Real Estate Contracts +8California · Real Estate · English

Real estate contracts include sales of real property, leases over one year, and agreements employing an agent/broker for compensation. All must be in writing and signed by the party to be charged. The four requirements are capable parties, consent, lawful object, and sufficient consideration. Buyer's terms constitute the offer; owner's agreement is acceptance forming the contract.

• ✓Real estate contracts must be in writing and signed by the party to be charged
• ✓The four requirements are capable parties, consent, lawful object, and consideration
• ✓A definite offer and unconditional acceptance create the contract

An earnest money deposit is trust funds. Under Real Estate Law Section 10145, a broker must place trust funds into a trust fund account, neutral escrow, or the principal's hands. When a transaction falls apart, a broker facing competing demands is advised to file an interpleader action and deposit funds with the court.

• ✓An earnest money deposit is trust funds handled under Real Estate Law
• ✓Section 10145 requires placing funds in a trust account, neutral escrow, or principal's hands
• ✓A broker facing disputed deposits should file an interpleader action

For residential sales (up to four units, buyer-occupied), special liquidated damages rules apply only to amounts actually prepaid. If the amount does not exceed 3% of the purchase price, the clause is valid unless the buyer proves it unreasonable. If it exceeds 3%, it is invalid unless the enforcing party proves it reasonable. The provision must be separately signed/initialed and, if printed, set off in specified type.

• ✓Liquidated damages up to 3% of purchase price are presumed valid on residential sales
• ✓Amounts over 3% are presumed invalid unless proven reasonable
• ✓The provision must be separately signed or initialed by each party

Listing agreements, deposit receipts, and exchange agreements should contain: date; names and addresses of parties; property description; consideration; reference to new or existing mortgages and terms; other required provisions; and date and place of closing. A contract of sale is executory until the deed is signed and delivered.

• ✓Contracts should include date, parties, property description, consideration, and financing terms
• ✓A contract of sale is executory until the deed is signed and delivered

A properly drawn contract binds heirs, executors, administrators, and assigns, allowing the buyer to compel specific performance from the seller's successors. Under the Uniform Vendor and Purchaser Risk Act (Civil Code 1662), if neither title nor possession has transferred and the property is materially destroyed, the seller cannot enforce and the buyer recovers payments; if title or possession transferred, the buyer bears the loss.

• ✓A contract binding heirs and assigns allows enforcement against the seller's successors
• ✓Under Civil Code 1662, risk of loss follows transfer of title or possession
• ✓If neither title nor possession transferred, the buyer may recover payments after destruction

The Escrow Law (Division 6 of the California Financial Code) requires the Commissioner of Corporations to license escrow holders who conduct public escrows. Banks, savings and loan associations, title insurance companies, underwritten title companies, trust companies, attorneys, and real estate brokers have certain exemptions. Under Financial Code Section 17006(a)(4), a real estate broker is exempt when performing acts in the course of or directly incidental to a real estate transaction, and must be an agent or party to the transaction performing an act requiring a real estate license.

• ✓The Escrow Law is Division 6 of the California Financial Code, administered by the Commissioner of Corporations
• ✓Banks, S&Ls, title companies, trust companies, attorneys, and brokers have exemptions from escrow licensing
• ✓Financial Code Section 17006(a)(4) exempts brokers acting incidental to a real estate transaction in which they are agent or party

The Department of Corporations interprets Section 17006(a)(4) to mean: the exemption is personal to the broker who cannot delegate other than ministerial duties; the exemption is not available for associations/arrangements with other brokers to conduct escrows; and when escrow business is a substantial factor in the utilization of the broker's services, it is not 'incidental to a real estate transaction.' A broker acting solely as a party (principal) and not as agent may not perform the escrow under the exemption.

• ✓The broker escrow exemption is personal and cannot be delegated except for ministerial duties
• ✓The exemption is not available for arrangements with other brokers to conduct escrows
• ✓When escrow business is a substantial factor, it is not 'incidental' and the exemption does not apply

A broker cannot advertise in a misleading manner or advertise conducting escrows under the exemption without specifying the services are only connected to the broker's brokerage business. A broker may not use a fictitious name containing 'escrow' or implying escrow services unless it includes the term 'a non-independent broker escrow' following the name. This term must appear in advertising, signs, and electronic promotional material (Commissioner's Regulation 2731(d)). Escrowed funds must be kept in a trust account with proper records per Regulations 2830.1 et seq., 2950, and 2951.

