation of Contracts
When there is a dispute and a party involved in a contract files a
lawsuit,thecourtoftenmustdecidewhatthecontractwasintended
to mean. This process is called interpretation and it is based on a
numberofcommonlawrulesofconstruction.
When a court finds that it is necessary to make a determination
about the intent of the parties in order to resolve the dispute, the
courtwillinterpretthelanguagewhichwasusedinthecontract.The
court’s job is not to rewrite the contract; it is to use these rules to
makethebestdeterminationastowhatthecontractreallymeans.
Here are a few of the rules of construction (interpretation) which a
courtwilluse:
1.
2.
Thecourtwillusetheplainmeaningofwords.Ifthewords
are clear, then additional evidence will not be used to
determine what the words mean. Regular words will be
interpreted as they are regularly used and defined;
technical words will be given their ordinary technical
meeting unless the intent of the contract clearly suggests
otherwise.
Therearefourtypesofbreaches:
MinorBreach:Thisisalsocalledapartialorimmaterialbreach.For
example, if a contractor is hired to build a deck, and the contract
states that the contractor will use all Phillips head screws, but
insteadheusesflatheadscrews,thisisaminorbreach,becausethe
screwsservethesamefunction.
Thecourtwilllookatthecontractasawholeandinterpret
it as an entire document whenever possible rather than
interpreting individual sections apart from the entire
document.
3.
Handwrittenortypedwordswillbegivenmoreimportance
than the pre-printed “boilerplate” words found in form
contracts.
4.
The contract will be interpreted more strictly against the
partywhodrafteditasthatpartyhadgreatercontrolover
howthewordswereused.
5.
When there is a contract dispute which ends up in court (or in
arbitration), the judge would review the contract for legal validity
andthenevaluatethemeritsoftheclaimbasedonthefactsandthe
law.
MaterialBreach:Thisiswhenapartyhasfailedtoperforminaway
thatpermitstheotherpartytosuetocompelperformanceorcollect
damages. An example would be if the contractor, instead of using
screws as the contract specified, used nails or an inferior type of
screwthatwouldrustquickly.Thisismuchdifferentthanwhathad
beenagreedto,sothiswouldbeamaterialbreachofcontractandthe
contractorcouldbesuedfordamages.
Fundamental Breach:Thisisalsocalledarepudiatorybreach.This
is when the breach of contract is very fundamental to the original
intent of the parties. In this case, an example would be if the
contractordidn’tshowupatall!Thiswouldbeafundamentalbreach
of contract and, of course, would allow the non-breaching party to
sue.
Wordsthatarespecificandexactareinterpretedwithmore
weightthangeneralterms.
Whyisthisimportant?First,ithelpstoexplainwhyitissoimportant
forattorneystobeinvolvedinthecreationofanycontractotherthan
the most simple and straightforward document. Second, it helps to
25
ConsequentialDamages
Anticipatory Breach:In the event that a party to a contract
specifically acknowledges that they will not perform the duties as
agreedto,theyareinanticipatorybreach.Ifawriteragreestowritea
bookforapublisherandreceivesmoneyasaforwardonbooksales,
and then instead notifies the publisher that he will not write the
book,oritbecomescleartothepublisherthatheisrefusingtowrite
the book, the writer is in anticipatory breach of contract. The other
party can take immediate action as soon as they are notified of the
anticipatory breach and sue for performance or damages even
thoughthefinalbreachhasnotyetoccurred.
Consequentialdamagescoverindirectcostsandlosseswhichcanbe
reasonably foreseen. Sometimes called special damages, these are
losses which are caused by circumstances which are beyond the
contract. If a hotel signs a contract with a company for a sales
conventionandthecompanyincursexpensestopromotetheirevent
only to discover later that the hotel has booked the venue to
someone else, the consequential damages would include the
expensesofpromotion.
PunitiveDamages
Remedies to a Breach
Punitivedamagesareusedto“punish”thedefendantforher/his/its
behavior.Therehavebeenmanyproductliabilitycasesinwhichthe
jury granted large punitive damages after concluding that the
defendant’sbehaviorwasextremelyinappropriate.Punitivedamages
are also imposed by a judge or jury in order to discourage others
fromengaginginsimilarconduct.
When two parties go to court with their dispute, they are typically
pursuing one of two outcomes: they want a monetary amount of
money for damages (money damages), or they want the judge to
order someone to do or to stop doing something (equitable
remedies).
Usually it is the punitive damages which lawmakers attempt to
control when addressing large civil lawsuit damages. Juries have
beenknowntoimposehugepunitivedamageswhichhavebeenlater
reduced by a judge as unreasonable during the appeals process.
Thereweremanycasesagainsttobaccocompanieswhereextremely
largepunitivedamageswereimposed;however,duetoanumberof
factors,manyoftheseawardswereallowedtogoforward.
EquitableRemedies
Injunction
An order from a judge requiring action or the cease of action from
someone as a result of a contract dispute is called an injunction. A
restaurantownermayfilealawsuittoseekaninjunctiontostophis
suppliersfrommakingdeliveriesoutsideoftheagreedupontime.
NominalDamages
An injunction is the result of a court order and is an equitable
remedytoacontractdispute.Apartyservedwithaninjunctioncould
facecivilorcriminalpenaltiesfornotcomplyingwiththeinjunction.
Non-compliance with an injunction in some jurisdictions can be
consideredaseriouscrimethatcouldresultinincarceration.
Nominaldamagesexisttoproveapoint–thattherewasaninjuryto
the non-breaching party. Nominal damages are usually very small
amounts;oftentheyareonedollar.Buttheyareimportantbecauseit
establishes that the other party did indeed breach the contract and
acted wrongfully. When someone brings a lawsuit as a matter of
principle, often with the goal of repairing a reputation, nominal
damagesareoftenawarded.
SpecificPerformance
Whenapartyofacontracthasadisputebutwantstheotherpartyto
perform as originally agreed, a remedy called specific performance
wouldbesought.
LiquidatedDamages
Thesedamagesareimportanttounderstandastheyoftenarepaidin
a real estate contract dispute. These are damages which are predetermined and specified in a contract. Thus, both the buyer and
sellerhaveagreedtothisaspartofthecontractnegotiation.
Forexample,twocomediansformanagreementtoperformasaduo
foroneyear.Theshowthattheyhavecreatedispopularandallthe
crowds expect them both to be part of the show. If one of the
membersdecidesthatheistakingeveryotherperformanceoff,then
the other member of the duo could sue in court for specific
performance.Thatgroupmembercouldaskforacourtordertoforce
the partner to return to the stage and finish out the contract as
agreed.
The buyer is encouraged (but not required) to submit a binder
deposit (also known as a good faith deposit or an earnest money
deposit) when making the offer. The seller will take the amount of
the deposit into account as she decides whether or not to accept,
reject,orcounterthebuyer’soffer.Whydoesthesellerthinkthatthe
amount of the deposit is important? The reason is that if the buyer
doesnotperformonthecontract,thesellerwillreceivetheamount
of the binder deposit as liquidated damages. Whether or not the
sellercanalsosueforcompensatoryorotherdamagesdependsupon
the terms of the contract. However, usually the liquidated damages
willbeallthesellerwillreceive.
Anorderofspecificdamagesissoughtwhenmonetarydamageswill
not provide a satisfactory solution for the plaintiff in a lawsuit.
Specific performance is an equitable remedy which is appropriate
whendealingwithuniquesituations–thereplacementofadisputed
antique,therequirementthatasellerfollowthroughwithconveying
his home to the buyer (remember that every piece of real estate is
unique), or when a partner in a successful comedy show is vital to
the show’s continuation. Clearly, in each of these situations, money
doesn’tsatisfythelossthatoccurswhenthecontractisbreached.
ItisveryimportanttounderstandthatthebinderdepositisNOTthe
consideration in the contract. The binder deposit has a specific
purpose–itmakesthesellercomfortablethatthebuyerislesslikely
to breach the contract as the seller (and the buyer) know that the
amount which the buyer places on deposit will be lost under those
circumstances.Therefore,itisnotunusualfortheseller,aspartofa
counteroffer, to request that the buyer increase the binder deposit
amountwhichhehasoffered.
Money Damages
CompensatoryDamages
Usually when one thinks about damages, he or she thinks about
money to cover direct losses and costs. This is what compensatory
damagesstrivetomeasure.Thesedamagesareawardedbasedupon
theplaintiffprovingthevalueofthelossthathesustainedasaresult
of the defendant’s actions. Another way of looking at compensatory
damagesisthedollaramountthatisneededtoreplacewhatwaslost
asaresultofthebreachofthecontract.
Review
In this chapter, we worked through the process of creating a
contract,discussedtheessentialelementsofacontract,andreviewed
eachelementinmoredetail.Wealsotouchedonbreachofcontract
and ways to remedy a breach, as well as equitable remedies and
moneydamages.
26
Signatures:Asignature,stamp,orsealisrequiredbyanauthorized
individualrepresentingeachpartytothecontract.
CHAPTER 3: REAL ESTATE
SALES CONTRACTS
If a party is a company or organization, then the authorized signer
musthavethecapacitytosigncontractsfortheentitytheyrepresent.
If the signer doesn’t have this authority, the contract would be
invalid.
Overview
Forexample,ahusbandmayhaveprovidedhiswifewith“powerof
attorney” which authorizes her to sign contracts for him in his
absence.Inthisevent,shecouldsignforherhusbandonarealestate
contract as his “attorney in fact.” However, without this special
authorizationthatisprovidedbyHIM,shecouldsignonlyforherself.
Keep in mind that a broker should never sign a contract or any
documentforthebuyerorsellerheorsherepresentsunderapower
ofattorney.Sinceasuccessfulsaleandclosingmeansthatthebroker
will earn a commission, there is a built-in conflict of interest if the
brokersignsadocumentwhichadvancesthepurchasewhichresults
inthatcommission.
Whentwoormorepartiesformanagreementregardingthetransfer
ofownershipofrealproperty,arealestatesalescontractisrequired.
As discussed earlier, a written contract is required as real estate
sales(realestatepurchase)contractsarecoveredundertheStatute
ofFrauds.Withoutawrittencontract,therealestatecontractwillnot
be enforceable in court. It is very important that the real estate
contract also be completed accurately as nearly every closing
document will be based upon what has been agreed to in this
contract.
When the buyer completes the blanks of the pre-printed real estate
contract(usuallywiththehelpofarealestatelicensee),thebuyeris
making an offer. While the form is called a real estate sales (or
purchase) contract, it is not legally a contract until it is accepted by
theseller.
Anotherexampleisasmallbusinesswhichhasaninternanswering
thephones.Supposeatelemarketercallstryingtosellthebusinessa
vacationrentalpropertyinOrlando.Theinternsays,“Sure,faxover
the documents and I’ll sign the contract.” The problem here is the
intern is not authorized to sign contracts for the company so,
therefore,thisagreementcouldnotbeenforcedincourt.
LearningObjectives
Uponcompletionofthischapter,studentswillbeableto:
•
Definecommontermsassociatedwithcontracts
•
Usetheproperformatofacontractandutilizethisformat
•
Recognize specific contracts, such as Contract for Sale and
Purchase, Third-Party Financing Addendum, Seller
FinancingAddendum,andLead-BasedDisclosure
LegalObject:Foracontracttobevalid,itmustservealegalpurpose.
Contractsthatcallforillegalactivityorforunlicensedindividualsto
completeworkthatrequiresalicensearenotenforceableunderthe
law.
Consideration:Inorderforarealestatecontracttobelegal,itmust
explain what is to be exchanged by both parties that has value.
Having value is not the same as money or property. “Love and
affection,”knownas“goodconsideration,”hasvalueandissufficient
when there is a transfer between close family members when no
significantmoniesarepartofthetransferandisjustasadequateas
“valuableconsideration.”Arealestatecontractisnotvalidifthereis
noconsiderationpledgedbythepartiesintheagreement.
Common Terms
Parties:Theindividualsorentitiesinvolvedinthetransactionmust
be identified by legal name. The name listed on the contract will
reflect the name that the property title will be transferred to and
recorded publicly. The sellers’ names should reflect how title is
currently held. It is also very important to make certain that all
current owners (and, in most states, their non-owning spouses) are
listed.
Typically, in a regular “arm’s length” transaction where there is no
close relationship between the parties, the consideration for the
buyeristhepromisetopaythepurchasepriceandtheconsideration
for the seller is the promise to transfer the ownership of the land
includingallbuildingsandstructurespresentontherealproperty.
However, there are times when this can become more complex.
There could be a chandelier in the dining room (which, as an
attachmenttotherealproperty,wouldnormallybeconsideredtobe
a fixture and therefore part of the real estate) which is not to be
includedinthesale.Thismustbespecifiedinthecontract.
Property Description:Therealpropertymustbeidentifiedusinga
legal description. The legal description identifies the location, sub
division, plot, and lot as organized in the public records. The
propertyaddressandrealestatenumberarealsocommonlyusedto
identifytheproperty.Keepinmindthatanaddress,whilehelpfulto
informallylocatetheproperty,isNOTalegaldescription.
A seller could agree to hold a note for the buyer. The buyer would
thenofferconsiderationofapromissorynoteora“promisetopay”
the seller. (Seller financing is somewhat complex and beyond the
scope of this course; however, it should be noted that a traditional
mortgage is not the only way to finance the purchase of the
property.)
PurchasePrice:Thetotalamountofmoneythatistobepaidbythe
purchaser for the real estate must be clearly identified on the
contract.Thetermsastohowandwhentheexchangeofmoneyfor
propertywilltakeplacemustalsobeincluded.Thetermsofhowthe
totalamountofmoneywillbepaidtothesellermustbeexplained.
Acknowledgements, Terms, and Conditions:The contract must
acknowledge that there is a mutual agreement between parties to
bindthemselvesinalegalcontract.Thetermsandconditionsofthe
agreement must be explained and completed in all sections. A
contract that is missing or contradictory in some of the terms and
conditionswillbedifficulttoenforcebecausetheintentoftheparties
isnotknown;thereisnota“meetingoftheminds”inregardtothese
provisions. However, sometimes the court will step in and use the
rules of construction (interpretation) to attempt to determine what
the contract likely means in order to preserve the transaction. (See
Chapter Two for an in-depth discussion about this topic.) For
example,ifthepreprintedlanguagesaysthatthewindowblindsARE
included, but there is a handwritten list in the contract of items
whichareNOTincludedandthissectionlists“windowblinds,”then
Forexample,ifthebuyeristopurchasethepropertywithamortgage
loan, he may be required to provide the seller with a loan
commitmentinwritingwithinacertainnumberofdaysaftersigning
thecontract.Sometimesthecontractstipulatesthatnoloanmaybe
usedtoclosethetransaction.Suchtransactionsarecalled“cashonly”
realestatecontracts.
As stated earlier, the amount of the binder deposit (the good
faith/earnest money deposit) is determined through negotiation.
Whateverthatamountis(ifany,asabinderdepositisnotrequired
to form the contract) will be written in the appropriate contract
blank.Ifthecontractproceedstoclosing,thebuyerwillusually,but
isnotrequiredto,applythisamounttothepurchaseprice.
27
the court will rule that the window blinds are not included. Why?
Because under the common law rules of construction, handwritten
provisionsaregivengreaterweightthanpre-printedprovisions.
is detailed in this section and explained with additional
documentationrelatedtotheloan.
•
Format
If there is a licensed real estate broker involved in the transaction,
thenindustrystandardpre-printeddocumentswillnormallybeused.
TITLEEVIDENCE
Realestatelawisstate-basedlaw.Whiletherearesomefederallaws
which affect real estate, the vast majority of statutory, case, and
regulatorylawisstate-based.Thus,it’simportantthatVermontpreprinted real estate purchase contract forms aren’t used in Montana.
In some cases, forms are also developed by local REALTOR®
associations. These forms are not for use by licensees who are not
REALTORS®orforusebythegeneralpublic.
•
•
DESCRIPTION
LegalDescriptionoftherealproperty.
•
StreetAddress.
•
Personal property included. Examples include appliances,
furniture,vehicles,etc.
Thetotalamountofmoneytobepaidtothesellerforthepropertyby
thebuyer.
•
Thepropertyissubjecttotheexistingrestrictionsimposed
by all government entities that have jurisdiction over the
property.
•
Forexample,ifapropertyiszonedresidential,thenabuyer
accepts this fact and refrains from building a commercial
manufacturingplantontheproperty.
•
Thesamefollowswithpropertiesthatexistinsubdivisions
with homeowner associations; there are existing
restrictionsthatcomewiththeproperty.Ifthebuyerwants
to purchase the property, the buyer must understand that
he is agreeing to all the restrictive covenants and rules of
theassociation.Thebuyerislikelytoalsoberequiredtobe
amemberoftheassociation.
Includesthefollowingdetails:
Depositheldinescrow.Explainshowmuchandwherethe
“binderdeposit”behelduntilclosing.
•
Additional escrow deposits. This is used only if the seller
requestsitandthebuyeragrees.
•
Explainstheamountofthepurchasepricetobepaidwitha
loan.
•
Describes the items of value to be given to the seller to
reflectthepurchasepriceifsomethingotherthancashwill
beused.Anexamplemightbegoldandsilvercoins.
•
OCCUPANCY
•
TIMEFORACCEPTANCEOFOFFER
Date by which the offer must be accepted or considered
void. Some states stipulate a specific number of days.
Others leave it up to the buyer to stipulate in the offer. Be
suretocheckyourownstateforthispotentialrequirement.
•
Thedateofcontract.Thisisalsocalled“effectivedate”asit
isthedatethatthecontractbecomesacceptedbyallparties
and is valid and in effect. This is usually the date that the
selleracknowledgesandacceptsabuyer’sformaloffer.
28
If this is a cash only transaction with no financing or loan,
thisisacknowledgedhere.
•
Ifthereisaloaninvolved,thenthedetailsoftheloanterms
will be explained here as well as the date by which the
buyerwillprovidethesellera“loanapproval.”
•
Assumption of existing mortgage. If the buyer agrees to
assumethemortgagethatexistsontheproperty,thenthis
•
Thissectionstatesthattypewrittenorhandwrittenchanges
to the contract shall take precedence over the original
printedversionsofthecontractintheeventofconflict
•
Forexample,ifthereisachangeofpriceandthebuyerand
sellersignapaperagreeingtothischange,thenthissigned
notereplacesthepriceoriginallyprintedonthecontractif
the paper includes language which incorporates the paper
properlyintotheoriginalcontractasanamendment.
ASSIGNABILITY
FINANCING
•
The seller agrees to provide the buyer occupancy to the
property at the time of closing. The buyer is taking
possessionofthepropertybyoccupyingtheproperty.
TYPEWRITTENORHANDWRITTENPROVISIONS
The final amount that must be brought by the buyer to
closing.Thisisthebalanceremainingafterpayingallbinder
andotherdepositstotheseller.
•
The agreed upon date that the buyer and seller will meet
and transfer the property ownership. This section also
explains when the contract becomes canceled if it’s not
closedontime.
RESTRICTIONS,EASEMENTS,LIMITATIONS
PURCHASEPRICE:
•
This section establishes how many days the seller has to
provideevidenceofcleartitleviaa“titlecommitment”and
who is paying for this expense of this title evidence -- the
buyerortheseller.
CLOSINGDATE
Parties: Explains specifically who is buying and who is selling the
property
•
Purchase money note and mortgage to seller. If the buyer
agrees to buy the property with seller-offered financing,
then this would be explained in this section and
documented further with additional riders and addenda
attached.
•
A contract provides a buyer with a right to buy a piece of
property; this right may be assigned to another party if
allowedbytheseller.
•
Thissectionoftherealestatecontractisimportantbecause
it will confirm if the contract can be assigned to another
partyorifassignmentofcontractisprohibited.
DISCLOSURES
Importantfactsaboutthepropertymustbedisclosedtoallparties:
•
Liens, special assessments, etc. Explain that the property
may be subject to pending liens, and if they are found,
explainwhoisresponsibletopayatclosing--thebuyeror
theseller.
processandtherequirementsofthebuyerinatransaction
thatrequiressellerfinancing.
•
A disclosure as to the presence of radon on the property
andtheoptionforthebuyertohavethisinspected.
•
This is a disclosure as to the seller’s knowledge of the
existenceofmoldontheproperty.Thebuyerisadvisedto
contactaprofessionalifthereisaconcern.
•
Survey-Explainsthebuyer’srighttoobtainasurveyforthe
property and the seller’s responsibility to provide access
forinspection.
•
Energy rating. The rating of the home from an insulation
andenergyefficiencystandpoint.
•
•
Lead-basedpaint.Thesellermustdisclosetheexistenceof
lead-based paint on the property if the home was built
before1978.
Wood-DestroyingOrganisms-Definesthetermandexplains
the buyer’s right to an inspection and time limits and the
responsibilityoftheselleriftheyarefoundontheproperty.
Example:termitesandcarpenterants.
•
IngressandEgress-Explainsthatthereissatisfactoryaccess
totheproperty.Example:ifthepropertyisinthemiddleof
the woods, a road may need to be created to access the
property.
•
Leases-Thesellermustprovidecopiesofallleasesexisting
on the property prior to closing. The buyer may consider
cancelingorkeepingtheleases;however,sinceleases“run
with the land,” the new owner cannot unilaterally cancel a
lease which still has a period of time remaining. The full
term of the lease and the tenant’s rights during this time
mustberespected.
•
Liens-This section confirms that the seller will furnish to
thebuyerbythetimeofclosinganaffidavitattestingtothe
absenceofliensorpotentialliensontheproperty.Allliens
which have attached to the property should be paid at the
closing.Iftheyarenotpaid,theywillfollowthepropertyto
thenewownerwhowillthenbecomeresponsiblefortheir
payment.
•
Place of closing-This section identifies the place of closing.
Generally, it would be in the county where the property
exists OR at the location of whoever is paying for title
insuranceORatthelocationselectedbytheseller.
•
Time-Asserts that “time is of the essence in this contract.”
This means that all time periods and deadlines must be
strictly observed. Weekends and holidays are excluded
frombeingspecifieddatesinthecontract.Forexample,the
contract may not be set to close on Sunday night or Good
Friday.
•
Closingdocuments-Thesellershallfurnishthedeed,billof
sale,etc.totransferthetitleofthepropertytothebuyerat
closingforaconsiderationreceived.
•
Expenses-This section explains who will pay for the
expensesrelatedtotheclosingofthetransaction.Example:
thesellerwillpayfordocumentstamps,thebuyerwillpay
for any fees related to financing and obtaining a survey or
propertyinspection.
•
Prorations; credits-Explains that taxes, assessments,
insurance, interest, etc. will be prorated through the day
before closing. Example: if the closing is set to occur on
January11,thentaxesfor10dayswillbepaidbytheseller
at closing. The prorated daily tax rate is the year’s taxes
dividedbythenumberofdaysinayear.
•
Special Assessment Liens-This section explains that any
existing liens are to be paid by the seller, and new liens
afterclosingaretobepaidbythebuyer.
•
Inspection, Repair, and Maintenance-In transactions that
arenot“asis,”thesellerwarrantsthatthepropertyisfree
from structural damage. For example, the seller is stating
that the roof does not leak and the foundation has no
knownissues.
•
Risk of Loss-Explains what happens if the property is
damagedbeforeclosing,andwhopaysforit--thebuyeror
29
•
Foreign person. If the seller is a foreign person, the seller
mustcomplywithaspeciallaw.
•
Homeowners’ association. This provision explains that the
buyer should not execute the contract without reading the
HOAdisclosure.Thiswouldcontainimportantinformation
suchasthehomeowner’sassociationduesandfees.
•
Propertytax.Thebuyeriswarnedthatheorsheshouldnot
rely on the seller’s current property taxes as these could
increaseovertime.
MAXIMUMREPAIRCOSTS
•
If the contract guarantees the home is free of “wooddestroying organisms” like termites and carpenter ants,
then the amount that the seller will be responsible for
payingislisted.
•
For “as is” contracts, the seller pays nothing to the buyer
and does not warrant the property in any way. However,
thisdoesnotpreventthebuyerfromconductingaproperty
inspection to determine the condition of the property and
to reject the contract if that condition is not acceptable.
Thus,an“asis”provisiondoesnotprohibittheinclusionof
ahomeinspectioncontingency.NOTE:The"asis"provision
in a contract can be interpreted differently from state to
state. Before relying on the "as is" statement in a contract,
besuretocheckwithalocalrealestateattorneytoseehow
itisinterpretedinyourstate.
HOMEWARRANTY
•
This paragraph explains if there is a home warranty
included and, if so, who will pay for it -- the buyer or the
seller.
RIDERS;ADDENDA;SPECIALCLAUSES
•
•
Anychangestotheagreementbecomepartofthecontract.
Thesellerandbuyermustsigntoauthorizeanychangesto
the contract in the form of amendment and/or special
clauses. Because of the Statute of Frauds, changes to the
contract,justliketheoriginalcontract,mustbeinwritingto
beenforceable.
For example, the buyer agrees to provide the seller with
access to the private lake once a year for fishing. This
special arrangement would have to be specifically written
intothecontract.
STANDARDSFORREALESTATETRANSACTIONS
Includesthestandardconcernsofarealestatetransactionsuchas:
•
Title Insurance-Explains when the buyer will receive an
insurabletitletothepropertyandwhatwillhappenifthere
aredefectsfound.
•
Purchase Money Mortgage; Security Agreement to SellerExplains the grace period in the event of default and the
buyer has no obligation to "perform" as would be the case in an
executorycontract.Besureyouknowwhichisthecaseinyourstate.
theseller.Ifthereisafireatthepropertytwonightsafter
signing the contract, it is stipulated who pays for what
damages and what rights the buyer and seller have in this
event.
•
Closing Procedure-Documents the process that will be
followedtotransferownershipfromthesellertothebuyer
atclosing.
•
Escrow-Identifies the “closing agent” and escrow closing
process involving a third party who will distribute the
proceedsofthesaletothesellerandrecordthetransaction
ofthepurchaseforthebuyer.
•
•
•
BARASSOCIATIONS,LAWYERS,ANDATTORNEYS
These groups have stated that only admitted attorneys may draft a
realestatesalescontract.
Asrealestateagentsandbrokersarenotattorneys,theyarewithin
theirrightsonlyto“fillintheblanks”ofastandardcontractform.
The lawyers and attorneys assert that only they can “draft” a legal
document which requires more than just filling in the blanks. They
define“drafting”asthedeterminationoftherightsandobligationsof
thepartiesinvolvedinacontract.Thiswork,astheyaffirm,canonly
becompletedbyalicensedattorney.
Contract non-recordable; persons bound; notice; facsimileExplainsifthecontractshouldorshouldnotberecordedin
publicrecords.Explainsthatpeoplehaveboundthemselves
bymakingthisagreementandthatacopyoftheagreement
shallbeconsideredanoriginal.
•
Other Agreements-Explains that no other agreement made
betweenbuyerandsellerwillbebindingunlessitiswritten
intothiscontract.Example:ifthebuyerandsellerareatthe
property one day prior to closing and have some casual
discussions about what to do about the pool, these
comments do not change the contract unless they are
formallywrittenintoit.
•
Butthequestionsremainastohowfaryou,asarealestatelicensee,
can go in helping your client complete the real estate purchase
contract. There is an ongoing debate between real estate
agents/brokers and attorneys regarding the practice of law when
completingthesecontracts.
Failure of Performance-This section explains what will
happen if the buyer fails to perform according to the
contract. Under these circumstances, the binder deposit
that will be kept by the seller as“liquidateddamages.”This
means that the buyer’s binder deposit (earnest
money/goodfaithmoney)ispaidtotheseller.
Conveyance-Explainsthatthesellershallconveyortransfer
marketable title to the real property specifically via a
warrantydeedorotherinstrument.
•
Contingencies are very useful for many aspects of the protection of
your client. One important way they can be used is by making the
contract contingent on your client’s attorney’s review and approval
withinacertainnumberofdaysaftercontractacceptance.
Attorney’s fees; costs-It is explained that in the event of a
disputeofthecontractwhichresultsinalawsuit,theparty
whichwinscancollectreasonableattorneyfees,costs,and
expensesfromthepartywhichloses.
•
•
Practice of Law
Thisdebateragesonandtakesdifferentformsineachstate.
In New Jersey, the Supreme Court committee on the Unauthorized
Practice of Law determined that it is not in the public interest for
non-lawyers to engage in the preparation of commercial real estate
sales contracts and leases.[New Jersey State Bar Association v. New
JerseyAssociationofRealtorBoards]
However, this ruling did not specify single-family homes or noncommercialpropertywhichmakesupthevastmajorityofrealestate
contracts.
A Supreme Court ruling in Arkansas set the precedent that a real
estateagentorbrokershould,amongstotherthings,neverchargea
feeforpreparingdocumentsandnevergiveadviceoropinionsasto
the legal rights of the parties.[Pope County Bar Association, Inc. v.
Suggs,274Ark.250,624S.W.2d828(1981)]
SellerDisclosure-Thesellerwarrantsthattherearenofacts
known that would have a negative material effect to the
property. For example: sink holes or hazardous waste on
the property. If they are known to the seller, they must be
disclosed.
In an older Arkansas Supreme Court ruling, in a case between the
state’sbarassociationandarealestatebroker[ArkansasBarAss'nv.
Block,-Ark.-,323S.W.2d912(1959)],thecourtruled,
Property Maintenance; Property access; Repair standards;
Assignment of Contracts and Warranties-Explains that the
seller will continue to maintain the property until closing
for normal wear and tear and provide insurance for
potential claims of damage to the property that is
considered “reasonably expected.” For example: an oceanfront condo seller is expected to maintain wind damage
insurance until closing due to the risk that a storm could
reasonablydamagethepropertybeforeclosing.
"Weholdthatthepreparationofanyoftheinstrumentshereincluded,
or any other instruments involving real property rights for others
eitherwithorwithoutpay...constitutesthepracticeoflaw.”
A similar result was found in New York. Section 484 of the Judicial
Lawsays,“nonaturalpersonshallaskorreceive,directlyorindirectly,
compensation for... preparing deeds, mortgages, assignments,
discharges, leases or any other instruments affecting real estate...
unless he has been regularly admitted to practice, as an attorney or
counselor..."
1031 Exchange-Explains the process of the IRS 1031
exchange, if applicable. This is the process of transferring
the proceeds of the sale of a property into the purchaseof
anotherpropertywithoutreceivingthefundsandtherefore
payingincometax.
Italsoprovidesthataviolationofthesesectionsisamisdemeanor.
In a precedent-setting case in 1978, the following was found by a
NewYorkjudge:
“It is for this reason that real estate brokers and agents must refrain
from inserting in a real estate purchase offer or counteroffer any
provision which requires the exercise of legal expertise. Thus it is not
properforsuchabrokertoundertaketodevisethedetailedtermsofa
purchase-money mortgage or other legal terms beyond the general
description of the subject property, the price and the mortgage to be
assumed or given. A real estate broker may readily protect himself
fromachargeofunlawfulpracticeoflawbyinsertinginthedocument
NOTE:Itisinterestingtonotethatinmoststates,thedocumentused
is a purchase contract that, after acceptance by the seller and
communication of acceptance back to the buyer, becomes an
"executory contract" (a contract under which both sides still have
important performance remaining). That contract has continuing
requirementsonbothparties.However,insomestates(Texasasan
example) the standard form is an "option agreement" in which the
earnest money deposit immediately belongs to the seller and the
30
counselbeobtainedwhentheinterestofanypartytothetransaction
requiresit.”
that it is subject to the approval of the respective attorneys for the
parties. Moreover, a real estate broker or agent who uses one of the
recommendedpurchaseofferforms...oronerecommendedbyajoint
committee of the bar association and realtors association of his local
county,whorefrainsfrominsertingprovisionsrequiringlegalexpertise
and who adheres to the guidelines agreed upon by the American Bar
AssociationandtheNationalAssociationofRealEstateBrokers,above
noted,hasnoneedtoworryabouttheproprietyofhisconductinsuch
transactions.” Duncan & Hill, supra, 62 AD2d at 701, 405 N.Y.S.2d at
345.
Sincerealestatebrokersandagentsarelicensedunderthestate,itis
importanttocheckifyourstatehasauniquesetofauthorized“fillin-the-blank” real estate contract forms and disclosures that are
required. This is why it’s important to obtain legal review and
consultaprofessionalwhenindoubt.
RealEstatePurchaseContract(Residential)–EntireContract
BelowisanexampleofthePurchaseContract–thisonefromFlorida.
Checkyourstate’swebsitefortheofficialdocumentforyourspecific
state.
In1996,NewYorkAttorneyGeneralDennisC.Vaccoissuedaformal
opiniononPreparationofPurchaseandSaleContractsbyRealEstate
Brokers.
Inithestated:
Contract for Sale and Purchase
“Thebrokersmustrefrain,evenwithrespecttothesesimplefill-in-theblankscontracts,fromprovidinglegaladvicetotheirclients.Normay
they discourage the parties from seeking advice from their attorneys.
Brokers may not add provisions to the standard fill-in-the-blanks
contracts unless they make the entire contract subject to and
conditioned upon the review and approval of each party’s attorney.
Brokersmayprovidepurchaseandsalecontracts,subjecttotheabove
conditions, only as an incident of the purchase and sale of real estate
andmaynot charge a separate fee for preparation of the contract or
share in the fees of attorneys for preparation or review of these
contracts.”
The link shows an example of a contract for sale and purchase
http://www.mckissock.com/vc5/VC/courses/2012/ContractForSale
Purchase.pdf This form is from the FloridaRealtors®. Please note
that this is just an example and that you should use only the forms
thatyouareauthorizedtouse.
Third-Party Financing Addendum
FollowingisanexampleofaFinancingAddendum.Checkyourstate
website for the official document specific to your state.
http://www.caryvalentine.com/Fast_Start_Assets/Sample_PURCHAS
E_CONTRACT.pdf
LICENSEDREALESTATEBROKERSANDAGENTS
Many people in these groups have started to prepare real estate
contractsusingtheirinterpretationofthisandotherrulings.
Loan Assumption Addendum
Only a few months after New York Attorney General Dennis C.
Vacco’sopinionwasissued,anarticlewaspublishedintheNewYork
Times in February of 1997 titled “Brokers Preparing Contracts” by
JayRomano.Inthisarticle,realestatebrokersadmittedtoproviding
sales contracts to their clients and encouraging them to have the
documents reviewed by an attorney before closing. They contend
thatifthereisaproblemwiththecontract,thenalawyercanmakea
changeorcancelthecontract,inwholeorpart,attheirleisure.This
is a very dangerous course that could result in a charge of the
unlicensed practice of law with possible civil and criminal penalties
andlicensesuspensionorrevocation.
Here is an example of aLoan Assumption Addendum- this one
happens to be from Texas. Check your state website to find the
officialdocumentforyourspecificstate. http://www.trec.state.tx.us/pdf/contracts/41-2.pdf
Seller Financing Addendum
HereisanexampleofaSellerFinancingAddendum–thisoneisused
in Texas. Check your state website to find the official document for
your specific state. http://www.trec.state.tx.us/pdf/contracts/266.pdf
The best course is to do what you do best – real estate sales and
service–andleavethepracticeoflawtotheattorneys!
Lead-Based Disclosure
The Contract --Fill-in-the-Blanks
Duetotherulingsbythecourts,thedocumentsusedtobuyandsell
realestatepropertyinacontractmustbeapprovedbyanattorney.
These approved forms are called "fill-in-the-blank” real estate
contracts.
Here is an example of aLead-Based Paint Disclosure Form. Check
your state website to find the official document for your specific
state.
http://www.michigan.gov/documents/landbank/lead_base_paint_di
sclosure_423990_7.pdf
This is due to the provision that only an attorney is licensed to
determine the rights and obligations of the parties signing the
contract. Therefore, brokers and agents are required to use “fill-inthe-blank” contracts or have original documents drawn up by an
attorney.
Miscellaneous Provisions
Herearesomeotherhelpfullinkstosampleforms:
Real estate brokers who are compliant with this law have obtained
approvalforthedocumentsthattheyuseandhavedistributedthese
approvedformstotheiragentsforusewiththeirclients.
http://realestate.utah.gov/forms/New_Blank_addendum.pdf
Professional organizations, including state and local REALTORS®
associations also provide legally authorized “fill-in-the-blank” forms
totheirmembers.TheCodeofEthicsandStandardsofPracticeofthe
NATIONAL ASSOCIATION OF REALTORS ® (Effective January 1,
2013)addressestheissuethisway:
Review
http://judicialtitle.com/pdf/OptionAgreementToPurchase.pdf
Inthischapter,wediscussedcommontermsrelatedtocontracts,the
formatofthecontract,andthenlookedatexamplesofcontracts,such
as the Contract for Sale and Purchase and the Seller Financing
Addendum.
“Article 13 REALTORS® shall not engage in activities that constitute
the unauthorized practice of law and shall recommend that legal
31
A New Look at Contract Law
~ Final Assessment Questions ~
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!!!!!!!
LISTING AGREEMENTS
Course Introduction
Thelistingagreementisthefirstcontractinwhatcanbealongprocesstothesaleandclosingofaproperty.Wewillexplorethemanyintricaciesof
thisagreementaswellassomecasestudiestohelpyoubetterunderstandlistingagreementsastheyareusedthroughoutyourrealestatecareer.
Therearemanyimportanttermsandconditionsstatedwithinalistingagreement,thiscoursewilldefinetheseaswellasnotetheimportanceof
usingthelatestversion.Bytheendofthecourseyouwillalsobemorefamiliarthenewlawsandhaveaccesstousefulresourcestogetfurtherin
yourprofessionalcareer.
WeencourageourcustomerstovisittheFAQssectionfoundherehttp://faqs.mckissock.com/forfurtherinformationregardingyoureducational
experiencewithMcKissock.Completewithstep-by-steptutorials,we’vedesigneditwithYOUinmind!
Learning Objectives
Uponcompletionofthiscourse,thestudentwillbeableto:
•
Identifytheinformationthatyoushouldgatherpriortocompletingalistingagreementandunderstandthebenefitsofhavingthis
•
ExplainthedifferencebetweenanExclusiveRighttoSellListingAgreement,anExclusiveAgencyListingAgreement,anOpenListing
Agreement,andaNetListing
•
DiscusselementsofatypicalExclusiveBuyer'sAgencyAgreementanddemonstratetheabilitytocompletetheform
•
Describetherelationshipofanaffiliatedlicenseewiththebrokerinalistingagreement
•
Explainwhenthesellermustbeprovidedacopyofthelistingagreement
•
Identifythreewaysalistingagreementcanbeterminated
•
Describesixenvironmentalfactorsthatmayrequiredisclosureinalistingagreement
•
DescribethemajorsectionsoftheResidentialSellerPropertyCondition
•
IdentifythesevencategoriesformingthebasisfordiscriminationundertheFairHousingLawandgiveapracticalexampleofwhyalisting
shouldberefusedundereachcategory
•
Explainwhatconstitutesfairhousingdiscriminationinadvertisingandaccuratelycomposetwoadvertisementsdemonstrating
compliance
•
Explainhowrealestatecommissionsaredeterminedandknowhowtocalculatecommissionsandpro-rations
•
Describewhoisentitledtoinitiateanactionforpaymentofacommissionunderalistingagreement
information
Table of Contents
•
Chapter1:AllAboutCreditReports
•
Chapter2:CreditScores
•
Chapter3:UnderstandingtheFullCostofHomeOwnership
•
Chapter4:FinalExam
33
CHAPTER 1: GETTING INTO A
LISTING AGREEMENT
o
ExclusiveBuyerAgencyAgreement
o
ExclusiveAgencyBuyerAgencyAgreement
LearningObjectives
•
Identify the information that you should gather prior to
completingalistingagreementandunderstandthebenefits
ofhavingthisinformation
•
Explain the difference between an Exclusive Right to Sell
ListingAgreement,anExclusiveAgencyListingAgreement,
anOpenListingAgreement,andaNetListing
•
Discuss elements of a typical Exclusive Buyer's Agency
Agreement and demonstrate the ability to complete the
form
Overview
•
•
Information That You Should Gather Prior to
CompletingaListingAgreement
o
PropertyProfileDetailsReport
o
Information about Comparable
ComparativeMarketAnalysis(CMA)
o
PhotosoftheProperty
o
InformationabouttheNeighborhood
o
Seller'sPropertyDisclosureStatement
o
InformationontheOccupants
o
ShowingoftheProperty
o
Reason(s) Why the Seller(s) is/are Selling the
Property
o
TimingforSellingtheProperty
-
Information That You Should Gather Prior to
Completing a Listing Agreement
Itishelpfultogainasmuchinformationasyoucanaboutaproperty
priortolistingit.Herearesomegeneralitems:
ExclusiveRighttoSellListingAgreement
o
•
Sales
LegalDescriptionanditsImportance
TypesofListingAgreements
PropertyProfileDetailsReport
•
Information About Comparable Sales -- Comparative
MarketAnalysis(CMA)
•
PhotosoftheProperty
•
InformationAbouttheNeighborhood
•
Seller's Property Disclosure Statement (required in some
states)
o
ExclusiveRighttoSellListingAgreement
o
ExclusiveAgencyListingAgreement
•
InformationontheOccupants
o
OpenListingAgreement
•
ShowingoftheProperty
o
NetListing
•
Reason(s)WhytheSeller(s)is/areSellingtheProperty
•
Buyer'sAgreements
•
TimingforSellingtheProperty
PhotosoftheProperty
Photos of the property can be used for flyers and promotional
literatureofthepropertyandcanalsobesubmittedtotheMLStobe
included with the listing to be posted to their site. It is advisable to
plan ahead when considering when to take photos. The following
shouldbeconsiderations:
PropertyProfileDetailsReport
Apropertyprofilecanbeobtainedfromcountytaxrecordsorfroma
titlecompany.Theycansupplythefollowinginformation:
•
Namesandaddressesoftheowners
•
Ifthepropertyisowner-occupied
•
Locationinformation
•
TaxInformation
•
Characteristicsofthepropertyandthedwelling
•
SalesHistory
•
MortgageHistory
•
PlatMapsoftheproperty
Walkthroughthehousepriortoshootingthephotographsandgeta
visualplanofwhatyouwouldliketocapture.