• ✓A broker must specify escrow services are only connected to the brokerage business, and not advertise misleadingly
• ✓A fictitious name with 'escrow' must include 'a non-independent broker escrow' per Regulation 2731(d)
• ✓Escrowed funds must be maintained in a trust account with records under Regulations 2830.1 et seq., 2950, and 2951

When a broker conducts an escrow under the exemption, the broker's agency and fiduciary duties are NOT limited to the course and scope of the escrow instructions (unlike a neutral third-party escrow holder). The broker's agency purpose expands to include the escrow. A broker representing (or acting as) buyer or seller becomes agent and fiduciary of the other principal(s) when electing to conduct the escrow. These additional agency and fiduciary relationships and conflicts must be disclosed to and consented to by the principals.

• ✓A broker-escrow holder's fiduciary duties are NOT limited to the scope of the escrow instructions
• ✓A broker conducting escrow becomes agent and fiduciary of the other principal(s) to the transaction
• ✓The added agency relationships and conflicts must be disclosed to and consented to by the principals

An assignment transfers the tenant's entire remaining interest; a sublease transfers part of the premises or the whole for less than the full remaining term. Prohibitions are construed strictly against the landlord, but a prohibition requiring landlord consent is valid if consent is exercised reasonably. The actual nature (not the label) determines legal treatment.

• ✓Assignment transfers the entire remaining interest; sublease transfers less
• ✓Consent requirements are valid if consent is exercised reasonably
• ✓The nature of the transfer, not its label, controls legal treatment

Unless prohibited, a landlord may transfer its interest to a third party; the lease remains in effect with the same rights/obligations. Under CC 823, a successor landlord is not liable for the prior landlord's violations of covenants against encumbrances or relating to title or possession.

• ✓A landlord may transfer its interest unless the lease prohibits it
• ✓The lease survives transfer with unchanged rights and obligations
• ✓CC 823 shields successor landlords from prior landlord's title/possession covenant violations

Assignment does not relieve the original tenant unless the landlord expressly agrees. The assignee is fully liable if it expressly assumed obligations; without express assumption, the assignee is liable only for privity-of-estate obligations (rent, maintenance) but not purely contractual obligations like attorney's fees.

• ✓The original tenant remains liable after assignment absent express landlord release
• ✓An assignee with express assumption is fully liable under the lease
• ✓An assignee without assumption is liable only for privity-of-estate obligations

In a sublease the original tenant remains liable for all obligations and the subtenant's acts. There is no privity of contract or estate between subtenant and landlord, so a subtenant has no direct obligation to the landlord. If the landlord terminates the tenant's lease, the subtenant's rights are simultaneously extinguished.

• ✓A subtenant has no direct obligation to the landlord (no privity)
• ✓The original tenant remains liable for all obligations and subtenant's acts
• ✓Termination of the tenant's lease extinguishes the subtenant's rights

A security interest designates the lender's interest in the borrower's property; deeds of trust and mortgages are security instruments.

• ✓Certain assets are set aside so the lender can reach or sell them upon default
• ✓The deed of trust is the most frequently used security instrument in California real estate loans

Historical distinctions between deeds of trust and mortgages have largely been eliminated.

• ✓Bank of Italy v. Bentley (1933) held deeds of trust and mortgages are functional equivalents
• ✓Civil Code 2920 (amended 1986) provides 'mortgage' includes any security device conferring a power of sale; both may include power of sale for non-judicial foreclosure (Civil Code 2924 et seq.)
• ✓Civil Code 882.020 deems deeds of trust and mortgages functional equivalents for statute of limitations

Remaining distinctions involve party names and the instrument used to release the lien.

• ✓A deed of trust is extinguished by a deed of reconveyance; a mortgage by a certificate of discharge/satisfaction
• ✓Mortgage parties are mortgagor (borrower) and mortgagee (lender/beneficiary)
• ✓A mortgage without power of sale may only be foreclosed judicially, affecting statute of limitations, deficiencies, and redemption rights

An all-inclusive trust deed wraps around existing financing while a new lender assumes payment of the existing loan.