Daylight -- The exterior of a home will look better on a sunny day
rather than a gloomy day, but be careful of shadows on sunny days
(such as a shadow from a big tree). The home will appear more
attractiveonaphototakenonasunnyday.
Interiorlighting--Makesurethatthereissufficientlightorthatyou
haveaflashonthecamera.
Back up as far as you can into a room to make the room appear as
largeaspossible.
Stage the rooms being photographed (remove clutter and perhaps
addavaseoffreshflowers).Cluttercanmakearoomappearmessy
andsmaller.
Information about Comparable Sales - Comparative Market
Analysis(CMA)
Performing a Comparative Market Analysis allows a licensee to
obtainapricerangefortheproperty.
Photograph special features that would enhance the perception of
thehouse.
WewilldiscussCMAsingreaterdetailinthe"EvaluatingandPricing
Property"sectionofthiscourse.
Avoidnegative areas, such as torn vinyl flooring in a kitchen, that
wouldmakethepropertyappearlessdesirable.
34
•
InformationabouttheNeighborhood
It is helpful to potential buyers and brokers who view the home to
haveinformationontheneighborhood.Youmaywanttogatherthis
information ahead of time and ask the seller(s) for assistance in
compilingthisdata.Considerleavingabookletofinformationinthe
home near where the flyers of the property are located. Helpful
informationmightinclude:
•
Schools
•
Parksandrecreationalfacilities
•
Distancetoshoppingandhealthcare
•
Proximitytobuslinesorotherpublictransportation
•
Areaattractions
•
Shoppingcenters
•
Drivingdirections
•
Instructionsonhowtousethesecuritysystem
Reason(s)WhytheSeller(s)is/areSellingtheProperty
To fully understand the motivation of the seller(s) and to best
represent them, you will want to know their reasons for selling. As
their representative, ask many questions about their reasons for
sellingsothatyoucanfullyunderstandtheiruniquesituation.
TimingforSellingtheProperty
Thetimingforsellingcanbeextremelyimportantandyoumaywant
to make sure that the coordination of the closing of a property is
tailored to your seller(s)' circumstances. This is your agency
responsibilitytotheseller.Considersomeofthefollowingsituations
inrelationtotiming:
Seller'sPropertyDisclosureStatement
Have the seller(s) fill out a seller property disclosure statement
before you take a listing or market the property. If there are any
negative issues disclosed on this statement, you will be able to
discusstheseitemswiththeseller(s)priortotakingthelisting.Some
statesrequireapropertydisclosurestatement.
InformationontheOccupants
•
Theirnexthome'sclosingdate
•
Theendoftheschoolyeariftheyhavechildren
•
Scheduledjobtransfer
•
Financialsituation
•
Healthorotheruniquesituations
Exclusive Right to Sell Listing Agreement
Youwillwanttohaveinformationonwhoisoccupyingtheproperty
foravarietyofreasons.
In this section, we will be completing an Exclusive Right to Sell
Listing Agreement. In section #3, we will be discussing different
typesofListingAgreements.Listingagreementformswillvaryfrom
statetostateandinparticularareas.Thefollowingaresometypical
itemsonaListingAgreement:
Let'slookatsomecasestudiesasexamples:
CaseStudy#1
TheAnderson'spropertywaslistedonJuly1st.Itisbeingoccupied
bytenantswhohavealeaseuntilSeptember1st.Thisinformationis
veryimportant,especiallyifthepropertywastobepurchasedbyan
ownerwhodesiredtooccupythepropertyuponclosing.Thetenants
willalsoneedtobenotifiedaboutthesale,andpermissionneedsto
beobtainedfromthetenantsforshowingtheproperty.
Untilmidnightof:Insertthedateforthedurationofthelisting,also
knownastheexpirationdate
CaseStudy#2
Commonlyknownas:Insertthecommonstreetaddress
The Barkers have listed their property with Lola of XYZ Realty. Mr.
Barker works a night shift and sleeps until 10:30am. Lola can put
restrictions on her listing for showing times to accommodate Mr.
Barker'sschedule.
Cityof:Insertthenameofthecity
Zip:Insertthezipcode
CaseStudy#3
Tobelistedat:Insertthelistprice
TheTaylorshaveadogthatdoesnotlikeitwhenstrangersenterthe
home. This could be a safety issue for agents and potential buyers
touringthehomeusingastandardlockbox.TheTaylor'sbrokerwill
want to know when one of the occupants is home so that he or she
can restrain the dog. The broker will want to put these special
showinginstructionsinthelisting.
Attached legal description:Write inAttached as Exhibit "A."We
willgointofurtherdetailaboutlegaldescriptionslaterinthissection
TheSeller:Insertthenameofallsellers
Herebygrantsto:Nameofthebrokerage,notthebroker
Countyof:Insertthenameofthecounty
Agency/DualAgency:Sellerauthorizesbrokertoappoint:Insert
thelistingbroker'sname
ShowingoftheProperty
Commission:Insert thetotalamount of commission charged as a
percentageofthesalespriceOR
As our three prior case studies show, there are certain
considerationsaboutshowingpropertywhichmightinclude:
Commission:Insert thetotalamount of commission charged as a
fixeddollaramount
•
Permissionforalockbox
•
Scheduleoftheoccupants
Cooperating Broker Commission:Insert the commission that you
areofferingthesellingoffice(SOC)asapercentageofthesalesprice.
Thisisthemostcommon.
•
Permissionandnoticetotenantsofthelistingaswellasto
showtheproperty
Cooperating Broker Commission:Insert the commission that you
areofferingthesellingoffice(SOC)asafixeddollaramount.
•
Hazardssuchasaslipperydeckorloosehandrail
DateoftheAgreement:Enterthedateofthelistingagreement
•
Pets in the home (such as instructions not to let the cat
outdoorsoranunfriendlydog)
AretheundersignedthesoleOwners?:Checkthe"yes"boxorthe
"no"box
•
Noticetooccupantsofshowings
Seller:Haveallsellersinitialhere
35
Date:Datethattheseller(s)is(are)signingthelistingagreement
•
Aretheundersignedthesoleowners?:Checkappropriateboxyes
orno.
They may not get reimbursed for their efforts even if the
homesells
•
They may not be able to re-coup their expenditures for
marketingandadvertisingevenifthehomesells
•
There is a possibility that there could be some confusion
overwhoprocuredthepurchaser
•
If there were multiple offers, and one of those buyers was
procured by the seller, the seller may favor that offer over
otherstoavoidpayingacommission
Broker(Company):Insertthenameofthebrokerage
Seller(s):Fullsignaturesofallsellers
By:Theprintednameandsignatureofthebroker(agent)
LegalDescriptionanditsImportance
A legal description is one of the most important components of the
listing. Without thefulllegal description, the listing agreement is
voidable;thismeansthateitherpartycancancelthecontract.Please
make note that thelegal descriptionof the property, which can be
obtained from the last deed and supplied by the title company,
isnotthesameasthestreetorcommonaddress.
OpenListingAgreement
WithanOpenListingAgreement,thesellerisobligatedtopayonlyif
thebrokerbringshimorheraready,willing,andablebuyerandthe
broker is the procuring cause. To be a procuring cause, the broker
must have been primarily responsible for bringing the parties
together. The seller is free to grant listings simultaneously to
multiple brokers. Because of this, it is considered a non-exclusive
listing. Only the broker who procures the buyer gets paid a
commission.
Legal descriptions can be described using the plat (lot and block
method), metes and bounds measurements, and a government
survey.
Hereisanexampleofacorrectfulllegaldescriptionbyplatmethod:
Anopenlistingisconsideredaunilateralcontractbecausetheseller
haspromisedtopayacommissionifthebrokerprocuresabuyer,but
thebrokerisnotcontractuallyliabletodoso.
Exhibit"A"LegalDescription
TheGrantorPaulS.PostandMaryB.Post,husbandandwife,
For and in consideration of TEN DOLLARS AND OTHER GOOD AND
VALUABLE CONSIDERATION in hand paid, conveys and warrants
toPeterD.SandersandKimH.Sanders
NetListingAgreement
InaNetListingAgreement,thesellerspecifiestheamountthatheor
shewouldliketoreceivefromnetproceedsfromthesale.Thebroker
isallowedtokeep,ascompensation,anyamountoverandabovethe
netproceeds.Pleasenotethatbecauseanetlistingdoesnotspecify
the amount of compensation due the broker, net listing agreements
maybeillegalinmanystates.
The following described real estate situated in the county
ofSNOHOMISH,StateofWashington
LOT 14, HAYWOOD HILLS, ACCORDING TO THE PLAT THEREOF
RECORDED ON VOLUME 32 OF PLATS, PAGES(S) 121-123,
INCLUSIVE RECORDS OF SNOHOMISH COUNTY, WASHINGTON.
SITUATED IN THE COUNTY OF SNOHOMISH, STATE OF
WASHINGTON
Buyer’s Agreements
ExclusiveBuyerAgencyAgreement
Types of Listing Agreements
In anExclusive Buyer Agency Agreement, the buyer agrees to pay a
buyer'sbrokeracommissionwhenapropertyispurchased,(usually
in a specific geographical area). Unless otherwise specified in the
agreement,thebuyerowesacommissiontothebuyer'sbrokereven
if the buyer located the property. The buyer can also state that the
commissionistobepaidonlybytheseller.
Pleasenotethatthenamesoftheselistingagreementsmayvaryfrom
statetostate.
Inmoststates,therearefourrequirementsforalistingagreementto
beenforceable.Theyare:
•
Thelistingmustbeinwriting
•
Thelistingmustbesignedbythelicenseeandtheseller(s)
•
Thelistingmustidentifythepropertytobesold
•
Thelistingmuststatethecompensationforthebrokerand
apromisetopaythebroker
ExclusiveAgencyBuyerAgencyAgreement
In anExclusive Agency Buyer Agency Agreement, the buyer is
obligated to pay the broker only if a property is purchasedif the
brokerdirectlyorindirectlybroughtthepropertytotheattentionof
the buyer.The buyer can also state that only the seller pay the
commission.Ifthebuyerlocatestheproperty,thenthebuyerisnot
obligatedtopaythecommission.
ExclusiveRighttoSellListingAgreement
Summary
In anExclusive Right to Sell Listing Agreement,in most states, the
listing broker earns a listing office commission no matter who
procures a purchaser. If a broker wants to be guaranteed to earn a
listingofficecommission,nomatterwhoprocuresthebuyer,thenan
ExclusiveRighttoSellListingAgreementshouldbeused.
Inthischapter,webeganbylookingattheinformationthatyouneed
to gather before you complete a listing agreement and why it is
importanttohavethisinformation.WeexaminedanExclusiveRight
toSellListingAgreementandthemajorelementsofthatdocument.
WeoutlinedthedifferencebetweenanExclusiveRighttoSellListing
Agreement,anExclusiveAgencyListingAgreement,anOpenListing
Agreement, and a Net Listing Agreement. We then learned how to
draftappropriatelistingagreementclausesandfurtherlearnedthat
net listings are illegal in some states. We looked at some different
listing agreement types and the key clauses related to
representation,rights,responsibilities,termination,andcommission
ontheagreements.
ExclusiveAgencyListingAgreement
With anExclusive Agency Listing Agreement, a listing broker
doesnotearn a listing office commission if the seller procures a
buyer.
Ifabrokeriswillingtoforegoalistingofficecommission,whenthe
sellerprocuresabuyer,thenanExclusiveAgencyListingAgreement
shouldbeusedasthecontractbetweenthebrokerandtheseller.
Manylistingbrokerswillnotenterintoalistingagreementusingan
ExclusiveAgencyListingAgreementforthefollowingreasons:
36
CHAPTER 2: WHAT CAN AND
CANNOT BE DONE?
Informationonwhoholdstitlecanbeobtainedby:
Overview
Thetaxrecordsfromthetaxassessor'soffice.
•
The Relationship of an Affiliated Licensee with the
BrokerinaListing
•
Methods of Determining Title and Some Less Familiar
WaystoHoldTitle
•
o
Partnership
o
TenancyinCommon
The last recorded deed which can be obtained through a title
company.
A preliminary title report if one has been ordered, again available
throughatitlecompany.
Therearemanywaysinwhichpeoplecanholdtitletorealproperty.
Itiscalledtitlevesting.Whilethisvariesfromstatetostate,hereare
someofthemorecommonways:
CommonwaysofholdingtitleareSoleOwnership,JointTenancy,and
Community Property (for married persons only). Be sure to check
withyourindividualstateontitlevesting.
Let'sexploresomeother,lessfamiliar,waysofholdingtitleinmost
states.
AvoidingDualAgencyWhenContactedAboutaListing
o
Partnership
DualAgentDefinition
•
When Do You Provide the Seller with a Copy of the
ListingAgreement?
•
Who Has the Authority to Sign, Modify, or Cancel a
ListingAgreement?
o
SigningtheListingAgreement
o
ModifyingandCancelingtheListingAgreement
•
WaysinWhichaListingMaybeTerminated
o
MutualConsentofBothParties
o
ConditionalReleaseofListing
o
ReleaseofListingthatisUnconditional
o
DeathofaSeller
o
ExpirationofaListing
This form of vesting may be between related or unrelated persons.
The partnership holds the title. The partnership agreement sets the
parameters for use and disposition of property. The partnership
interest of the individual, in the event of his or her death, passes to
hisorherdesignatedheir(s).
TenancyinCommon
This form of vesting may be held by any number of persons.
Ownership can be divided into any number of interests, equal or
unequal.Theindividualco-ownersdonotneedtheconsentofothers
to use or dispose of their individual interest. The individuals'
interest, in the event of their deaths, passes to their designated
heir(s)throughprobate.
Let'slookatanexamplewhereholdingtitleasTenancyinCommon
wouldmakesense:
CaseStudy
Jane, Barbara, Susan, and Annette wish to purchase a property.
Annette has twice the funds available for the purchase than Jane,
Barbara, or Susan. Because Annette is investing twice the dollar
amount than that of the others, she would like to have a greater
interest in the property. Tenancy in Common vesting will allow
Annette to have a greater interest in the property since ownership
sharesmaybeequalorunequal.
LearningObjectives
•
Describe the relationship of an affiliated licensee with the
brokerinalistingagreement
•
Explain when the seller must be provided a copy of the
listingagreement
•
Identifythreewaysalistingagreementcanbeterminated
The Relationship of an Affiliated Licensee with the
Broker in a Listing
Methods of Determining Title and Some Less
Familiar Ways to Hold Title
Alicenseeisanagentforhisorherdesignatedbroker.Asanagent,
thelicenseemayenterintoalistingagreementwithaselleronbehalf
of the designated broker. The designated broker does not need to
signthelistingagreementinmoststates.Generally,thelicenseemay
alsomodifymostofthetermsofthelistingagreementwiththeseller,
without the broker's signature. Listing cancellations, conditional
releaseoflistings,andchangesinthesellingofficecommissionthatis
offered to the buyer's broker usuallyrequire a designated broker's
signature.
The designated broker or brokerage owns the listing. Should the
licenseeleavethebrokerage,thelistingbelongstothebroker.
The broker also has a duty to supervise the licensee and is
responsibleforthelicensee'sconduct.
It is important to determine who has the title to property for many
reasons. One of the most important reasons is to make sure that all
ownershaveconsentedtoandsignedthelistingagreement.
Let'slookatanexampleofanagentwhoistransferringhislicenseto
anotherbrokerage:
Jerry,withXYZRealty,hasalistingwiththeBrowns.Jerryisleaving
XYZ Realty and joining ABC Realty, where his friend Robert works.
JerrywantstotaketheBrown'slistingwithhimtoABCRealty,since
37
representinghimorher,youshouldmakeitclearassoonaspossible
that you are representing the seller. If he or she does not have a
broker, the chance of undisclosed dual agency is greater. It is
imperativethatyoustatethatyourepresenttheseller.
hehasspentalotoftimeonthelistingandincurredahugeamount
ofmarketingandadvertisingcosts.CanJerryautomaticallytakethe
listingtohisnewbrokerage,ABCRealty?
Usuallynot;onlywiththepermissionofhisdesignatedbrokeratXYZ
Realty.Furthermore, if XYZ Realty decides to keep the listing, the
brokerage may be under no obligation to reimburse Jerry for the
time or expenses that he incurred with the Brown's listing unless
otherwise specified in an independent contractor agreement. This
should be addressed in the independent contractor agreement
betweenthebrokerageandthelicenseeatthetimeofhire.
Basically,youhavethreechoicesonhowtohandleasituationwhere
thebuyerhasnorepresentation:
Avoiding Dual Agency When Contacted About a
Listing
•
Dualagency(ifyourstatelawsandbrokerageallowit)
•
Referring the buyer to another agent who can represent
himorher
•
Represent the seller and have the buyer represent himself
orherself
This choice should be made early on and in the first conversation.
You should explain to the buyer that you represent the seller, and
thatifthebuyerwouldalsolikeyoutorepresenthimorher,thenit
wouldbeadualagencysituationandallpartieswouldneedtoagree
tothisinwriting.
DualAgentDefinition
Another choice is to simply state that you represent the seller and
offer to refer the buyer to another broker who could represent him
orher.
If you choose to represent the seller and the buyer will be
representinghimselforherself,besuretospecify,inwriting,inthe
contract that the "buyer understands that the broker writing the
offer represents the seller and that the buyer is advised to seek
independentlegalcounsel."Thismakesitcleartothebuyerthatyou
arerepresentingthesellersolelyandthatheorshehasbeenadvised
toseeklegalcounsel.
Dualagencyoccurswhenabrokerisrepresentingboththesellerand
the buyer in the same real estate transaction. Since the broker has
promised a duty of confidentiality, loyalty, full disclosure, and
dedicationtopurposetobothpartiesatthesametime,itisnecessary
tolimitthesedutiesinthissituation,ifbothpartiesagree.
When Do You Provide the Seller with a Copy of the
Listing Agreement?
Thedualagencyrelationshipmayhavethefollowinglimitations:
•
The broker must deal with the buyer and the seller
impartially
•
The broker will have the duty of disclosure to both the
buyerandtheseller
•
Thebrokerwillnotdisclosepersonalinformationaboutthe
buyerorthesellerunlessauthorizedtodosoinwritingby
theparties
•
Thebrokerwillnotdisclosewhatthebuyeriswillingtopay
or the terms that he or she will agree to, and will not
disclosewhattheselleriswillingtoacceptorthetermsthat
heorshewillagreeto
•
Thebrokerwillnotdisclosethemotivationofthebuyeror
thesellerunlessauthorizedtodosoinwriting
Asellermustbeprovidedacopyofthelistingagreementrightafter
he or she has signed the agreement. It is the broker's responsibility
to provide the seller with a copy of the agreement. If the signing is
done in an office or a home where there is a copy machine, then
copies are easily obtainable. However, if there is not a copier
available,therearesomeotheroptions.
Firstly, if available, a broker can use preprinted forms which are
carbonless duplicate paper and produce a duplicate copy
immediately.Theadvantageofthisisthatthecopyiseasilyobtained.
Thedisadvantageofthesecopiesisthattheydonotholdupwelland
can easily fade over time, especially when exposed to sunlight.
Anotherdisadvantageofusingtheseformsisthatyoumaynothave
obtainedthelatestrevisionofaformwhenusingyouroldinventory
offormsortheoldinventoryatyourbrokerage.Thebestwaytobe
surethatyouareusingthelatestrevisionofaformistoobtainthese
formsfromyourlocalMLSonlineifavailable.
Note: If your state allows dual agency, usually the broker must get
approval,inwriting,fromboththebuyerandthesellertobeintherole
ofadualagent.
AnothermethodofdeliveringtimelycopiesoftheListingAgreement
totheselleristohavehimorhersigntwodifferentcopies(onefor
himself or herself and one for the agent). The danger of using this
procedureisthatthecopiesmustmatchexactly.Ifthetwocopiesdo
not match exactly, there could be a myriad of legal ramifications
involvedinthis.Thismethodisnotrecommended.
Whenyouhavealisting,itmaybecommonthatprospectivebuyers
may contact you. This may arise from a sign call where they saw a
"For Sale" sign on a property, or from any other means that you
mightusetopromoteaproperty.Otherexamplesmightbeavisitor
to an open house or a potential buyer who contacts you from a
website.
Who Has the Authority to Sign, Modify, or Cancel a
Listing Agreement?
It is very important that you not place yourself in the role of
anundisclosed dual agentwhen contacted about a property.
Rememberthatasthelistingbroker,yourepresenttheseller.
SigningtheListingAgreement
Checkwithyourindividualstatelawsandyourbrokerageonhowto
handledualagency.
The listing agreement is a contract between the seller and the
brokerage.Allownersofapropertymustsignthelistingagreement.
A licensee in most states is usually authorized to sign the listing
agreementforhisorherbroker.Thelistingagreementdoesnotneed
tobepersonallysignedbythedesignatedbroker,inmoststates.
When contacted by a prospective purchaser, one of the first
questionsthatshouldbeaskedofhimorherisifheorsheisbeing
represented by another broker. If he or she has a broker who is
38
At the end of the term of the listing, called the expiration date, the
listingexpiresandis,ineffect,cancelled.