• ✓Analyze existing financing for due-on-sale/due-on-encumbrance clauses before using an AITD; the Garn-St. Germain Act (1982) preempts state law and permits acceleration on transfer/further encumbrance
• ✓The AITD principal includes the unpaid existing balance plus new funds advanced; borrower pays the new lender who pays the senior loan holder
• ✓Using an AITD in violation of a due-on-sale clause may constitute fraud or breach of fiduciary duty; legal counsel is recommended
• ✓Owner-occupied residences have certain Garn-St. Germain exemptions

Civil Code amended in 2006 made uniform the foreclosure statute of limitations.

• ✓If the maturity date is ascertainable from recorded evidence, foreclosure may commence within 10 years of that date
• ✓If maturity is not fixed in the recorded evidence, foreclosure may commence within 60 years after recording the security instrument

Junior financing is a loan recorded after or subordinate to senior financing.

• ✓Junior financing may not be used on a first conventional loan from an institution/licensed lender without approval
• ✓When senior financing is FHA insured or VA indemnified, junior financing is most often prohibited due to due-on-further-encumbrance clauses

A package or mixed collateral instrument secures a real property loan with additional personal property.

• ✓It may include fixtures and other business or household personal property as collateral
• ✓MLBs are not licensed to make/arrange private-investor loans secured by business/household personal property; the CFL license authorizes such loans

A blanket instrument covers more than one parcel and usually contains a release clause.

• ✓A release clause provides for release of a particular parcel upon repayment of a specified loan portion, typically used in speculative subdivisions
• ✓Releases require compliance with the Subdivision Map Act (Government Code 66411) and the Subdivided Lands Law (B&P 11000)
• ✓It is unlawful to sell/lease/finance subdivision parcels without a recorded final map and issuance of a Public Report (or exemption)

An open-end instrument allows future advances without affecting priority if the advances are obligatory.

• ✓Obligatory advances retain the priority of the recorded instrument; optional advances may not (Civil Code 2882 and 2884)
• ✓Construction loan advances under construction loan agreements are obligatory; partial/staged funding using fractionalized interests risks loss of mechanic's lien priority and possible Ponzi schemes
• ✓Partial or staged funding of construction/rehab loans is prohibited under B&P 10238(h)(4) multi-lender exemption

Under a pledged savings account loan, part of the down payment funds a pledged savings account as collateral.

• ✓The account serves as cash collateral for the lender and supplements payments during the first (usually two) years, with interest typically paid to the borrower
• ✓Used to reduce required equity/down payment for residential and commercial loans and to cover construction interest

The Equal Credit Opportunity Act (ECOA) prohibits credit discrimination based on age, sex, race, marital status, color, religion, national origin, receipt of public assistance, or exercise of Consumer Credit Protection Act rights. The Fair Housing Act also prohibits discrimination based on handicap or familial status.

• ✓ECOA prohibits discrimination on age, sex, race, marital status, religion, national origin
• ✓Fair Housing Act prohibits discrimination on handicap and familial status
• ✓Credit guidelines must be applied equally, including each spouse's income

Originating a loan begins when a borrower contacts an MLB or mortgage loan originator (MLO). The four steps are: (1) The Application; (2) Loan Processing; (3) Underwriting Analysis; and (4) Loan Approval, Funding and Closing.

• ✓Four steps: Application, Processing, Underwriting, Approval/Funding/Closing
• ✓MLO must know each loan program and funding source guidelines
• ✓MLO should conduct an initial interview with the prospective borrower

A standard residential loan application form is used industry-wide, a collaboration of FNMA (Form 1003) and FHLMC (Form 65). The application identifies the loan amount, terms, purpose, and repayment. Each loan request must be evaluated in a fair, impartial, non-discriminatory manner.

• ✓FNMA Form 1003 (FHLMC Form 65) is the standard application form
• ✓FHA and VA also use the standard application form
• ✓Applications must be evaluated fairly and non-discriminatorily

MLB/MLOs may collect advance fees for origination only under a written agreement previously reviewed and authorized by the DRE (Regulation 2970). Advertising materials must be pre-approved. Credit/appraisal report fees in the exact amount are permitted without prior approval but remain trust funds.

• ✓Advance fee agreement requires prior DRE review and authorization (Reg 2970)
• ✓Advance fees are trust funds deposited into a trust account
• ✓Withdrawal only when expended for principal or 5 days after verified accounting
• ✓Mishandling presumes Penal Code 506/506a violation (embezzlement/conversion)

The processor gathers information to assess capacity and willingness to repay: purpose of loan, source of repayment (usually 2 years same employment), assets/liquidity, liabilities (front-end and back-end ratios), and credit history. Housing expenses form the front-end ratio; total obligations form the back-end ratio.

• ✓Most lenders require minimum 2 years in same line of work
• ✓Front-end ratio is housing expenses to income; back-end ratio includes all debt
• ✓Credit history indicates financial management and repayment likelihood

The MLO submits the application to processing to assemble a loan application package with a completed form and supporting documentation. Lenders use checklists: Compliance Checklist, Stack Order, Borrower Checklist, and Property Checklist, ensuring required steps and documentation to approve and close the loan.

• ✓Loan package includes completed application and supporting documentation
• ✓Checklists: Compliance, Stack Order, Borrower, Property
• ✓RESPA requirements apply to fees imposed at time of application

The property's value, title condition, and quality are evaluated to ensure adequate collateral. Because of long loan terms, the lender estimates current value and neighborhood/economic trends. The processor orders a Preliminary Title Report to confirm the borrower has good title.

• ✓Property evaluated for value, title, and quality as adequate collateral
• ✓Preliminary title report confirms borrower has good title
• ✓Lender considers economic trends in the neighborhood

The four most important disclosures in the historic H-2 model form are: the finance charge ('the dollar amount the credit will cost you'), the APR ('the cost of your credit as a yearly rate'), the total of payments ('the amount you will have paid when you have made all scheduled payments'), and the amount financed (principal minus prepaid finance charge). The finance charge and APR must be the most conspicuous.

• ✓The four key historic disclosures are: finance charge, APR, total of payments, and amount financed
• ✓Finance charge and APR must be more conspicuous than any other disclosure except the creditor's name
• ✓Amount financed = principal loan amount plus other financed amounts minus the prepaid finance charge

TILA and Regulation Z require disclosures to be grouped together, segregated from other information, and prohibit including unrelated information. The itemization of the amount financed must be separate. Borrowers receive the GFE concurrently with TILA disclosures. The terms 'finance charge' and 'APR' must be more conspicuous than other required disclosures.

• ✓Disclosures must be grouped together and segregated from unrelated information
• ✓The terms 'finance charge' and 'APR' must be more conspicuous than other disclosures
• ✓The GFE is provided concurrently with TILA disclosures

The proposed model forms (e.g., H-19(A)) disclose a loan summary, the APR with comparison to average APR for excellent-credit borrowers, a range of APRs within a 'high cost zone,' the nominal rate, monthly payments, and escrow estimates. A new 'key questions about risk' category asks whether the rate/payment may increase and whether a prepayment penalty applies, plus warnings about foreclosure and no guaranteed refinance.

• ✓Proposed forms compare the borrower's APR to the average APR for excellent-credit borrowers
• ✓Proposed forms include 'key questions about risk' regarding rate increases and prepayment penalties
• ✓Proposed forms warn that failure to pay could result in loss of the home through foreclosure
• ✓Verbatim use of descriptive phrases is not required, only descriptive phrases for key items

Creditors may not engage in a pattern of lending based on collateral value without regard to the borrower's ability to repay. Home improvement loan proceeds must be disbursed to the borrower, jointly with the contractor, or through an escrow agent. The creditor is presumed to have violated if it fails to verify and document repayment ability, income/assets, and obligations.

• ✓No pattern of collateral-based lending disregarding repayment ability
• ✓Home improvement proceeds must be disbursed to borrower, jointly with contractor, or via escrow
• ✓Presumed violation if creditor fails to verify/document income, assets, and obligations (W-2, tax returns, payroll, bank records)

When selling/assigning a Section 32 loan, the creditor must furnish a notice that purchasers/assignees could be liable for all borrower claims and defenses. Within one year of extending a Section 32 loan, a creditor may not refinance the same borrower into another Section 32 loan unless in the borrower's interest, and cannot use evasion tactics like arranging refinancings through affiliates.

• ✓Assignee notice required: purchasers could be liable for all claims/defenses the borrower could assert
• ✓No refinancing the same borrower into another Section 32 loan within one year unless in borrower's interest
• ✓Prohibited from evading via patterns of affiliate refinancing or fee-charging loan modifications

No presumption of compliance is available where the regular periodic payments for the first seven years would cause the principal balance to increase, or where the loan term is less than seven years and the payments do not fully amortize the balance. This does not apply to temporary/bridge loans of twelve months or less.