ModifyingandCancelingtheListingAgreement
Modifications to the listing agreement, after it is originally signed,
canbemadeusingaStatusChangeInputSheetoranamendment.
Note:Thereissomeverbiageinalistingagreementwhichcouldcause
acommissiontobepaidaftertheexpirationdate.
Abrokershouldalwaysobtaintheinitialsanddatesfromallsellers
onallchanges,andthelicenseeshouldalsoinitialanddatetheform.
Summary
Somemodificationsthatrequiretheseller'ssignatureare:
•
Pricechanges
•
Extensionofexpirationdateofthelistingagreement
•
Temporarilyoff-market
•
Contingentonthepurchaser'shomeselling
•
Salependingwithback-upsrequired
•
Cancellationoflisting
•
Changestothecommentsfields
Inthischapter,welookedattherelationshipofanaffiliatedlicensee
with the broker in a listing agreement. We then identified three
methods of determining who has the title to property if you should
be asked to list the property, and two less familiar ways of holding
title. We also explored the different options a listing broker has,
when contacted by a prospective buyer, in order to avoid agency
conflicts. We went over the steps that should be taken to guard
against dual agency. We also defined the time frame for when the
sellermustbeprovidedacopyofthelistingagreement,andalsowho
has the authority to sign, modify, or cancel a listing agreement.
Lastly, we discussed the three ways a listing agreement can be
terminated.
Some modifications that usuallyrequire the designated broker's
signatureare:
•
Cancellationoflisting
•
Changes in the selling office commission that is being
offered
•
Salefailedrelease
CHAPTER 3: WHAT ROLE
DOES THE ENVIRONMENT
PLAY?
Care must be taken that the changes be input into the Multiple
ListingService(MLS)toaccuratelyreflectthedesiredchanges.Some
licensees have listing input privileges granted by the MLS and are
abletomodifythelistingthemselves.Thoselicenseeswithoutlisting
inputprivilegesmustsendthechangeformtotheMLSandtheMLS
willinputtherequestedchanges.Ineithercase,itisimportanttoedit
themodificationsandcheckforaccuracy.
Overview
•
Ways in Which a Listing May be Terminated
Alistingmaybeterminatedbymanymeans.Thefollowingaresome
ways which listings can be terminated that are worth exploring.
Pleasefamiliarizeyourselfwiththedetailsinyourparticularstate.
MutualConsentofBothParties
In this situation, both parties agree to terminate the listing. The
listingmaybeterminatedwithorwithoutconditions.
SixEnvironmentalFactorsThatMayRequireDisclosure
inaListingAgreement
o
DrainageProblemsontheProperty
o
IfthePropertyContainsLandFill
o
If There is Any Material Damage to the Property
From Fire, Wind, Floods, Beach Movements,
Earthquake,ExpansiveSoils,orLandslides
o
If There are Shorelines, Wetlands, Floodplains, or
CriticalAreasontheProperty
o
If the Property Has Soil or Groundwater
Contamination
o
If There Are Radio Towers in the Area That May
CauseInterferencewithTelephoneReception
ConditionalReleaseofListing
The Conditional Release of Listing is another common contract that
residential agents use. In essence, itrescindsthe listing agreement
with the condition that the seller will still pay the broker a
commission if a future buyer purchases the property having
identifiedthepropertythroughmeansofthebroker'sadvertisingor
showingforaspecifiedamountoftime.
•
ResidentialSellerPropertyDisclosureStatement
o
WhatisaSeller'sPropertyDisclosureStatement?
o
What Type of Transactions and Transfers Does It
ApplyTo?
Therearesituationswhereboththebrokerageandtheselleragreeto
theunconditionalreleaseofthelisting.
o
Title
o
SellerIs/IsNotOccupyingtheProperty
DeathofaSeller
o
SystemsandFixtures
Intheeventofthedeathofthesellerduringalistingagreement,the
agreement is cancelled in most states. If there was more than one
seller, the surviving seller would be required to enter into a new
listingagreementwiththebroker,inmoststates.
o
Homeowners'Association/CommonInterests
o
AdverseEnvironmentalFactors
Note: A broker cannot cancel a listing without his or her broker's
signatureandtheseller'ssignature,inmoststates.
ReleaseofListingthatisUnconditional
ExpirationofaListing
39
Learning Objectives
•
Describe six environmental factors that may require
disclosureinalistingagreement
•
Describe the major sections of the Residential Seller
PropertyCondition
Soilissuessuchaserosionandlandslides
•
Excessivepoolsoractualfloodingofwater
•
Neighboring properties that may be receiving the excess
waterrunoff
•
Wasthelandcompactedproperlyafterthefillwasbrought
in?
•
Ifthefilldecomposes,willitcausesettling?
If There Are Radio Towers in the Area That May Cause
InterferencewithTelephoneReception
Radio towers and cell phone towers can interfere with telephone
reception. This is important to know for regular telephone usage,
computerusage,andfacsimiletransmission.
Residential Seller Property Disclosure Statement
WhatisaSeller'sPropertyDisclosureStatement?
If There is Any Material Damage to the Property From Fire,
Wind,Floods,BeachMovements,Earthquake,ExpansiveSoils,or
Landslides
The sellers provide the purchasers with a disclosure statement
regarding material facts or material defects about a property. This
usually applies to real estate purchases and also some property
transfers.Thisinformationisbasedontheseller'sactualknowledge
of the property when completing the form. Only the seller of the
propertycancompletethestatement.Itisimportanttonotethatreal
estate brokers or any other third party are prohibited from
completingthestatementforthesellersinmoststates.
All of these issues can be of extreme importance in the following
arenas:
•
Soil issues from flooding that relate to the stability of the
foundationofthehome
•
Damagefromfiretoahome'sstructuralmembersthathas
beencoveredoverwithfinishingmaterials
•
Earthquake movement which could have caused major
damagetothestructureorthesurroundingsoil
•
Floods which may have caused erosion on a hillside or
aroundafoundation
Some states have separate forms for Improved Land and
UnimprovedLand(VacantLand).
While the seller is responsible for completing the form, it is
important to note that there is usually liability for the licensee as
well. The licensee, in most states, is responsible for what he or she
knows or should have known. A licensee may not fill out a Seller's
DisclosureStatementfortheseller.
Any information that a seller can relate to a buyer on any of these
topicswouldbecrucial.Itwouldalsogivethebuyeranopportunity
tohireaprofessionalexpertintheseareastodeterminetheseverity
oftheproblem.
Some of the items the seller may be asked to disclose on the
statementare:
IfThereareShorelines,Wetlands,Floodplains,orCriticalAreas
ontheProperty
Wetlands are an important issue in many states. Each area of land
that is designated as a wetland may serve a different function, but
mayincludesomeofthefollowing:
40
•
FloodControl
•
GroundWaterRecharge
•
Waterfiltrationandpurification
•
ErosionControl
ResearchandEducation
ThecornerlotwheretheSmith'shomeislocatedwasthesiteofagas
station over 30 years ago. During the years as a gas station, oil had
leaked into the soil causing contamination to the soil and the
drinking water. The developer of the property may have not
discloseditspriorusetotheBrownswhopurchasedthepropertyas
newconstruction.TheBrownsthensoldittotheSanderswhothen
soldittotheSmiths.Theliabilityfortheclean-upmayrestwiththe
developer,theBrowns,theSanders,andtheSmithsdependingonthe
disclosuresinvolved.
Landfillcanposesomeinterestingissuesandquestionssuchas:
Wasthelandfilledwithanyhazardoussubstances?
•
Example:
IfthePropertyContainsLandFill
•
Recreation
Soilorgroundwatercontaminationmayhavebeencausedbyaprior
use of the property, such as for commercial or industrial purposes.
Withthistypeofcontamination,costforclean-upandliabilitycould
possiblygobackthroughthechainoftitle.
Drainage issues are of particular issue since they can affect
numerous aspects of a property; and while the following list is
certainly not exhaustive, it provides some areas that might be
negativelyaffectedbydrainageissues.
•
•
IfthePropertyHasSoilorGroundwaterContamination
DrainageProblemsontheProperty
Thebasement,crawlspace,orfoundationofthestructure
Wildlifehabitat
The identification of wetlands on a property is crucial and can
possiblypreventfuturedevelopment.
Six Environmental Factors That May Require
Disclosure in a Listing Agreement
•
•
•
Environmentalinformation,suchassoilexpansion,erosion,
orsettlement
•
Open wells, mine shafts or tunnels, and noise from
surrounding areas including airports or traffic, plus odors
orotherissues
•
Past or present asbestos, lead-based paint, radon,
pesticides, underground storage tanks, or fuel/chemical
storage
•
Sewerwasteandwatertreatmentandutilities,whetherthe
property currently receives listed utilities, including water
sources and information on drinking water along with the
nameoftheutilities'provider
•
•
component of the entire system. Using the term "system" will
encompass a broader area and provide greater protection for your
buyer.
Building and safety information including structural
integrityoftheproperty,anoticeforthebuyertoverifythe
conditionoftheroof,woodinfestation,treatmenthistoryof
theproperty--includingnameoftreatmentprovider--for
eliminatingwood-destroyingorganisms
Structural
This section deals with any structural defects to the property.
Questionspertainingtotheageofthestructure,remodeling,permits,
settling,andstructuraldefectsareasked.
Heating, cooling, plumbing, and electrical information,
including swimming pools, spas, hot tubs, saunas or other
features on the property and whether they have had any
problems
•
Scorpions, rabid animals, bee swarms, rodents, owls, or
reptilesthathaveeverbeenpresentontheproperty
•
Information about any work or improvements to the
property, permits obtained for that work, and other
miscellaneousitems
Note:Ifthereisastructuraldefectthatisnotlistedinthissection,the
sellerisstillobligatedtodisclosethisinformation.
SystemsandFixtures
Questions in this section pertain to the major systems of the home,
(plumbing, electrical, heating and cooling systems, sump pumps,
appliances, security systems and leased equipment). The
maintenance,repair,orreplacementofthesesystemscanbeamajor
expenditure and again, the purpose of this section is to supply the
purchaserwithasmuchinformationaspossibleaboutthesystemsof
thehome.
WhatTypeofTransactionsandTransfersDoesItApplyTo?
Each state will have its own laws regarding the seller's property
disclosures.Thevariablesmightinclude:
Homeowners'Association/CommonInterests
•
Typeofstructure
•
Numberofunits
•
Typeoftransfer
This section doesnotalways pertain to condominiumsonly. There
aremanysingle-familydevelopmentswhichhavemonthlyoryearly
assessments (dues), Covenants, Conditions and Restrictions (C, C &
Rs),andcommonareas.
•
Courtinvolvement
Asellershouldbeawareofanyofthesebeforefillingoutthisform.
Thefollowingareexamplesofsectionsthatmightbecontainedina
seller'spropertydisclosurestatement:
EnvironmentalFactors
Thissectiondealswithenvironmentalfactorsinvolvingtheproperty
and is one of themost important sections on the disclosure
statementforthefollowingreasons:
Seller'sNameandAddress
InstructionstotheSeller
•
These are instructions for the seller on how to properly
completetheform.
NoticetotheBuyer
•
Thissectionnotifiesthebuyerofhisorherrightstorescind
afterreceivingthedisclosurestatement.
SellerIs/IsNotOccupyingtheProperty
Inthissection,thesellerwillspecifywhetherornottheyare
occupyingtheproperty.
Title
This section deals with issues which affect title, such as the legal
authoritytosell,titleissuessuchasencroachments,easements,joint
maintenance agreements, covenants, conditions or restrictions, and
surveysfortheproperty.
Water
This section usually contains information on household water,
irrigation and outdoor sprinkler systems. Household water deals
withthesource,conditionandamountofthewatersupply.Ifaseller
receives water from privately owned or public water systems, then
mostofthesection'squestionswillnotbeapplicable.
Environmentalissuesarehighlyregulated
•
Theirclean-upcanbeahugeexpenditure
•
Theexistenceofthesehazardscancausemajorproblemsto
thehomeowner(Hereareafewexamples):
o
Mayprohibithowthepropertyisused
o
May affect the type and size of structure that can
bebuilt
o
Mayrequireextrareinforcementstoastructure
o
May affect the health and well-being of the
inhabitants
o
Mayaffectprotectedwildlife
o
Mayaffectnaturalgrowthplantlife
o
Mayaffectthequalityandquantityofthedrinking
water
Lead-BasedPaint
This section is only applicable if the structure was built prior to
1978. The seller should disclosure if he or she knows of any leadbased paint in the structure and if he or she has any records or
reportsonlead-basedpaintinthehome.Hereissomebackgroundof
whylead-basedpaintissuchanissue:
Sewer/On-SiteSewageSystems
ThissectiondealswithanOn-SiteSewageSystemknownasaSeptic
System.ThehomeeitherisonaPublicSewerSystemoronaSeptic
System.Thissectionmainlydealswithquestionspertainingtoseptic
systems.Sincesepticsystemscanbecomplicatedandtheirrepairor
replacement can be very costly, it is important for the purchaser to
obtainasmuchinformationaspossibleaboutthesystem.
One of the most serious health risks that have come to light with
respecttopropertiesisthepresenceofleadinthepaintusedonthe
interior walls of a structure, including apartments, condominiums
and single-family homes. This is true for both public and private
housing.
Hint:Asabuyer'sagent,whenaskingforanyinspectionsorworktobe
performed where there is an on-site sewage system, always use the
term septicsystemand not septictank. A septic tank is just one
•
41
WhatisLead-BasedPaint?
CHAPTER 4: KEEPING THE
COMPETITION FAIR AND
WHO GETS WHAT?
Overview
•
Lead-basedpaintwascommonlyusedinresidentialpropertiesprior
to1978,whenaFederallawwaspassedbanningitsuse.Thispaint
canposeaseriousriskwhenthepaintchipsofforwhen,intheevent
of a total demolition or remodel, the paint dust is expelled into the
air.
People can be exposed to lead by breathing the lead dust, or
consuming lead dust or paint chips. Children are especially
susceptible to lead poisoning because their bodies can more easily
absorbthelead,andchildrenmaynotbeawareofwhattheyputin
their mouths. Many objects may have lead dust on them without
anyoneknowing.Leadpoisoningcancausedamagetothebrainand
central nervous system, resulting in learning and behavioral
problems, slowed growth and hearing problems in children, nerve
and digestive problems in adults, and can cause difficulties during
pregnancies,andcancausebirthdefects.
FairHousing
o
BackgroundfortheFairHousingActof1968
o
Article 10 of the Code of Ethics and Standards of
PracticeoftheNationalAssociationofRealtors®
•
FairHousingDiscriminationinAdvertising
•
Anti-TrustLaws
o
AnIntroduction
o
TheShermanAnti-TrustAct(1890)Sec.1,Trusts,etc,
inRestraintofTradeIllegal;Penalty
o
The Three Types of Anti-Trust Violations Which Are
MostImportantintheRealEstateIndustry
o
PenaltiesforAnti-TrustViolations
•
HowRealEstateCommissionsareDetermined
ManufacturedandMobileHomes
•
This section deals with questions related only to manufactured
homes. Those sellers who are not selling a manufactured home
shouldanswerN/Atoallthequestionsinthissection.
WhoisEntitledtoInitiateanActionForaPaymentofa
CommissionUnderaListingAgreement
•
How a Broker May be Entitled to a Commission
FollowingExpirationofaListingDate
•
TransactionFiles
Thissectionallowsthesellertohavetheopportunitytodiscloseany
othermaterialdefectstotheproperty.
•
WhereMustFilesbeKept?
Verification
•
HowLongMustFilesbeMaintained?
Includedinthissection,thesellerusuallyindemnifiesandholdsthe
real estate brokers harmless and states that the information
containedinthedisclosureis"completeandcorrecttothebestofthe
seller'sknowledge."Afullsignatureanddateisrequiredbyallofthe
owners.
•
AccuracyofRecords
•
ImportanceofTransactionFiles
FullDisclosurebySellers
Learning Objectives
NoticestotheBuyerre:SexOffenderRegistration
•
Identify the seven categories forming the basis for
discrimination under the Fair Housing Law and give a
practicalexampleofwhyalistingshouldberefusedunder
eachcategory
•
Explain what constitutes fair housing discrimination in
advertising and accurately compose two advertisements
demonstratingcompliance
BuyerAcknowledgement
•
This section provides information to the buyer about the entire
disclosurestatement,thepartiesinvolved,andtheresponsibilitiesof
theparties.
Explain how real estate commissions are determined and
knowhowtocalculatecommissionsandpro-rations
•
Describewhoisentitledtoinitiateanactionforpaymentof
acommissionunderalistingagreement
Thissectiongivesnoticetothebuyeronwhereheorshecanobtain
informationonsexoffenders.Inmoststates,thesellerortheseller's
agentisnotrequiredtoresearchanddisclosethisinformation.
ProximitytoFarmingNotice
Thissectiongivesnoticetothebuyerthatthelandthatheorsheis
purchasingmaybeincloseproximitytofarmland.
Summary
Fair Housing
In this chapter we looked at the environmental factors that may
require disclosure in a listing agreement. We looked at the major
sectionsoftheResidentialSellerPropertyDisclosureStatementand
who must complete the statement. We also identified the potential
troublespotsforsellers.
BackgroundfortheFairHousingActof1968
42
In 1968, Congress passed the Fair Housing Act. This law, which is
administeredbytheDepartmentofHousingandUrbanDevelopment
(HUD),protectsconsumersfromdiscriminationrelatedtoalmostall
housingarrangementswithintheUnitedStates.Inthesaleorrental
example ofdiscrimination based on national originand Barry must
refusetotakethelisting.
of any housing, the law prohibits discrimination based on the
followingprotectedgroups:
•
Race
•
Color
•
Nationalorigin
•
Religion
•
Gender
•
Familialstatus
•
Disability
Mr. and Mrs. Browne request that their broker, Mary Beth, of ABC
Realty, or any other member of the MLS, only bring offers from
Jewish buyers since the synagogue is close by and this is a Jewish
neighborhood.This is an example ofdiscrimination based on
religionandMaryBethmustrefusetotakethelisting.
Alexandra and Alice agree to list their property with Mandy of XYZ
Realty only if she can produce a woman buyer.This is an example
ofgenderdiscriminationandMandymustrefusetotakethelisting.
Mr. and Mrs. Altemonte agree to list their property with Johnny, of
ABC Realty, only if Johnny and all other members of the MLS show
thehometopeoplewithnochildren.Theyfurtherexplainthatthisis
a quiet area and the neighbors would not like the noise of children
living nearby.This is an example ofdiscrimination based on familial
statusandJohnnymustrefusetotakethelisting.
Fair Housing also includes the discrimination in the obtaining or
accesstorealestatefinance(mortgagelending):
•
The refusal to offer mortgage loans to persons in a
protectedgroup.
•
The refusal to provide information regarding loans to
personsinaprotectedgroup.
•
Thesettingofdifferentloantermsorconditionsforpersons
inaprotectedgroup,suchasdifferentinterestrates,points,
orfees,oradditionaldocumentation.
Mr.andMrs.Peterstelltheirlistingbroker,Vance,withABCRealty,
thattheywillnotlisttheirpropertywithhimifheproducesabuyer
withphysicaldisabilitiesandthattheyandtheneighborswouldnot
feel that it was a good fit for the neighborhood.This is an example
ofdiscriminationbasedondisabilityandVancemustrefusetotakethe
listing.
Fair Housing Discrimination in Advertising
Theuseofdifferentcriteriaintheappraisalofapropertyownedby
personsinaprotectedgrouporpropertiesbeingsoldtopersonsina
protectedgroup.
AccordingtotheFairHousingActof1968,itisillegalto:
"Advertise or make any statement that indicates a limitation or
preference based on race, color, national origin, religion, sex, familial
status, or handicap. This prohibition against discriminatory
advertisingappliestosingle-familyandowner-occupiedhousingthatis
otherwiseexemptfromtheFairHousingAct."
Therefusaltograntaloanwheretheborrowerisaprotectedgroup
or the setting of different terms or conditions for purchasing a loan
wheretheborrowerisinaprotectedgroup.
Inaddition:Itisillegalforanyonetothreaten,coerce,intimidate,or
interfere with anyone exercising a fair housing right or assisting
otherswhoexercisethatright.
This law is administered by the Department of Housing and Urban
Development(HUD).
Even though many brokers are not Realtors, the Realtors Article 10
oftheCodeofEthicssumsitupwell.
Hereareafewexamplesofnon-discriminatoryadvertisements:
Beautiful modern home on large wooded lot. Four bedrooms, three
bathswithahugedeckoverlookingPugetSound.Wellappointedwith
granite countertops, tile backsplash and new cabinets in the kitchen.
Slate tile in entry way. Newly remodeled baths with new fixtures.
Centralvacuumcleaner.Justminutestomajorarterials.Thespacious
three-car garage has 220 wiring. New roof in fall of 2007. $ 699,990.
For further information, please contact Judy Smith at XYZ Realty at
(555)555-5555.
Article10oftheCodeofEthicsandStandsofPracticeoftheNational
AssociationofRealtors®:
Realtors®shallnotdenyequalprofessionalservicestoanypersonfor
reasons of race, color, religion, sex, handicap, familial status,national
origin, sexual orientation, or gender identiy. Realtors® shall not be
parties to a plan or agreement to discriminate against a person or
persons on the basis of race, color, religion, sex, handicap, familial
status,national origin, sexual orientation, or gender identify.
(Amended1/14)
Singlestory,rambler-stylethreebedroom,one-bathhomewithatwocarattachedgarage.Beautifullushgardenwithahottub.Kitchenhas
been updated and includes stainless steel appliances, tile floors and
marble countertops. Spacious deck with built-in seating. New
composition roof was installed in the spring of 2007. New insulated
windows installed in the winter of 2008. All interior rooms newly
painted spring of 2008. Washer and dryer included in the sale.
$299,000. For further information, contact Sue Yen of ABC Realty at
(555)555-5555.
Realtors®, in their real estate employment practices, shall not
discriminateagainstanypersonorpersonsonthebasisofrace,color,
religion, sex, handicap, familial status, or national origin. (Amended
1/100)
Let's look at some examples of why a listing should be refused
accordingtotheFairHousingLaw:
Mr. and Mrs. Martin agree to list their property with Marla of ABC
Realty with the following conditions: that Marla, or any other
member of the MLS, not show the property or bring a buyer to the
property who is not Mexican.This is an example ofrace
discriminationandMarlamustrefusetotakethelisting.
Anti-Trust Laws
AnIntroduction
Anti-Trust Laws are designed to promote the policy and practice of
COMPETITION. Some of the symptoms of a lack of competition are
higherpricinganddiminishingqualityofaserviceorproduct.
Mr.LorenzoagreestolisthispropertywithJeannetteofXYZRealty
with the understanding that he will not sell to "any of those white
folks."This is an example ofcolor discriminationand Jeannette must
refusetotakethelisting.
Real estate brokers compete with one another to obtain listings for
sale. At the same time, they often cooperate with one another to
secure buyers for those listings. This dual situation of competition
Mr.andMrs.AllenagreetolisttheirhomewithBarryofBNTRealty
withthestipulationthatBarryoranyothermemberoftheMLSnot
show the property to any buyers who are from Japan.This is an
43
Hereisanexampleofanimbalancedcommissionsplit:
and cooperation, which is unique to the real estate industry, can
presentmanyopportunitiesforAnti-Trustviolations.
Alistingbrokeroffers1%tobuyeragentswhosellhisorherlistings.
Yetthebrokerseeks3%ofthecommissionwhenheorshesellsthe
listingofotherbrokerswhohave6%totalcommission.
In light of this risk, the National Association of Realtors (NAR) has
produced a 16-minute video entitled "Anti-Trust and Real Estate"
which may be obtained through NAR or viewed on many Multiple
Listing Service (MLS) websites. This informative video explains the
basisforAnti-TrustLawsandhowtheypertaintoyouasarealestate
professional.
This splitting structure discourages cooperation from other brokers
and increases the likelihood that the broker can sell his or her own
listing.
ConspiracytoBoycott-‚"Theconspiracytoboycotthappenswhena
group of competitors agrees not to deal with another firm or when
brokerscollectivelydecidenottodealwithathirdpartytoeliminate
competition.Here'sanimportantdistinction:
The foundation for federal Anti-Trust laws is the Sherman Act of
1890.
The Sherman Anti-Trust Act (1890) Sec. 1, Trusts, etc, in
RestraintofTradeIllegal;Penalty
Individualseachhavearighttochoosewhomtheywillandwillnot
do business with. It is the collective action of a group which is
prohibitedbyAnti-TrustLaws.
"Every contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of trade or commerce among the several
States,orwithforeignnations,isdeclaredtobeillegal.Everyperson
who shall make any contract or engage in any combination or
conspiracy hereby declared to be illegal shall be deemed guilty of a
felony, and, on conviction thereof, shall be punished by fine not
exceeding $10,000,000 if a corporation, or, if any other person,
$350,000,orbyimprisonmentnotexceedingthreeyears,orbyboth
saidpunishments,inthediscretionofthecourt."
CaseStudy
Overalunchmeeting,brokerAfromXYZRealtyandbrokerBfrom
ABC Realty agree not to show the listings of Mare Realty. They
further state that if no other brokers will show the Mare Realty
listings,thenMareRealtyshouldbeoutofbusinessinnotime.Thisis
aconspiracytoboycotttoeliminatecompetition.
Note: The emphasis of this Act is to prohibit the restraint of trade to
allowforgreatercompetition.
PenaltiesforAnti-TrustViolations
TheDepartmentofJustice-‚"TheU.S.AttorneyGeneralmayenforce
criminal or civil Anti-Trust Violations. Civil action may be
investigated by the FBI and criminal actions may be investigated
throughagrandjury.
The Three Types of Anti-Trust Violations Which Are Most
ImportantintheRealEstateIndustry
1.
ConspiracytoFixPrices
2.
ImbalancedCommissionSplits
3.
ConspiracytoBoycott
ConspiracytoFixPrices-‚"ItisaviolationofbothStateandFederal
Anti-TrustLawsfortheretobeANYagreementbetweencompeting
real estate brokers to fix the prices that each will charge to a third
party.
•
A corporation that is found guilty may be fined up to $10
million.
•
An individual who is found guilty may be fined up to $
350,000.
Private Causes of Actions - Persons or firms that have been injured
byAnti-TrustViolationsmayrecovertreble(threetimes)theiractual
damagesandreasonableattorney'sfees.
Let'slookatsomeexamplesregardingConspiracytoFixPrices:
•
Thefollowingexamplesareprohibited:
Aninjunctionmaybeplacedtoprohibitfurtheractivities.
The Federal Trade Commission (FTC) -- A complaint filed with the
FTCcouldresultinanextensiveinvestigationandaceaseanddesist
ordercouldbeplaceduponthepersonorfirminviolation.
Example#1
Brokerage A and Brokerage B agreed to charge all their clientsx%
commissiononalllistings.
Example#2
Court Supervision -‚" The courts may have a right to supervise the
businessthatisinviolationforupto10years.
Brokerage A, Brokerage B, and Brokerage C agreed to pay a set
amounttooutsidebrokersforanyreferral.
Loss of Brokerage or Real Estate License -- It is possible for a
brokerageoranindividualtolosetheirlicensetopracticerealestate.
Example#3
How Real Estate Commissions Are Determined
Brokerage A tells her clients that her brokerage charges 7%
commission on all its listings and that all other brokers charge the
sameamountasitisa"standard"intheindustry.
Realestatecommissionsarenegotiatedbetweenthesellerandhisor
herbroker.Itisperfectlyacceptableforanagenttorefusetotakea
listingifheorsheisnotwillingtoworkforagivendollaramountor
certainpercentageofthelistprice.
Imbalanced Commission Splits-‚" A broker needs to be especially
carefulofimbalancedexploitativesplitswhencooperatingwithother
agentsonlistings.Anexploitativesplitisonethat:
•
Minimizes the agent's costs of cooperation with other
brokers
•
Maximizesthebroker'scommissionbecauseheorshesells
hisorherownlistings
•
Maximizes the broker's commission when he or she sells
otheragents'listings
What is not acceptable is to conspire with others to fix prices, offer
imbalanced commission splits, and conspire to boycott another
brokerage(especiallyinreferencetotheprices)aswelearnedinthe
Anti-Trustsectionofthischapter.
Somebrokerageswillindividually,notcollectively,suggestthattheir
licensees charge a specific minimum amount of commission for the
listingsthattheytake.
Let'slookatsomeexamplesofhowcommissionsarecalculated:
Commissions are usually based on theselling priceof a property.
Theyarepaidtothebrokerageandnotthebrokerdirectly.
44
[agreedupon]commission.Provided,thatifacommissionispaidtoa
memberofMLSoracooperatingMLSinconjunctionwithasale,the
amount of commission payable to Broker shall be limited to the
amountofcommissionwhichwouldhavebeenpayablepursuantto
this Agreement less any commission so paid to another member of
the MLS. Provided further, that if Seller cancels this Agreement
without legal cause, Seller may be liable for damages incurred by
Brokerasaresultofcancellation,regardlessofwhetherSellerpaysa
commissiontoanotherMLSmember."
The Gilbert's home was listed for $210,000. The selling price was
$200,000.Thetotalcommissionwas6%.JohnfromABCRealtywas
the listing broker and Jane from XYZ Real Estate was the buyer's
broker.ThetermusedforJohnandJane'sbusinessrelationshipiscooperating brokers.The total commission from the sale is $12,000.
Asco-opbrokers,JohnandJanearegoingtosplitthecommissionas
specifiedinthelisting(whichinthiscasewas3%tothelistingoffice
and3%totheofficethatbroughtthebuyer),soitissplit50%/50%.
•
$6,000goestoABCRealty(John'sbrokerage)
•
$6,000goestoXYZRealEstate(Jane'sbrokerage)
Let'slookatacoupleofcasestudiestobetterunderstandtheabove
clause:
John and his broker have an independent contractor agreement
whichstatesthatallofJohn'scommissionsaretobesplit70%/30%
with the brokerage which means that John keeps 70% of his
commissionsandhisbrokeragekeeps30%.
Case#1
Bill,abrokerwithXYZRealty,hadalistingwithMr.andMrs.Morgan.
The total commission that Bill charged the Morgans was 6%. Bill
showed the home to Mr. and Mrs. Rutley. The Rutleys loved the
home, but felt that it was too small since Mr. and Mrs. Rutley's
granddaughter was planning on living with them when she got
acceptedtotheUniversityintheirarea.TheRutleysdecidedtowait
to buy a home until they could afford something larger. The listing
expired and the Morgans listed "For Sale By Owner." Three months
later, Mr. and Mrs. Rutley's granddaughter chose a different college
and decided to move to the east coast. The Rutleys then contacted
Bill about the home since they saw a for sale sign on the property.
The Morgans sold the home to the Rutleys and paid Bill a 6%
commission.
TocalculateJohn'scommission:
$6,000x.70=$4,200commissionduetoJohn
TocalculateJohn'sbrokerage'scommission:
$6,000x.30=$1,800commissionduetoJohn'sbrokerage
TIP:
Todoublecheckthatthiscalculationiscorrect:
Add$4,200+$1,800=$6,000.
Thesumofthetwonumbersshouldalwaysequalthetotal
commission.
Case#2
Mr. and Mrs. Montello had a listing with Jason, of ABC Realty. A
buyer, who had viewed the house during an open house that Jason
had held, was supposed to write an offer within the next few days.
Mr. and Mrs. Montello cancelled the listing before the listing
expirationdatewithoutanylegalexcuse.Theythentransactedadeal
with these buyers. The transaction between Mr. and Mrs. Montello
andthesebuyersclosedwithinafewmonthsaftertheexpirationof
the listing. Can Jason's brokerage sue for this commission? Yes, the
provisioninthelistingagreementallowsforthis.
Now let's calculate Jane's commission. Jane and her broker have an
independent contractor agreement which states that all of Jane's
commissionsaresplit80%/20%whichmeansthatJanekeeps80%
ofhercommissionsandherbrokeragekeeps20%.
TocalculateJane'scommission:
$6,000x.80=$4,800commissionduetoJane
TocalculateJane'sbrokerage'scommission:
$6,000x.20=$1,200
Todoublecheckthecalculations:
Transaction Files
$4,800+$1,200=$6,000(whichisthetotalcommission).
A transaction file is a separate file which must be kept for each
individual transaction. Most states require that all brokerages keep
transactionfilesandcanusuallybekeptelectronicallyorviaapaper
copy.
Who is Entitled to Initiate an Action For a Payment
of a Commission Under a Listing Agreement
Atransactionfoldershouldcontainallagreements,contracts,notes,
documents, fax correspondence, documentation, leases, closing
statements, earnest money receipts, correspondence for each real
estate or business opportunity transaction, and correspondence for
each rental, lease, contract or mortgage collection account. This
encompassesalltransactionsincludingpendingones.
Inmoststates,thedesignatedbrokerisentitledtoinitiateanaction
for payment under a listing agreement. As we discussed earlier, the
designated broker owns the listing and is therefore responsible for
collectingthecommission.
WhereMustFilesbeKept?
How a Broker May be Entitled to a Commission
Following Expiration of a Listing Date
In most states, all required records must be stored at one location
wherethebrokerislicensed.Thislocationmaybethemainofficeor
a branch office. Physical records may be able to be stored at one
remotefacilityiftheyhavebeenclosedforaspecificperiodoftime.
Included within the verbiage of some listing agreements is a clause
whichallowsforthepaymentofcommissionwithinaspecificperiod,
after the listing expiration of a purchaser whose attention it was
broughttothroughtheeffortsofthebrokerpurchasestheproperty.
Furthermore,theremaybeaclausewhichprotectsthebrokerifthe
sellercancelsthelistingagreementwithoutlegalcause.
Thelicenseemayalsokeepaduplicatecopyofthetransactionfolder
if desired, but it is the broker's responsibility to keep these records
onfile.
HowLongMustFilesbeMaintained?
Hereisanexample:
While it varies from state to state, files must be maintained for
usuallythreeyears.Checkyourstate'srequirementsfortheselaws.
"Further,ifSellershall,withinsixmonthsaftertheexpirationofthis
Agreement,sellthePropertytoanypersontowhoseattentionitwas
brought through the signs, advertising or other action of Broker, or
oninformationsecureddirectlyorindirectlyfromorthroughBroker,
duringthetermofthisAgreement,SellerwillpayBrokertheabove
AccuracyofRecords
All required real estate records must be accurate and kept up-todate.
45
ImportanceofTransactionFiles
Here are some important reasons why transaction files are
important:
•
Staterequirement
•
Brokeragerequirement
•
Neededintheeventofafederalorstateaudit
•
Neededifadisputearisesbetweenabrokerandaclient
•
Areferencefortheagentastothepaperworkcompletedfor
atransaction
Certain items in a transaction file can keep the seller
informedofwhatishappeninginatransaction
•
Summary
Inthislastchapter,welookedatthecategoriesthatformabasisfor
discriminationundertheFairHousingLawandwhyalistingshould
be refused under each category. We also explored what constitutes
fairhousingdiscriminationinadvertising.Welookedintorealestate
practice activities controlled by anti-trust law. We then started a
discussiononrealestatecommissionsandhowtheyaredetermined.
We learned how to calculate commissions and pro-rations, who is
entitled to initiate an action for payment of a commission under a
listingagreement,andhowabrokermaybeentitledtoacommission
following expiration of a listing agreement. Lastly, we outlined the
reasons for creating a transaction file and what information should
becontainedinthisfile.
46
Listing Agreements
~ Final Assessment Questions ~
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$'!!
BASICS OF GREEN BUILDING IN REAL ESTATE
Course Introduction
Thiscourseisintendedtoprovidesomebasicinsightinto“greenbuilding.”Itspurposeisnottomakethestudentanexpertbyanystretchofthe
imagination.RatheritwillofferanoverviewofrecentactivityacrosstheUnitedStatesregardingthegreenbuildingmovementandhowconsumers
are responding. Because there are hundreds of controversial and diverse ideas being floated by environmentalists, politicians, and other
stakeholders,itisimportantthatlicenseeshaveaplaceatthetableandafundamentalandbasicunderstandingoftheprinciples.
WeencourageourcustomerstovisittheFAQssectionfoundherehttp://faqs.mckissock.com/forfurtherinformationregardingyoureducational
experiencewithMcKissock.Completewithstep-by-steptutorials,we’vedesigneditwithYOUinmind!
Learning Objectives
Uponcompletionofthiscourse,participantswillbeableto:
•
Relatetheconceptsbehindgreenbuilding
•
Explainhowabuildingworksasasystemingreendesign
•
Discusshownewbuildingmaterialscontributetosustainability
•
Explaintheimportanceofefficiencyratingsystems
•
Identifytheareaswherepropertyownerscanimproveenergyefficiency
•
Discusshowenergyefficientmortgagesgiveconsumersgreaterbuyingpower
•
ExplaintheroleofPhotovoltaicsintheuseofsolarpower
•
Discussthedifferencebetweenopen-andclosed-loopgeothermalheatpumpsystems
•
Describetheimportanceofwindenergytothefutureofgreendesign
Table of Contents
•
Chapter1:GreenBuildingBasics
•
Chapter2:RatingSystems
•
Chapter3:AlternateEnergySources
48
According to Energy Pulse.Org-- A consumer energy study and
survey that investigates energy consumption and conservation
attitudesdeterminedthat:
CHAPTER 1: GREEN
BUILDING BASICS
Introduction
WhatisGreenBuilding?
•
SustainableSites
•
WaterEfficiency
•
EnergyandAtmosphere
•
MaterialsandResources
•
IndoorEnvironmentalQuality
•
Innovation
•
86% of Americans would choose one home over another
basedonenergyefficiency
•
78% of Americans who just bought homes say nobody
talkedtothemaboutenergyefficiency
•
62%ofpeoplewantenergyefficientdwellings
•
63% say energy prices have increased enough to make
themconsiderchangingtheirconsumptionhabits
NAR's 2009 Profile of Home Buyers and Sellers echoed these
findings. The Profiles suggest that 88% place a high value on green
featuresinahomewithheatingandcoolingcostbeingratedasmost
important. Energy efficient appliances and energy efficient lighting
were"very"or"somewhat"importanttoamajorityofhomebuyers.
Asthegreenbuildingmovementgainsmomentum,sodoesconsumer
demand for such buildings. Two-thirds of consumers are paying
attention to green homes and buildings; they recognize the link
betweengreenproperties,costsavings,andhealthyliving.
What'sThisSustainabilityStuff?
GreenBuildingMaterials
Acronymsusedthroughoutthiscourseinclude:
•
Pre-PanelizedWalls
•
FormlessTechnology
•
IAQ-Indoorairquality
•
SolidConcreteWalls
•
HVAC-Heating,ventilation,airconditioning
•
ASHRE - The American Society of Heating, Refrigeration,
andAir-conditioningEngineers
ChapterOverview
•
CFCs-chlorofluorocarbons
Thischapterwillprovideabasicoverviewofgreenbuilding.Wewill
discusssomeoftherecenttrendsingreenbuildingaswellassomeof
thekeycomponentsingreenbuilding.Inaddition,wewillalsolook
at some of the more popular green building materials being used
today. The chapter will also examine the new NAR building and its
greenfeatures.
•
VOCs-VolatileOrganicCompounds
•
LEED™ - Leadership in Energy and Environment Design
(designation)
•
USGBC-UnitedStatesGreenBuildingCouncil
•
IRC-InternationalResidentialCode
•
NAR-NationalAssociationofREALTORS®
•
RESNET-ResidentialServicesNetwork
•
HERS-HomeEnergyRatingSystem
•
HESP-HomeEnergySurveyProfessional
•
BPI-BuildingPerformanceInstitute
•
BPA-BuildingPerformanceAuditor
•
GHPs-GeothermalHeatPumps
•
PV-Photovoltaic
•
EEM-EnergyEfficientMortgage
•
EIM-EnergyImprovementMortgages
•
CFLs-Compactfluorescentlightbulbs
Learning Objectives
LearningObjectives
•
Relatetheconceptsbehindgreenbuilding
•
Explainhowabuildingworksasasystemingreendesign
•
Discuss how new building materials contribute to
sustainability
Introduction
Real estate practitioners have a fiduciary responsibility to their
buyer and seller clients. The quality of life in the communities in
whichtheypracticehasadirecteffectontheirabilitytomarketreal
property. The industry understands the importance of safe
neighborhoods,accessiblerecreationareas,openspace,andcleanair
and water. Licensees must be in tune with consumer wants and
needs--andclearly,buyerswantenvironmentallyfriendlybuildings.
A National Association of REALTORS® study reported that
approximatelynineoutoftenhomebuyersputahighvalueon
greenfeatureswhentheylooktopurchaseahome.IntheWinter
2010 issue ofOn Common Groundpublished by the National
Association of REALTORS®, contributing editor Christine Jordan
Sexton points out that "While location is still the top driver when it
comes to real estate transactions, green features that help to fight
climate change as well as save money are swaying home owners
whenitcomestobuyingahouse."
These 19 acronyms are used often in this course. You may want to
printoffthelistforreference,commitall19tomemory,orjotthem
downsomewhere.
Continuing education courses are available to real estate licensees
whowishtobetterhelphomeownersmarketpropertieswithenergy
efficientfeaturesandhelpbuyersbuysuchgreenpropertiesthrough
Eco Broker®http://www.ecobroker.com/. Eco Broker's green
designation is highly regarded. Eco Broker®, founded in 2002 by
John Beldock, a former director of environmental analysis for the
UnitedStatesDepartmentofEnergy'sofficeofEnergyEfficiencyand
49
Most new construction is at least, in some way, green. This means
thatmostnewbuildingsareusingsustainableconstructionmaterials
and systems, providing better indoor air quality (IAQ) than homes
builtinthepast,andgenerallydecreasinghomeutilitybillsfortheir
owners.
Renewable Energy, claims over 6000 members with members in all
50states.Itwasthefirsttoofferadesignation.
TheNationalAssociationofREALTORS®hasalsodevelopedagreen
designationprogramtoofferadvancedtrainingandcertificationfor
realestateprofessionals.ThedesignationhelpsREALTORS®gainthe
expertise needed to better advise their consumers on what to look
for and consider when interested in making more eco-friendly
building
purchases.