• ✓No compliance presumption if first-seven-year payments increase principal balance
• ✓No compliance presumption if term under 7 years and payments do not fully amortize
• ✓Exception for temporary/bridge loans of 12 months or less

The Cost Approach = value of land as if vacant PLUS cost to reconstruct the building new, LESS accrued depreciation. Cost new tends to set the upper limit of value. Procedure: estimate land value, estimate replacement/reproduction cost, estimate depreciation, deduct, then add land value.

• ✓Cost Approach = land value + (cost new of improvements − accrued depreciation)
• ✓Cost new tends to set the upper limit of value
• ✓Principle of substitution applies
• ✓Land value is usually based on the market/comparable approach

Three bases: Historic Cost indexed to Cost New (actual original cost indexed); Reproduction Cost New (exact replica in design/materials); and Replacement Cost New (modern methods/materials with same utility). Replacement Cost New is the most frequently used in practice.

• ✓Three bases: Historic Cost indexed, Reproduction Cost New, Replacement Cost New
• ✓Reproduction = exact replica; Replacement = modern equivalent utility
• ✓Replacement Cost New is the most frequently used cost approach base

Square-Foot Method is most common on the West Coast and fastest. Cubic-Foot Method is popular in the East, most accurate for warehouses/industrial. Quantity Survey Method is very accurate but time-consuming (used by contractors). Unit-in-Place Method calculates cost of installed units.

• ✓Square-Foot Method is most common on the West Coast and the fastest
• ✓Cubic-Foot Method is popular in the East, used for industrial/warehouse buildings
• ✓Quantity Survey Method is most detailed/accurate but time-consuming
• ✓Costs classified as direct (hard) and indirect (soft) costs

This law (Public Resources Code 2621, et seq.) controls development near hazardous faults; sellers/agents must disclose property located within a delineated earthquake fault zone.

• ✓The State Geologist delineates earthquake fault zones, usually one quarter mile in width
• ✓Section 2621.9 requires a seller or agent to disclose that property is within a delineated earthquake fault zone
• ✓Developers within a delineated zone subject to the Map Act must obtain special approval per State Mining and Geology Board criteria
• ✓Maps may be consulted at the California Department of Conservation or the county assessor/recorder

Under the Map Act, a subdivision is any division of contiguous land for sale, lease, or financing, including condominiums, community apartments, and certain stock cooperative conversions.

• ✓Includes condominium projects, community apartments, and conversion of five or more existing dwelling units to a stock cooperative
• ✓The subdivider must generally prepare a map for local government approval
• ✓The land must be contiguous under the Map Act

The local jurisdiction must find a subdivision conforms to general and specific plans and must deny approval if the site is not physically suitable.

• ✓The local agency must deny approval if the site is not physically suitable for the proposed development
• ✓Water, drainage, soil, and sewerage problems can limit feasibility
• ✓Adverse environmental effects trigger review under the Environmental Quality Act

A preliminary soils report by a registered California civil engineer based on test borings is required for every subdivision requiring a final map, subject to waiver.

• ✓Required for every subdivision for which a final map is required
• ✓Must be prepared by a registered California civil engineer based on adequate test borings
• ✓The city or county may waive it under certain conditions
• ✓When prepared, the fact, date, and engineer's name should be noted on the final map

When a flood hazard exists, the report describes degree (inundation, flood, sheet overflow, ponding) and frequency (frequent, infrequent, remote).

• ✓Frequent: flooding may occur on average more than once in 10 years
• ✓Infrequent: flooding may occur once in 10 years or more
• ✓Remote: flooding dependent on conditions not lending to frequency analysis (levee break, channel obstruction)
• ✓Degrees include inundation, flood, possible flood, sheet overflow, and ponding of local storm water

For residential subdivisions, water feasibility and quality must be established. The Porter-Cologne Act requires notifying regional boards of tentative map filings involving waste discharge.

• ✓Water quality must meet local health department or State Department of Health Services standards
• ✓The Porter-Cologne Water Quality Control Act (Water Code 13000 et seq.) is administered by nine regional control boards
• ✓Section 13266 requires notifying the regional board of tentative subdivision map filings involving waste discharge (except community sewer and dwellings of five-family units or less)

The Public Utilities Commission requires undergrounding for all extensions of electricity and telephone service in residential subdivisions.

• ✓The PUC has mandated undergrounding for all extensions of electricity and telephone service in residential subdivisions
• ✓The developer must arrange telephone, gas, and electricity service to the site