The
NAR
link
is
http://www.greenresourcecouncil.org/. Like other NAR course
offerings, the material is up-to-date and of high quality, and is
recommended to any REALTOR® member wishing to learn more
about"greenbuilding."
Sustainable design (or green design) begins with an understanding
thatbuildingchoicesarenotmadeinisolation.Thechoicesworkin
harmonytoachieve'sustainability'oncethebuildingisconstructed.
The notion of a building being interconnected is fundamental to
sustainability.
For example, the choice of materials used for the exterior of the
structure will impact the choice of HVAC, which will determine air
circulation and air quality, which will affect other choices. Some of
thesefactorsinclude:
TheNationalAssociationofREALTORS®(NAR)establishedaSmart
Growth Advisory Group which was approved by the board of
directors in 2000. Its goal is to increase industry awareness,
involvement, and effectiveness in land use and growth issues. The
Association'scoreprinciplesinclude:
•
Commitmenttohousingopportunityandchoice
•
Buildingbettercommunities
•
Protectingtheenvironment
•
Respectingtherightstoown,use,&transferrealproperty
•
Implementingfair&reasonablefiscalmeasures
NAR has taken a number of other steps to raise public awareness
about green building - including building a "green" building of their
owninWashington,D.C.whichwasfirstoccupiedin2004.NARhas
partnered with federal agencies and others to promote, not only
green building, but a gamut of growth issues. For example, NAR
partneredwiththeDepartmentofEnergytoprovideconsumerswith
an "Energy Savers" brochure with facts about reducing energy use
andsavingmoney.
•
Climate(SouthernCaliforniaorBangor,Maine)
•
Sun(Southernexposure)
•
Water
•
Lighting
•
Materialselection(frame,stone,stucco)
•
Connectiontonature
Properlydiagnosingandfixingtherootcauserequiresahouse-as-asystemapproachbasedonbuildingscience.
Onecannotmakechangestoonepartofabuildingwithoutaffecting
the many other parts which make up the building envelope. When
building size, building materials, and energy-related items are
viewed as separate, unrelated parts during construction, the
piecemealapproachtoconstructioncanhaveanynumberofbadside
effects. Increasing the insulation in a wall or attic in a building
withoutsealingtheairleaksfromtheinsideintothatspacecanlead
tomoldandrottingproblems,forexample.
A formal definition from the office of the Federal Environmental
Executivesdefinesgreenbuildingasthepracticeof:
Thebuildingenvelopeconsistsoffourthings:
Increasing the efficiency with which structures and their
sitesuseenergy,water,andmaterials;and
Reducingtheimpactonhumanhealthandtheenvironment
through better locating of our buildings, design,
construction, operation, maintenance, and waste removal
throughthecompletebuildinglifecycle.
Greenbuildingisalsosometimesknownas"sustainablebuilding"or
"environmentalbuilding."Thesepracticesuselessenergyandwater,
improve public and occupant health, and reduce environmental
impacts.
Communityimpact
Ifonesystemhasaproblem,itimpactstheothersystems'abilityto
function properly. Treating the obvious symptom without knowing
the real culprit behind it can actually make the problem worse or
create new problems. The "process of elimination" approach just
causesfrustrationasyoutrysolutionaftersolution-investingmore
time,money,andenergy-withoutresolution.
Thiscourseaddresses"greenbuilding."Thereisnothingnewabout
using environmentally sound resources and techniques to conserve
energy, conserve resources, and provide for healthier living -
builders strived to take advantage of solar heating and prevailing
breezes centuries ago. It was during the 1980s that the term 'green
building' entered our vocabularies and the Green Movement shifted
intohighgear.
50
•
High energy bills, uneven temperatures from room-to-room, drafts,
moisture,mold,mildew,poorindoorairquality(IAQ),icedams,pest
infestations, seemingly uncontrollable humidity levels, and even
prematuredeteriorationofbuildingmaterialscanallbetheresultof
abreakdownintherelationshipbetweenthesystemsinahouse-the
building envelope (shell), heating and air conditioning (HVAC)
equipment,andtheoccupants.
What is Green Building?
•
Size(2000SFv5000SF)oflivingarea,forexample
Weunderstandthatourcarsaremadeupofinteractingcomponents
andsystems-‚"whenonecomponentfails,itaffectstheperformance
oftheentirevehicle.Thesamegoesforbuildings.
Real estate practitioners generally supportvoluntary, incentivebased approaches to improving energy efficiency in America. The
industry furthermore supports providing property owners with the
education,
incentives,
and
resources
they
need
tovoluntarilyimprove their homes and save energy. As business
people,licenseesknowthatenergyefficiencyimprovementswilladd
value to property, reduce electricity use, save consumers money on
their energy bills, and help stimulate a sluggish job market in
building,remodeling,andrenovationactivities.
•
•
•
BelowGrade-foundation
•
ExteriorWalls
•
Fenestration-[FenestrationcomesfromtheLatinwordfor
window.Ingeneral,itreferstoopeningsinastructure;i.e.
the design and arrangement of openings in a building
envelope]
•
Roofs
WhiletheFederalTradeCommissiongrantsFTCapprovalformeats
andsuch,thereisnogovernmententitydeterminingwhatis"green"
andwhatisnot.Agreen(orsustainable)buildingisadesigninwhich
thefocusoftheconstructionisincreasingefficiencyoftheresources
usedsuchawaterandmaterials.Itismainlybuiltforreducingwaste,
environmentaldegradation,andpollution.Wearetryingtopreserve
ourearthasmuchaspossiblewithsuchconstruction.
•
building in an
redevelopment)
•
cleaning of a contaminated brownfield site (a gasoline
stationpreviouslyoccupiedtheproperty)
•
providingbicyclestorageandaccesstoshowerfacilitiesfor
bicycleusers
•
using low-flow faucets, lavatory motion sensors, and
waterless urinals to reduce water usage, resulting in 30%
lesswaterusethanstandardcode-compliantfixtures
•
purchase of "green power" (a renewable energy source
suchaswindpower)tosupply50%ofthebuildingsenergy
consumption
•
useoflocallyandregionallyproducedbuildingmaterialfor
over80%ofthebuildingmaterials
•
a public education program to teach the building's visitors
aboutitssustainablefeatures
Considerationsinsustainablebuildingsinclude:
•
Highbenefitlightingtechniques
•
Lesstoxicmaterials
•
Energyefficientairhandlingsystems
•
Accesstonaturaldaylighting
•
Superiorindoorairquality(IAQ)
•
Individualcontrolofheat,light,andventilation
•
Landscapes designed to conserve rainwater and natural
sunlight
40%ofrawstone,gravel,andsand,indirectlycausingtoxic
runoff, deforestation, air and water pollution from
processing
•
25% of virgin wood is used for construction, adding to
deforestation, flooding,biological, and cultural diversity
losses
•
Buildings use 40% of total energy, adding to local air
pollution,acidrain,dammingofrivers
•
16%oftotalwaterwithdrawals,addingtowaterpollution;
thiscompeteswithagricultureandecosystemsforwater
•
area
(urban
•
Urbandevelopment.Thebuildingwaserectedinanalready
developedarea.
•
Cleaning of a contaminated brown field site. A gas station
previouslyoccupiedthesite.
•
Location near public transit. The building is three blocks
from Union Station which is served by a Metrorail subway
stationandcommutertrains.
•
Providingbicyclestorageandaccesstoshowerfacilitiesfor
thosewhoridebikestowork.
•
Placing parking underground and shading the site with
treesandlight-coloredpavementtoreducetheurbanheat
islandeffect.
•
Lighting designed to reduce spillage of light from the site,
reducinglightpollution.
WaterEfficiency
•
Usingnativeandadaptiveplantspeciesinthelandscapeto
reduce irrigation demands and capturing rain in a 10,000gallontankforreuseinlandscapingirrigation.
•
Using low-flow faucets, lavatory motion sensors, and
waterless urinals to reduce water usage, resulting in 30%
lesswaterusethanstandardcode-compliantfixtures.
EnergyandAtmosphere
Designing and installing efficient HVAC systems [HVAC stands for
heating, ventilation, and air conditioning, and is used most often in
architecture and construction contexts to describe the methods of
controlling temperature and releasing gases] and a highperformance glass curtain wall, resulting in a 30% reduction in
energyusecomparedtoASHRE[TheAmericanSocietyofHeating,
Refrigeration and Air-Conditioning Engineers] advances
technologytoservehumanityandpromoteasustainableworld]code
standards.
Poor air quality in 30% of new and renovated buildings,
addingtohigherincidenceofsickness-andultimately,lost
productivityintensofbillionsofdollarsannually
EarlierwelearnedthattheNationalAssociationofREALTORS®put
their money where their mouth was and practiced what they
preached by building what was to become the first LEED™ certified
building in the District of Columbia. The best way to grasp the
concepts of green building is to use the NAR Building as our initial
CaseStudy.
•
The striking, glass-wrapped 93,000 square foot 12-story Class "A"
Building,whichservesastheWashington,D.C.operationscenterfor
NAR,reflectstheindustry'scommitmenttosustainability.
Among the 35 separate sustainable features for which the building
earnedcertificationwere:
developed
Sustainable Sites
Overall design of Green is the building's major systems' energy
performance.Greenbuildingshouldincreasetheefficiencyofenergy,
water, and materials used while reducing environmental and
negativehealthimpacts.Someofthemajorproblemswithbuildings
todayarethattheyuse:
•
already
Zero use of CFC-based refrigerants in the building.
[Air
conditioning
and
refrigeration
systems
requirerefrigerants -often CFCs (or chlorofluorocarbons)
to produce their cooling effect. The most shocking fact
aboutCFCsis that they have exceptionally long
atmospheric life which, in certain cases, even extends to
100years.]
51
•
The National Association of REALTORS® purchased "green power"
(arenewableenergysourcesuchaswindpower,whichisconsidered
to be sustainable) to supply 50% of the building's energy
consumptionfortheirWashington,D.C.building.
Purchase of "green power" (a renewable energy source
suchaswindpower)tosupply50%ofthebuilding'senergy
consumption.
Oil and coal, for example, are considered 'nonrenewableunsustainableenergysources.'Sustainableandgreenareoftenused
synonymously.
MaterialsandResources
•
High-recycled-content building materials,
concrete,steel,glass,carpet,andceilingtile
including
•
Use of locally and regionally produced building materials
forover80%ofthebuildingmaterials
Click http://www.youtube.com/embed/FS7o4g5kzMM for a video
produced by Yale University. Dr. Paul Raskin discusses
sustainability and an initiative that he started that promotes
sustainability.
IndoorEnvironmentalQuality
•
Prohibiting smoking throughout the building including
first-floorrestaurants
Green Building Materials
•
Installation of a carbon dioxide CO2 monitoring system to
introducefreshairinresponsetoincreasesinoccupancy
Materialsareactualpartsusedinthebuildingprocess.When"green"
constructionproductsareused,thechemicalshavebeenreducedor
arenon-existent,creatingabetterdegreeofairquality.
•
Useoflow-emitting,lowVOC[VolatileOrganicCompound]
paintsandcarpets
•
Permanententrywaysystemstocapturedirtandparticles
•
Providing daylight for 75% of regularly occupied spaces
andviewsfor90%ofalloccupiedworkareas
For interior spaces, paints with little to no Volatile Organic
Compounds (VOCs) are common in each building phase of "green"
construction finishes. VOCs produce a sometimes odorless,
breathable gas when applied, diminish air quality, and have been
shown to be detrimental to health. Freshly painted is not good;
THESEAREHIGHTOXINSFILLINGTHEAIR.
Innovation
•
You will begin to hear about natural materials used in sustainable
building practices around the world: Cob, Rammed Earth, Poured
Earth, Earth bag, Straw bale, Cordwood, EARTHSHIP, as well as
bambooarebeingused.
Writing and implementing Green Tenant Improvement
Guidelines to ensure that a sustainable design intent is
carriedoutinthebuild-outofrentedofficespace[NARonly
occupies 5 of the 12 stories of the building, and rents the
rest]
•
Creating a comprehensive green housekeeping plan which
requires the use of non-toxic cleaning products, recycled
paperandplasticsuppliestobeusedbycleaningservices
•
Apubliceducationprogramtoteachthebuilding'svisitors
aboutitssustainableor"green"features
In green building, the materials plus the performance contribute to
thesafetyoftheoccupants,andthatsafetycanbemeasurable,rated,
and certified. It is the energy efficiency that is good for indoor air
quality,andtheenvironmentthatgainspointsforcertifiedmaterials
andstructures.
Plastics do not rust. They can be used for wall systems, insulation,
sealants,andmuchmore.Plasticsreducelossofhabitatandsoilfrom
over-harvestingforests.
Theconferencetablepictured,shownintheNARBoardRoominthe
photograph on page three of the PDF, is made of Eucalyptus wood.
Eucalyptus trees are quick growers and many species reach a great
height. Even the Eucalyptus table in the boardroom is of a
sustainablematerial.
Plasticsofferawidevarietyofproductsanddesignsolutionsforthe
construction market. Other building materials such as concrete,
along with plastics, present an array of possibilities -- such as
Structural Insulated Panels (SIPs) and Insulating Concrete Forms
(ICFs). These are foam-core laminated to sheets of high-strength
oriented strand board and are only a few examples of sustainable
structure. They promote better indoor air quality by using fewer
toxinsfortheinstallationprocess.
A building's energy efficiency performance is only part of the
sustainable development equation. Equally important is the
building's location. If it is located in the middle of nowhere with no
mass transit, it is possible that more energy is consumed getting to
thebuildingthanisspentoperatingthebuilding.
Pre-PanelizedWalls
Pre-panelization means superior quality control, simplification of
yourbuildingprocess,dimensionalaccuracy,andreductionoflabor
andon-sitecycletime.
Many think that emissions from our automobiles are the primary
cause of carbon dioxide emissions. The fact is buildings emit more
carbon dioxide than any other industry sector. Emissions from
automobiles represent about 1/3 of all greenhouse gas emissions,
however.
What's This Sustainability Stuff?
To this point in the course, you cannot have missed the word
"sustainability."Theoperativewordnowadaysis"sustainability."
Fastconstruction:twotofourdaysonmoststructures
•
Two inches of insulation and interior furring strips for
easierfinishing
•
Nodelaywaitingforskilledtradesormaterialshortages
Formless Technology
You will hear the words sustainable & sustainability used in many
different ways, but what does "sustainability" really mean, and how
can you tell if your community, for example, is sustainable?
Sustainability is related to the quality of life in a community -
whethertheeconomic,social,andenvironmentalsystemsthatmake
up the community are providing a healthy, productive, meaningful
lifeforallcommunityresidents-presentandfuture.
52
•
Formless technology (stays in place) gives you maximum flexibility
onthejobsitewithaminimuminvestment.
SolidConcreteWalls
Solid concrete walls prevent the chaffing and cracking problems
associated with block walls, which means fewer call backs to a
builder.
•
information about sustainable design. We also reviewed the green
features of the NAR building and discussed the importance of NAR
leadingbyexampleingreendesign.Finally,wegavesomeexamples
ofsomeofthemorepopulargreenbuildingmaterials.
Waterproof -- #1 FEMA problem recorded during any
stormiswaterintrusion.
Green construction considers how much energy is in the building
materialsthemselves,intheirtransportation,andintheirassembling
and durability. These cannot be the only considerations. Once the
structure is built, how much energy does it consume to keep its
inhabitantshealthyandcomfortable?
In the next chapter, we will discuss Energy Audits and Rating
Systems. Going forward, real estate professionals must understand
thepurposeanduseofRatingSystemswithinthebuildingindustry.
Youneedtounderstandwhatenergyauditsareandwhattheydoin
ordertoanswerquestionsandofferadvicetorealestateconsumers
whoreadaboutthisstuffeverydayintheirlocalnewspapers.
Therearesomanynewmaterialsrealestateprofessionalswillneed
to learn about in the very near future. Tank-less water heaters, and
systems that capture solar wind and storm water, are coming at a
rapidrate.Therearesustainableroofingmaterials,environmentally
friendly insulation. The use of renewable energy technologies is the
waveofthefuture,andwillsave20%-40%onautilitybill.
CHAPTER 2: RATING
SYSTEMS
OwnersofGreenBuildingsexpect:
•
Areductioninliabilityinsurance
•
Areductioninworker'scompensationinsurance
Rating Systems
•
IncreasedMarketValue
ChapterOverview
•
Decreasedenergycosts
•
Decreasedoperationandmaintenancecosts
•
Overallpaybacks
•
Highertenancyrates
•
Higherproductivityforoccupants
Inthischapterwewilldiscussthedifferentefficiencyratingsystems
for homes and buildings. The components of each system will be
outlined, as will the rating scale for each. In addition, we will detail
which systems are most popular, and which are most widely used.
The chapter will also examine energy-efficient mortgages and how
theyareabletogiveconsumersmorebuyingpower.
LearningObjectives
A common misconception must be addressed: It may not be more
expensive to build green if the decreased operating costs, health
benefits,comfortlevels,environmentalbenefits,andfuturevalueare
considerationsinthebeginningplanningstagesofabuildingproject.
Green Building Materials
Explaintheimportanceofefficiencyratingsystems
•
Identify the areas where property owners can improve
energyefficiency
•
Discuss how energy-efficient mortgages give consumers
greaterbuyingpower
Is building green more expensive initially? Yes. For example, the
owner of a 38-unit apartment house recently reported that her
heating expenses rose from $22,000 in 2000 to $38,000 in 2008,
representinga70%increaseinoperatingcost.Herapartmenthouse
isoccupiedbymanyrent-burdenedfamilieswhopaymorethan30%
of their incomes on rent. The increase in heating expenses was
stifling on-going maintenance and kept her from re-investing in
upgradesandothercapitalimprovements.
CourseOutline
She found that preserving and upgrading one of her existing
apartments cost half as much as building a new one. A contractor
suggested that a retrofit, including a new boiler, vent damper
controls, and other improvements to the building's envelope
includingcaulking,stormwindows,ceilinginsulation(noneofwhich
is very disruptive to tenants) would cost approximately $2,500 per
unit. Yes. That's not cheap. But the payback to the owner was
estimatedtobesixyears.
•
Introduction
•
LEED®RatingSystem
•
ENERGYSTAR®RatingSystem
•
RESNETRatingSystem
•
ComprehensiveHERSRating
•
Energy-EfficientMortgages
•
WhytheEEMWorks
Introduction
In Chapter one, you were introduced to green or "sustainable"
buildingusingtheREALTOR®BuildingasaCaseStudy.Welearned
thatthebuildingwasaLEED®Certified"Green"Building-infact,it
wasthefirstLEED®CertifiedstructureintheDistrictofColumbia.
Energy saving rehab costing up to $5,000 per unit would have
yielded 40% to 50% heating expense savings and payback to the
ownerin8to10years,accordingtoherconsultant.
Whatwouldyoudoifyouweretheownerofthe38-unitbuilding?
In this section, we will discuss not only the LEED® program, but
several of the other certifying and energy rating organizations with
whichyoushouldbecomefamiliar.
As real estate practitioners, we care about affordable housing. We
have an obligation to do our share to try to keep rental housing
affordable-justaswehaveanobligationtoprotecttheenvironment.
Since the Supreme Court's momentous decision that carbon dioxide
endangers the public health just like asbestos and lead-based paint,
the Environmental Protection Agency is, by necessity, poised to
regulate carbon dioxide emissions. Practitioners are aware that too
manyregulationscandistorttherealestatemarket,makerealestate
less affordable, and reduce choice in the marketplace. Housing built
Summary
Inthischapter,wediscussedsomeofthebasicsofgreenbuilding.We
lookedatsomeofthetrendstowardgreenbuilding,aswellassome
of the resources that real estate professionals can use to find more
•
53
todayisthefutureinventorythatrealestateagentsandbrokerswill
besellingtomorrow.
Interior materials used should be without toxins such as
formaldehyde, commonly found in paints and adhesives. The fewer
toxic materials used in the building process, the more points
achieved in the certifications which should carry through to
valuations. Some of the materials used to gain points in green
buildinginclude:
The industry supports incentivizing owners to make energy
efficiency improvements and is strongly supportive of new green
building.Theindustryisgreatlydivided,however,whenitcomesto
EnergyPerformanceRatings-especiallyforolderresidentialhousing
stock. Many in the real estate industry fear that government may
implement amandatorysystem of home energy labels
whilemandatingenergyefficiencyimprovements.
LEED® Rating System
•
Carpetingmadefromrecycledtires,tilemadefromrecycled
glass
•
Fabrics for upholstery, windows, and accessories made
fromorganiccottonwhichcangainLEED®credits
•
Sidewalksmadefromrecycledtiresthatabsorbrainwater,
recycle it through a pump, and use it to flush toilets and
watertheyardindrytimes
The United States Green Building Council (USGBC) has conducted
researchanddeterminedthat:
•
Health is better in green-built homes and commercial
structures
•
Wood for flooring from trees that are not killed, but just
shaved
•
Student test scores are 20% higher in green schools, and
teachersaremoreengagedintheirwork
•
Building walls made from foam to withstand higher wind
velocity
•
In green hospitals, nurses make fewer mistakes and
patientsarereleasedtwodaysearlier
•
•
In green office buildings, productivity is higher and
absenteeismislower
Adhesives,insulation,grout,andfinishesallwithloworno
VOCs that damage a home's or commercial building's
indoorairquality
•
Ingreenshoppingmalls,retailsalesarehigher
The REALTOR® Building in D.C. is Certified Silver. The Proximity
Hotel, Greensboro, North Carolina (a featured Case Study by the
USGBC) was awarded the Platinum certification in 2008 by
demonstrating that the building used 39% less energy, 34% less
water,anddiverted87%ofbuildingmaterialsfromthelandfill.For
more information on this hotel from the USGBC website, go
tohttp://www.usgbc.org/projects/proximity-hotel?view=overview
In 1999, the USGBC created avoluntarynational standard for
developinghigh-performancesustainablebuildings.
The USGBC is a non-profit organization dedicated to make green
buildingsavailabletoeveryone.TheirLEED®(LeadershipinEnergy
and Environmental Design) has emerged as the most recognized
force in the accelerating market for green buildings by federal
agencies. The LEED® rating system is a tool for green building and
construction. The LEED® rating system applies to both residential
and commercial property. Check out the USGBC site
athttp://www.usgbc.org/for more on their rating system. Click on
RESOURCES which appears across the top to the right of USGBC's
logoandnavigatetoLEED®ProjectCaseStudies.Laterwewilllook
at a few of these Case Studies just as we did with the REALTOR®
BuildinginChapterOne.
Case Study
The 4 Diamond Luxury Proximity Hotel used local materials saving
ontransportationandhelpingthelocaleconomy.Ofthematerialsin
the building, 46 percent were sourced regionally and most of the
furniture was made within 18 miles of the site. The bar in the
restaurant was made from salvaged, native walnut trees brought
downbystormordisease.ChipHolton,theartist-in-residenceforthe
project,created500piecesofartfortheguestroomswhileworking
inatemporarystudioadjacenttothehotel.Thiseliminatedtheneed
for packaging materials and shipping, lowering the environmental
impactoftheartwork.
LEED® Certifications are Certified (40-49 points), Silver (50-59
points), Gold (60-79 points), and Platinum (80 points and above),
andareavailablefor:
•
Newconstruction(mostpopular)
•
Existingbuildings
•
Commercialinteriors(includingtenantbuild-outs)
•
Coreandshellwithoutfill-outs
•
Schools,retail,healthcare,and
•
RESIDENTIALHOMES
TheenergyperformanceoftheProximityHotelbeginswithdemand
reductions. A well insulated building envelope and highperformance, operable windows reduce heating and cooling needs.
Regenerative-drive elevators generate electricity as they descend,
providing much of the energy needed for ascent. Overall, the hotel
uses39%lessenergythanasimilarhotelconstructedtocode.
Ventilationandrefrigerationneeds, amongotherthings,makemost
kitchens energy hogs. Variable-speed vent hoods in the kitchen
adjusttomeettheventilationneedsofthespace,typicallyoperating
at only 25 percent of their full capacity. Instead of a standard
refrigeration system, an energy-efficient ground-source heat-pump
refrigerationsystemexchangeswasteheatwithgroundwaterloops.
Pointsareawardedbasedonthefollowingitems:
54
•
Sustainablesites(26possible)
•
Waterefficiency(10possible)
•
EnergyandAtmosphere(35possible)
•
MaterialsandResources(14possible)
•
IndoorEnvironmentalQuality(15possible)
•
Innovationindesign(6possible)
•
Regionalpriority(4possible)
Thehotelalsouses34percentlesswaterthanacomparablebuilding.
Low-flowtoiletsthatuse1.2gallonsperflush,waterlessurinals,and
low-flowfaucetsallcontributetowatersavings.
Solar thermal panels on the roof provide 60% of the hotel's water
heating needs. Overall, the project is expected to save $140,000 a
year in utility costs. The water savings alone saved the company
$13,000 in the first year of operations. Including tax credits,
operatingsavings,andincreasedrevenuesduetocustomerdemand,
theoverallpaybackfortheadditionalfirstcostsisexpectedtobeless
thanfouryears.
globalwarmingandprotecttheenvironmentforfuturegenerations.
Totheirwayofthinking,thelessenergyused,thelessairpollution
generated. These are the consumers who are looking to make sure
their homes are energy-efficient. They are looking for the blue
ENERGY STAR mark, the government-backed symbol for energy
efficiency.
LEED® Rating System
Examples of certified green projects not only from North Carolina,
butfromCalifornia,Colorado,Georgia,Idaho,Illinois,Massachusetts,
New York, Pennsylvania, and Washington, D.C. are illustrated and
discussed as LEED® Project Case Studies. Perhaps you are familiar
with one of these projects. In that case, you will want to learn as
muchabouttheprojectasyoucanforfuturereference.
AnyhomethreestoriesorlesscanearntheENERGYSTARlabelifit
has been verified to meet EPA's guidelines, including: single family,
attached, and low-rise multi-family homes; manufactured homes;
systems-built homes (e.g., SIP, ICF, or modular construction); log
homes,concretehomes;andevenexistingretrofittedhomes.
TheAmericanSocietyofInteriorDesignershasalsoteamedwithThe
U.S. Green Building Council to develop a REGREEN program which
dealswithgreenresidentialremodeling.
Check http://www.regreenprogram.org/Case studies illustrate that
greendoesnotnecessarilymeanweirdorugly.
Programguidelinescanbefoundat:
http://www.regreenprogram.org/docs/regreen_guidelines.pdf
ENERGY STAR Ratings
Most of us are familiar with the ENERGY STAR logo seen on
dishwashers
and
other
appliances.
ENERGY
STAR
athttp://www.energystar.gov/is a joint program of the U.S.
EnvironmentalProtectionAgencyandtheU.S.DepartmentofEnergy
dedicatedtohelpingusallsavemoneyandprotecttheenvironment
throughenergy-efficientproductsandpractices.
ENERGY STAR qualified homes can include a variety of 'tried-andtrue' energy-efficient features that contribute to improved home
quality and homeowner comfort, and to lower energy demand and
reducedairpollution:
The ENERGY STAR® Homes program promotes voluntary
partnershipswithhomebuilderstoconstructnewhomesthatare30
percentmoreenergy-efficient.
•
Insulation--LearnmoreaboutProperlyInstalledInsulation
http://www.energystar.gov/ia/new_homes/features/Insul
ation_062906.pdf
Unlike LEED® homes, ENERGY STAR Homes are tremendously
popular.Morethan1millionENERGYSTAR®homeshavebeenbuilt
intheUnitedStatessincetheprogramfirstbeganlabelinghomesin
1995. Families living in ENERGY STAR qualified homes will save
morethan$270millionthisyearontheirutilitybills,whileavoiding
greenhousegasemissionsequivalenttothosefrom370,000vehicles
accordingtoENERGYSTAR.
•
High Performance Windows -- Energy-efficient windows
employ advanced technologies, such as protective coatings
and improved frames, to help keep heat in during winter
and out during summer. These windows also block
damagingultravioletsunlightthatcandiscolorcarpetsand
furnishings. Learn more about Qualified Windows
http://www.energystar.gov/ia/new_homes/features/Wind
ows_062906.pdf
•
TightConstructionandDucts--Sealingholesandcracksin
the home's "envelope" and in heating and cooling duct
systems helps reduce drafts, moisture, dust, pollen, and
noise. A tightly sealed home improves comfort and indoor
air quality while reducing utility and maintenance.
Learn
more
about
Efficient
Duct
Systems
http://www.energystar.gov/ia/new_homes/features/Duct
Systems_062906.pdf
•
Efficient HVAC Equipment -- In addition to using less
energy to operate, energy-efficient heating and cooling
systems can be quieter, reduce indoor humidity, and
improve the overall comfort of the home. When properly
installedintoatightlysealedhome,thisequipmentwillnot
havetoworksohardtoheatandcoolthehome.Learnmore
about:
It has been claimed that if all U.S. Households used ENERGY STAR
refrigerators,theelectricitysavedcouldeliminatetheneedforabout
threenuclearpowerplants.
AccordingtoEnergyStar.Gov-Afamilyoffouruses25,550gallonsof
water per year just to do laundry. Homeowners and Home Buyers
arepayingattention.
ToearntheENERGYSTAR,ahomemustmeetguidelinesforenergy
efficiency set by the U.S. Environmental Protection Agency (EPA).
Thesehomesmustbeatleast15%moreenergy-efficientthanhomes
built to the 2004 International Residential Code (IRC),
http://www.energystar.gov/index.cfm?c=bldrs_lenders_raters.nh_IR
C and include additional energy-saving features that typically make
them 20 - 30% more efficient than standard homes. [NOTE: The
InternationalResidentialCode(IRC)isacomprehensive,stand-alone
residentialcodethatcreatesminimumregulationsforone-andtwofamily dwellings of three stories or less. It brings together all
building, plumbing, mechanical, fuel gas, energy, and electrical
provisionsforone-andtwo-familyresidences.TheIRCalsoprovides
a prescriptive approach (i.e., a set of measures) and a performance
approach(i.e.,energymodeling)fordeterminingcompliance.]
With homebuyers increasingly interested in green building, energy
efficiency is the place to start. Many of today's homeowners are
concernedbecausetheenergyusedintheirhomesoftencomesfrom
the burning of fossil fuels at power plants, which they fear
contributes to smog, acid rain, and risks of global warming. The
averagefamilyspends$1,900ayearonenergybills,muchofwhich
goes to heating and cooling. If they were to reduce the amount of
energyusedintheirhomes,theywouldsavemoneyonenergybills
andreducethegreenhousegasemissionsgeneratedbyburningfossil
fuels to make that electricity. That also would reduce the risks of
•
o
QualifiedHeatingEquipment
http://www.energystar.gov/ia/new_homes/featu
res/Heating_062906.pdf
o
QualifiedCoolingEquipment
http://www.energystar.gov/ia/new_homes/featu
res/Cooling_062906.pdf
o
MechanicalVentilation
http://www.energystar.gov/ia/new_homes/featu
res/MechVent_062906.pdf
EfficientProducts--ENERGYSTARqualifiedhomesmay
alsobeequippedwithENERGYSTARqualifiedproducts-
lightingfixtures,compactfluorescentbulbs,ventilation
fans,andappliances,suchasrefrigerators,dishwashers,
55
andwashingmachines.LearnmoreaboutENERGYSTAR
qualifiedproducts:
•
Variationsinconstructiontypesandtheirramifications
http://www.energystar.gov/index.cfm?fuseaction=find_a_product.
•
Typesandefficienciesofwindows
o
QualifiedAppliances
http://www.energystar.gov/ia/new_homes/featu
res/Appliances_062906.pdf
•
Types and efficiencies of heating, cooling, water heating,
andlightingsystems
o
QualifiedLighting
http://www.energystar.gov/ia/new_homes/featu
res/Lighting_062906.pdf
•
Types and characteristics of space conditioning and
domestichotwaterdistributionsystems
•
Typesofthermostaticcontrols
•
Determinationofairleakage
•
Qualityassurance
o
o
•
AdvancedLightingPackage
http://www.energystar.gov/ia/new_homes/featu
res/Advanced_Lighting_Package.pdf
Because more and more consumers are requesting home energy
audits, it is important that real estate practitioners know what
energyauditsareandhowtheyarebeingutilized.Tofindoutwhat
an energy audit entails, go tohttp://www.resnet.us/home-energyaudit-benefits.
HighEfficiencyWaterHeaters
http://www.energystar.gov/ia/new_homes/featu
res/WaterHtrs_062906.pdf
Third Party Verification -- With the help of independent
Home Energy Raters, ENERGY STAR builder partners
choose the most appropriate energy-saving features for
theirhomes.Additionally,ratersconductonsitetestingand
inspectionstoverifytheenergyefficiencymeasures,aswell
as insulation, air tightness, and duct sealing details. Learn
more about Independent Inspection and Testing.
http://www.energystar.gov/ia/new_homes/features/HERS
rater_062906.pdf
Homeownersorderenergyauditsto:
A response from the real estate committee, presented to the Senate
EnergyandNaturalResourcesCommitteetoEnergyStar,isincluded
--infairness,toillustrateindustryconcerns.Mandatorylabelsarea
concern to many in the real estate industry. Many feel that labeling
will impact older properties and point out that 60% of our homes
werebuiltpriorto1980.Theseolderhomesareoccupiedbyelderly,
impoverished, and minority owners. Rural communities - especially
inthenortheast-consistprimarilyofhomesbuiltbefore1980.
RESNET Rating System
The Residential Services Network (RESNET) rating index known as
HERS (Home Energy Rating System Index) provides scores from 1100 for residential properties. Their websitehttp://resnet.us/
provides information on how to become a certified rater and much
more.
•
Recommendedenergyupgrades
•
Estimate of the cost, annual savings, and useful life of
upgrades
•
Improved Rating Score after the installation of
recommendedupgrades
•
Estimate of total energy cost for home before and after
energyupgrades
56
Thermalresistanceofinsulationmaterials
•
Blowerdoortestingprocedures
•
Ductleakagetestingprocedures
Increasethecomfortoftheirhome
•
Increasetheirhome'sresalevalue
•
Increasetheirhome'smarketability
•
Uncoverhiddenproblems
•
Helptheenvironment
•
Takeadvantageofgovernmentincentiveprograms
RESNET has defined three types of energy assessments for existing
homes which range in complexity from a simple but effective walkthrough survey to a performance audit using diagnostic equipment
and computerized data analysis to a comprehensive home energy
ratingutilizingthemostsophisticatedmodelingsoftwaretoproduce
a home rating score on the HERS (Home Energy Rating System
Index).Theseoptions,listedfromleastcomplextomostcomplex,are
explainedbelow.
TheleastcomplexoptionisaHomeEnergySurveywhichisavisual
inspection with no diagnostic testing. Inspections are made
regarding:
Someoftheareasratersincludeintheirreport:
•
•
A home energy audit (or survey) evaluates an existing home to
determine where and how energy is being lost, what systems are
operatinginefficiently,andwhatcost-effectiveimprovementscanbe
implemented to enhance occupant comfort, make the home more
durable,andlowerutilitycosts(seeBenefitsofaHomeEnergyAudit
http://www.resnet.us/home-energy-audit-benefits).
AHERSReportincludes:
OverallRatingScoreofthehouseinitscurrentcondition
Savemoneyontheirenergybill
Licenseesneedtobuildknowledgeandresourcesintotheirpractice
oftheirprofessiontoassistclientsinpurchasesandmakinglandsale
decisions.Theyshouldstayuptodatewiththeleading"green"home
certificationprogramsincludingEnergyStar®andLEED™.Thiswill
allow licensees to help clients buy and sell certified properties, use
verified energy savings and green financing tools to realize larger
loans, and make transactions easier to close. As the green building
movement gains momentum, so does the consumer demand for
green properties. Two-thirds of consumers are paying attention to
green homes and buildings; they recognize the link between green
properties, cost savings, and healthy living. Consumers also
understand the long-term investment and savings associated with
greenerhomes.
"WhileHomeStarlegislationappearstobeaneffectiveapproachto
incentivizehomeownerstoconductenergyefficiencyimprovements
athome,NARisveryconcernedaboutadministrativeinitiativesthat
take a much different approach and seem to use the home buying
processasthevehicletoimplementasystemofenergylabels,while
alsomandatingenergyefficiencyimprovements."
•
•
•
Building envelope features (windows, doors, insulation,
ducts)andages
•
Heating, cooling, and ventilation equipment types,
characteristics,andages
•
Applianceandlightingcharacteristics
•
Comfortcomplaints
•
Visiblemoistureissues
•
Visiblehealthandsafetyissues
TheHomeEnergySurveyProfessional(HESP)willrequestareview
of utility use and billing history to better understand potential
opportunities for savings. A report of the complete assessment is
provided, including basic recommendations for improving the
home's energy efficiency, as well as low-cost, do-it-yourself tasks. It
also includes information on relevant, utility-based programs that
may incentivize the homeowner to take action. A Home Energy
Surveytakesapproximatelyonehourtocomplete.
•
Next,theBPIcertifiedprofessionalwillconductathorough
walk-through - both indoors and out. The technician may
use an infrared camera to get a visual on temperature
differencesindifferentareas,conductablowerdoortestto
depressurize the house and assess air leakage levels
through the building envelope, and test for leakage in the
duct work of forced-air HVAC systems by using a
bolometer.Theywillalsoperformotherfunctionandsafety
tests on HVAC equipment, including carbon monoxide
levelsandcombustionapplianceback-drafttesting.
•
At the end of the comprehensive whole-home assessment,
the home performance contractor will provide the
homeownerwithascientific,objectiveviewofthesituation.
He will help prioritize repairs in order - from must-do to
nice-to-do - so the owner can solve the biggest problems
withoutmakingsmallerproblemsworse.Heshouldalsobe
able to guide the homeowner regarding which fixes are
suitable as do-it-yourself projects and which will require
expert help - either from the BPI-accredited contracting
company who performed the assessment or from another
equallyqualified,trainedsource.
•
Once the improvement work is completed, the BPI
contractor will conduct a second whole-home assessment
thatfollowsallthesamestepsasthefirst.Thismakessure
thatallthecorrectionswork,andthedesiredperformance
levelshavebeenachieved.
•
A BPI contractor will document every test result and
provideawrittenreport.
ABuildingPerformanceAuditincludesalloftheinspectionsprovided
intheHomeEnergySurveyandalsoincludesdiagnostictestingusing
specialized equipment such as a blower door (which measures how
air tight your home is), duct leakage tester (which measures
tightness of your air ducts), combustion analyzer and thermal
infraredcamera(whichshowsimpropercaulking,windows,framing
gaps,andothersuchissues)todetermine:
•
TheamountofleakagefromHVACdistributionducts
•
The amount and location of air leaks in the building
envelope
•
Theeffectivenessofinsulationinsidewallsandceilings
•
Anyexistingorpotentialcombustionsafetyissues
•
Other tools for residential use include a bolometer (a
capturehoodthatallowsmaximumairdistributionthrough
registers), co-heat tests which measure overall heat loss
from windows), and electric moisture meters (which
measuremoistureinabuildingmaterial)
DO NOT SAY YOU HAVE CERTIFIED any home.There are various
waystoachievethefinallevelofenergyefficiencyapropertyowner
desiresandobtainacertificateandanumberforverificationwitha
third party organization. A good practice is to guide clients toward
these resources. Having a third party verification is what actually
certifies a structure as "green." You do not want to act as or be a
certifying agent, or be viewed as one, unless you are actually
certified. For real estate professionals, from a legal standpoint, it is
recommended you add a disclaimer to your paperwork if you are
representinga"green"home.Thisisimportanttohaveinwritingso
whenapropertyownerwantsyoutomarketorsellastructureinthe
future, an appraiser needs to appraise the value, or an insurance
professional needs the certification, the property owner has that
certification and does not come to you expecting this type of
paperwork. ALWAYS REFER TO LEED® or state "CERTIFIED
GREEN", BACKED BY A CERTIFICATE AND A NUMBER ON THAT
CERTIFICATE.
A Building Performance Auditor (BPA) conducts a whole-house
evaluationandperformscomputersoftwareanalysistoidentifyand
prioritizeproposedtreatmentsforimprovement.Thedetailedreport
will provide suitable retrofit recommendations and specifications
and guide the homeowner to the appropriate RESNET Qualified
Energy Smart Contractors who can perform the work. A Building
Performance Audit takes 3-4 hours depending on the size of your
home.
Comprehensive HERS Rating
A Comprehensive HERS Rating is the most in-depth performance
audit of an existing home. It consists of the evaluation, diagnostic
testing, cost-effective recommendations, and work specifications
containedinaBuildingPerformanceAudit.
Energy-Efficient Mortgages
An innovative loan product, the energy-efficient mortgage (EEM),
was first introduced by Fannie Mae in 1979 but was not a major
avenue for financing a home for mortgage and real estate
professionals. There was not enough activity in the field of energy
efficiencytomeritalevelofactivity.Thishaschangeddrasticallyin
thelastfewyears.
In addition, a Comprehensive HERS Rating includes a computerized
simulation analysis utilizing RESNET Accredited Rating Software to
calculate a rating score on the HERS Index. The report will also
containacost/benefitanalysisfortherecommendedimprovements
and expected return on investment. A comprehensive HERS home
evaluation of existing homes will be required to qualify loan
applicantsforcertainfederallysponsoredenergy-efficientmortgage
productswhichwillbediscussedlaterinthecourse.
RESNET, a non-profit company developed five years ago, is the
governing body for HERS raters. When a consumer applies for an
energy-efficient mortgage to improve existing property, sometimes
calledanEIM(energyimprovementmortgage),thestructuremustgo
throughanextensiveratingprocess.
AccordingtotheBuildingPerformanceInstitute(BPI),thisiswhatis
entailedforanenergyaudit:
•
Duringaloanapplication,lendersareaskedasaregularpracticeto
recommend improvements a buyer or sometimes a seller may need
to complete to make their structure more efficient. The mention of
energy-efficient improvements for lowering utility costs, lowering
negative contributions to the environment, and creating a vast
improvement in indoor air quality are important recommendations.
Mostprojectsstartwithaninterviewwiththehomeowner,
tofindoutwhatsymptomsheorshehasnoticedandwhat,
if anything, he or she has tried to fix those symptoms. An
evaluationofenergybillsprovidescluestoareasthatneed
improvement.
57
Basic understanding of energy efficiency will help you to point out
what can be or already has been improved for the real estate
investor.
in the decision-making process for making homes and commercial
buildingsmoreenergy-efficient.
Lenders will become well-versed in guiding buyers to consider
directingaportionoftheirincometoward"green"housinginsteadof
higher utility bills. Lower utility bills means property owners will
have more money in their pockets each month. They can then
allocate a larger portion of their incomes to expenses and to
qualifyingforlargermortgages.
Summary
Our focus for this chapter was on the various rating systems for
energy-efficient homes and buildings. Specifically, we examined the
components of the LEED® rating system and the different levels of
LEED® certification. In addition, we discussed the popularity of
ENERGY STAR® rated homes and their place in the future of the
industry. Finally, we looked at energy-efficient mortgages and how
theycanbeusedtoincreasethebuyingpowerofconsumers.
MostlendersarelearningmoreaboutEEMsandwillhelpaconsumer
recognize that if they normally qualify for a $260,000 home, they
may actually qualify for a $280,000 home because when a lender
factors in a rating for energy savings and the consumer takes
advantage of the many tax advantages the government offers, it
createsapositivesituationforallinvolved.
Why the EEM works
CHAPTER 3: ALTERNATIVE
ENERGY SOURCES
Energy-efficient homes cost less to own than non-efficient homes,
thoughtheymaystartoffwithhigherpricetags.
Overview
Source:FederalCitizen
InformationCenterofthe
OlderExisting
SameHomewith
U.S.GeneralServices
Home
EnergyImprovements
Administration.Pacific
GasandElectricCompany,
1996,allrightsreserved.
HomePrice
(90%mortgage,8%
interest
$150,000
$154,000
LoanAmount
$135,000
$139,000
MonthlyPayment*
$991
$1023
EnergyBills
+$186
+$93
Thetruemonthlycostof
homeownership
$1,177
$1,116
MonthlySavings
In this, our final chapter, we will examine some of the options that
are available to property owners to make their homes/buildings
more "green." Much of the discussion will focus on utilizing solar
energy and geothermal heat pumps as a way to utilize renewable
energy sources for heating, cooling, and powering a home/building.
Inaddition,wewilldetailthebenefitsofusingwindorhydroelectric
power instead of burning fossil fuels. The role fuel cells will play in
future green design will be outlined as well. Finally, we will look at
the Green Building Finance Consortium and the role it plays in the
researchanddevelopmentofsustainablebuildings.
Learning Objectives
$61
*Estimated mortgage payments are based upon principal and
interest only, and do not include taxes and insurance. Values
indicated here are for example only, and will vary from home to
home.
•
ExplaintheroleofPhotovoltaicsintheuseofsolarpower
•
Discuss the difference between open- and closed-loop
geothermalheatpumpsystems
•
Describe the importance of wind energy to the future of
greendesign
Introduction
Biomass
•
GreenRoofs
This home qualified for $4,816 in upgrades. With the EEM, lenders
recognize the savings the upgrades will bring. Borrowers may use
thesepotentialsavingslikeextracash,andaddthecostofupgrades
into the mortgage, paying them off easily as part of the monthly
mortgage payment. Once the upgrades are installed, the potential
savingsturnintorealsavings.
SolarPower
The other EEM option is for the lender to stretch debt-to-income
qualifying ratios to allow a larger loan for a house that is already
energy-efficient.Adebt-to-incomeratio"stretch"meansthatalarger
percentage of the borrower's monthly income can be applied to the
monthly mortgage payment. That means the buyer has more
borrowingpowerbaseduponthesameincome.
WhatAboutFuelCells?
GeothermalHeatPumps
•
Closed-LoopSystems
•
Open-LoopSystem
WindisFree
Hydroelectric
GreenBuildingFinanceConsortium
Many homes qualify for energy upgrades. Once a consumer decides
to upgrade the systems in his or her home to achieve optimum
energy efficiency, he or she should contact a lender and the lender
will begin the process for obtaining a loan amount. This type of
important information, which can be found in monthly newsletters
and on websites, can position a true professional to be a point of
contact.Propertyownersandconsumerswillrespecttheguidanceof
arealestateprofessionalwhounderstandstheseissuesandcanhelp
58
•
Introduction
Mostbuyersdon'tbuy"green"astheirprimarymotivation.However,
surveys show that energy-efficient homes are more marketable.
There clearly is a consumer-driven demand for "green" and many
Americansareconcernedabout'"greenhousegases"andareseeking
informationonalternativeenergysources.
Recognizing that oil, gas, and coal are LIMITED energy sources that
cannot be replaced, many Americans look to RENEWABLE energy
sourcessuchassolarorwindtosupplementtheirenergycosts.Ithas
beenpointedoutthatenergyefficiencyandconservationarenotthe
same. Riding a bicycle instead of driving is an example of
conservation.Likewise,theuseofalternativeandrenewableenergy
sources to supplement, if not replace, the use of non-renewable
(LIMITED) sources, represents efforts at conservation of LIMITED
energysources,andtheuseofsuchalternativesourcesofpowerhas
gainedtractioninrecentyears.Thediscussionastowhethernuclear
energyis"limited"or"renewable",sinceuraniumperhapscannotbe
replaced,willbelefttoanothercoursefordebate.Let'slookatwhat
areconsideredtoberenewableenergysources.
Solar Power
Insomeremoteareasofthecountrywheretherearenopowerlines,
Photovoltaic(PV)solarcellsproduce100%oftheelectricityusedby
homeowners. More often than not however, homes using PVs are
connected to our interconnected power grid of power plants and
transmissionlines.
FromWikipedia,thefreeencyclopedia,"Asolar cellisadevicethat
converts the energy of sunlight directly into electricity by the
photovoltaic effect. Sometimes the termsolar cellis reserved for
devicesintendedspecificallytocaptureenergyfromsunlight,suchas
solar panels and solar cells, while the termphotovoltaic cellis used
whenthelightsourceisunspecified.Assembliesofcellsareusedto
make solar panels, solar modules, or photovoltaic arrays.
Photovoltaics is the field of technology and research related to the
application of solar cells in producing electricity for practical use.
Theenergygeneratedthiswayisanexampleofsolarenergy--also
knownassolarpower."
RENEWABLEsourcesinclude:
•
Biomass
•
Solar-Ofgreatinterestto"GreenBuilders"
•
Geothermal-Ofgreatinterestto"GreenBuilders"
•
Wind-Ofincreasinginterestto"GreenBuilders"
•
Hydroelectric
There are two ways of converting sunlight energy into electricity:
directlyorindirectly.
•
Direct conversionisachievedbyusingSolar Panels,also
called PhotoVoltaic Arrays. Most solar panels are
constructed with silicon PV cells, which are somewhat
analogoustothechlorophyllusedbylivingorganisms.Solar
Panels can be installed either on the ground, on countryside houses or massive power plants, or on rooftops for
individualuse.
•
Indirect conversionis achieved byconcentrating
sunlightusinglensesormirrorstogenerateheat.Theheat
is then transferred to a transfer fluid for a conventional
powerplant,oritcanevenbecombinedwithPVarraysto
improve their efficiency. It is the same basic process as
usingamagnifyingglasstoburnsomething.1
Biomass
Biomass is matter usually thought of as garbage. Some of it is just
stuff lying around -- dead trees, tree branches, yard clippings, leftovercrops,woodchips,andbarkandsawdustfromlumbermills.It
canevenincludeusedtiresandlivestockmanure.Yourtrash,paper
products that cannot be recycled into other paper products, and
other household waste are normally sent to the dump. Your trash
contains some types of biomass that can be reused. Recycling
biomassforfuelandotherusescutsdownontheneedfor"landfills."
This linkhttp://www.nrel.gov/learning/re_photovoltaics.htmlis to
theDepartmentofEnergy'sNationalRenewableEnergyLaboratory's
website. It will take you to a 6½ minute video. View the video and
return to the course upon completion. Is extensive use of solar
energyjustafuturisticfantasy?Thesescientiststhinknot.
The stuff nobody seems to want can be used to produce electricity,
heat, compost material, or fuels. Composting material is decayed
plantorfoodproductsmixedtogetherinacompostpileandspread
tohelpplantsgrow.Biomasscropshavedeeperrootstructuresthat
prevent soil erosion and return important nutrients to the ground.
Even the vegetable oil we throw away and farm animal waste can
produceenergy.
1http://solarpower.com/
PVsolarpowersystemsproduceelectricitywithoutgivingoffcarbon
dioxide.OnePVsolarsystemcanoffsetapproximatelysixtonsofCO2
emissionsoveratwenty-yearlifespan.
Theconversionofbiomassintofueliscalledbio-energyorbiodiesel.
Theconversionprocessisknownasbiotechnologyandwilloccurin
afacilitysometimescalledabiorefinery.
Settingupasolarpowersysteminyourpropertycanincreaseyour
property's value and be regarded as an effective investment. The
Appraisal Institute reveals that by installing a Photovoltaic solar
electricsystem,thevalueofhomescanincreaseby$20,000forevery
$1,000 per year saved in operating costs. Numerous countries are
encouraging individuals and businesses to install PV solar power
systemsinordertoimprovetheefficiencyofenergycosts.
California produces more than 60 million bone-dry tons of biomass
eachyear.Ofthistotal,fivemillionbone-drytonsarenowburnedto
make electricity. This is biomass from lumber mill wastes, urban
woodwaste,forestandagriculturalresidues,andotherfeedstocks.
If all of it was used, the 60 million tons of biomass in
Californiacouldmake close to 2,000 megawatts of electricity for
California's growing population and economy, however. That is
enoughenergytomakeelectricityforabouttwomillionhomes!
Solar power is just one example of a rapidly growing alternative
energies industry. Real estate practitioners should be aware of tax
incentives offered in their area to homeowners who install solar
panelsandthelike.
Green Roofs
Geothermal Heat Pumps
The primary objective of a green roof is to absorb the precipitation
which contacts the roof surfaces and release it at a reduced and
measuredpace.Thegreenroofreducesrunoffvolumesfromrainand
snowmelt and will minimize deleterious impacts from concentrated
storm water runoff. Roof gardens reduce air conditioning and
heatingcostsandcanhavealifeexpectancyof50years.
Geo-exchange systems (more commonly referred to as Geothermal
Heat Pump Systems or GHPs) are among the most efficient and
comfortable heating and cooling technologies currently available,
becausetheyusetheearth'snaturalheattoprovideheating,cooling,
andoften,waterheating.Theyareusingaheatsourcethatisliterally
free.AsofDecember1,2009,homeownerswhoinstallENERGYSTAR
qualified geothermal heat pumps are eligible for a 30% federal tax
credit.http://www.energystar.gov/index.cfm?c=tax_credits.tx_index.
59
horizontalpipe(i.e.,manifold),placedintrenches,andconnectedto
theheatpumpinthebuilding.
ConventionalElectricair-sourceheatpumps,oftenusedinmoderate
climates, use the difference between outdoor air temperatures and
indoor air temperatures to cool and heat your home. Conventional
air source heat pumps are appreciably cheaper than ground source
heat pumps, but the more expensive energy-efficient Geothermal
HeatPumpConsortiumsaysgeo-exchangesystemscutheatingcosts
by30to70percent.GHPshaveanestimatedsystemlifeof25years
for inside components and 50 years for the ground loop which can
providesavingsinmaintenancecostsaswell.
Experts will tell you that if your home is more than 10 years old, it
probably does not have a good heating system. You may have a
pretty good heating system, but because of recent technology, the
systemlikelywouldnotmeetcurrentENERGYSTARrequirements.
Therearefourbasictypesofgroundloopsystems.Threeofthese--
horizontal, vertical, and pond/lake - are closed-loop systems. The
fourthtypeofsystemistheopen-loopoption.Whichoneoftheseis
bestdependsontheclimate,soilconditions,availableland,andlocal
installationcostsatthesite.Alloftheseapproachescanbeusedfor
residentialandcommercialbuildingapplications.
Closed-Loop Systems
Horizontal
This type of installation is generally most cost-effective for
residential installations, particularly for new construction where
sufficientlandisavailable.Itrequirestrenchesatleastfourfeetdeep.
The most common layouts either use two pipes, one buried at six
feet, and the other at four feet, or two pipes placed side-by-side at
fivefeetinthegroundinatwo-footwidetrench.TheSlinky™method
of looping pipe allows more pipe in a shorter trench, which cuts
downoninstallationcostsandmakeshorizontalinstallationpossible
in areas it would not be possible with conventional horizontal
applications.
Pond/Lake
If the site has an adequate water body, this may be the lowest cost
option. A supply line pipe is run underground from the building to
thewaterandcoiledintocirclesatleasteightfeetunderthesurface
topreventfreezing.Thecoilsshouldbeplacedonlyinawatersource
thatmeetsminimumvolume,depth,andqualitycriteria.
Vertical
Open-Loop System
Large commercial buildings and schools often use vertical systems
because the land area required for horizontal loops would be
prohibitive.Verticalloopsarealsousedwherethesoilistooshallow
for trenching, and they minimize the disturbance to existing
landscaping.Foraverticalsystem,holes(approximatelyfourinches
indiameter)aredrilledabout20feetapartand100-400feetdeep.
Intotheseholesgotwopipesthatareconnectedatthebottomwitha
U-bend to form a loop. The vertical loops are connected with
60
This type of system uses well or surface body water as the heat
exchangefluidthatcirculatesdirectlythroughtheGHPsystem.Once
ithascirculatedthroughthesystem,thewaterreturnstotheground
throughthewell,arechargewell,orsurfacedischarge.Thisoptionis
obviously practical only where there is an adequate supply of
relatively clean water, and all local codes and regulations regarding
groundwaterdischargearemet.2
usecurrently.Residentialinstallationsdoexist,buttheyaretypically
demonstrationprojects.
Wind Is Free
"Wind powerisnowtheworld'sfastestgrowingenergysourceand
hasbecomeoneofthemostrapidlyexpandingindustrieswithsales
ofroughly$2billionin1998,"saidChrisFlavinoftheWorldWatch
Institute.
The Alternative Institute was formed in 1977 at West Texas State
University as an outgrowth of wind energy research in 1970. Its
primary emphasis has been placed on wind energy though some
research is also on solar energy. Their site iswww.windenergy.org.
Online courses on renewable energy sources are available by going
to the site and clicking on the EDUCATION tab as are short videos
illustrating wind mill farms, maps, and lots more for those students
whowishtolearnmoreaboutwindasaRENEWABLEenergysource.
2http://www.energysavers.gov/your_home/space_heating_cooling/i
ndex.cfm/mytopic=12650
What about Fuel Cells?
Afuelcellisanelectrochemicaldevicethatcombineshydrogenand
oxygentoproduceelectricity,withwaterandheatasitsby-products.
As long as fuel is supplied, the fuel cell will continue to generate
power, unlike a conventional battery which has a stored energy
supplythatwilleventuallyrunout.Sincetheconversionofthefuelto
energy takes place via an electrochemical process, not combustion,
the process is clean, quiet, and highly efficient - two to three times
moreefficientthanfuelburning.
An average U.S. household uses about 10,655 kilowatt-hours (kWh)
of electricity each year. One megawatt of wind energy can generate
from2.4tomorethan3millionkWhannually.Therefore,amegawatt
of wind generates about as much electricity as 225 to 300
householdsuse.Itisimportanttonotethatsincethewinddoesnot
blowallofthetime,itcannotbetheonlypowersourceforthatmany
households without some form of storage system. The "number of
homes served" is just a convenient way to translate a quantity of
electricity into a familiar term that people can understand.
(Typically, storage is not needed, because wind generators are only
part of the power plants on a utility system, and other fuel sources
are used when the wind is not blowing. According to the U.S.
Department of Energy, "When wind is added to a utility system, no
newbackupisrequiredtomaintainsystemreliability."WindEnergy
Myths,
Eachtypeoffuelcellhasadvantagesanddrawbackscomparedtothe
others,andnoneisyetcheapandefficientenoughtowidelyreplace
traditional ways of generating power, such as coal-fired,
hydroelectric,orevennuclearpowerplants.
Mostofthediscussiononfuelcellshastodowithhydrogen-powered
carsandtrucks--notbuildings.
However, the Conde Nast Building built 1996-1999, a "green" 48storyskyscraperlocatedat4TimesSquare-42ndStreet&Broadway
inNewYorkCity,combinesalternativeenergyusesincludingfuelcell
technology.Thebuildingisoneofthesubjectsof"BigandGreen",an
exhibit at the National Building Museum in Washington, D.C. One of
the points the exhibit makes is that many of the skyscrapers we
knowandloveareenergyguzzlers.
•
WindPoweringAmericaFactSheetSeries,
http://www.nrel.gov/docs/fy05osti/37657.pdf)3
Thisbuildingusestwohydrogenfuelcellstohelpgenerate
hotwaterandelectricity.Eightwereoriginallyplanned,but
hadtobescaledbackduetoweightissues.
3http://www.awea.org/faq/wwt_basics.html
•
Thebuildinghasasmallpatchofsolarcellsprovidingsome
ofitselectricity.
Hydroelectric
•
The building has 50% more insulation in the walls and
double the insulation in the roof as a typical New York
skyscraper.
Ourfinalrenewableenergysource,hydroelectricpower,usesflowing
water to create electricity. The most common type of hydroelectric
plant uses a dam on a river to store water in a reservoir. Water
releasedfromthereservoirflowsthroughapipeandintoaturbine,
which spins to drive a generator, producing electricity. Pumped
storage plants use a two-reservoir system, pumping water from a
riverorareservoirtoahigherreservoirwhenelectricitypricesare
low during the night. When the value of electricity on the grid is
higher during the day, water is released from the upper reservoir,
spinningtheturbinestoproduceelectricity.
Photovoltaiccellsintegratedintothefacadeonthetop19floorsand
natural-gaspoweredsolidfuelcellsontheroofproduceheatthrough
the interaction of hydrogen and oxygen with water as its harmless
by-product.
Althoughincludedinthecourse,studentsmustunderstandthatfuel
cells are expensive and, for that reason, impractical for residential
61
Building a hydroelectric plant in one's backyard is not high on the
prioritylistofagreenbuilder-buthydroelectricenergyisoneofthe
renewable sources of energy we've discussed. Like sunlight and
wind,flowingwaterisfree.
Green Building Finance Consortium
TheGreenBuildingFinanceConsortium(GBFC)isagroupofleading
corporations, real estate companies, and trade groups who have
joined together to address the need for independent research and
analysisofinvestmentingreenorenergy-efficientbuildings.
GBFC'seffortisunique,inthatitisthefirstindependenteffortofits
kind led by real estate finance and investment specialists who have
advisedmanyofthenation'sleadingrealestateorfinancecompanies
including Standard and Poor's Corporation, Merrill Lynch, CalPers,
Freddie-Mac,AlaskaPermanentFundCorporation,BankofAmerica,
RREEF, Standard Mortgage Investors, Catellus, and scores of other
leadingcompanies.
The GBFC was formed to help fill the void of information, methods,
andpracticesforthevaluationandunderwritingofsustainable
properties. When the Consortium was founded in 2006, the public
sectorwaspioneeringsustainabilityinsomeofitsproperties,yetthe
privatesectorwaswellbehind.Accordingly,theConsortiumchoseto
focus its efforts on enabling private sector participants to make
sustainablepropertyinvestmentdecisionsfromafinancial/fiduciary
perspective.Note: the term fiduciary duty does not apply to all
states.Ifyourstatedoesnotrecognizetheterm,"statutoryduty"
mayapply.
Giventhecriticalimportanceofindependence,GBFChasalsochosen
tonotacceptmembershiporfinancialsupportfromgreenproductor
green building trade organizations, and it limits the individual
investments of any organization in the Consortium's work. GBFC
does accept support from a select group of governments, nongovernmental organizations, and real estate industry companies
activelyinvolvedinenergyefficiencyandsustainabilityinvestment.4
4http://www.greenbuildingfc.com/Home/History.aspx
Summary
Inthischapter,wediscussedalternativeenergysourcesthatcanbe
used as sources of heating, cooling, and powering a home or
commercial building. Specifically, we examined solar power,
including the use of photovoltaics, as a means of utilizing a
renewable resource (the sun) to power a home instead of burning
fossilfuels(coal).Wealsolookedatthedifferenttypesofgeothermal
heat pumps and how they utilize the heat from the earth's crust to
provide heating, including hot water, and cooling. In addition, the
role both wind and hydroelectric power will play in the future of
green design was detailed. Finally, we discussed the Green Building
Finance Consortium and how they will help shape research and
developmentofsustainablebuilding.
62
Basics of Green Building for Real Estate
~ Final Assessment Questions ~
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Book & Individual Course Evaluations Form
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Indiana Real Estate Broker CE Registration Form
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Indiana Real Estate Broker CE Assessment Answer Sheet
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Basics of Green Buildling for Real Estate
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