If you’ve had your offer accepted by a seller, you might be considering a memorandum of contract to prevent someone from swooping in and trying to outbid you.
Will your seller back out if this happens?
Although this isn’t typically a concern when purchasing bank-owned properties, some private sellers and investors have been known to do this.
Having a memorandum of contract signed, notarized, and recorded in the county courthouse will cloud the property’s title and prevent the seller from selling the property to anyone other than you after your offer has been accepted.
Here’s what you need to know about getting a memorandum of contract.
1. What is the definition of memorandum of contract?
A memorandum of contract, also known as a memorandum of understanding, is a form memorializing a purchase and sale agreement or contract.
In the purchase and sale agreement, two parties settle upon the same objective, which is the sale/purchase of a property.
The memorandum of contract is less legally binding than the purchase and sale agreement, but it can be used to outline the terms and details of the agreement before the contract is drawn up or to simply record that a contract has been executed.
It can also be used to evidence the relationship between a property owner and the purchaser under a land contract.
Memorandums can be used in court when one party fails to meet one or more of the obligations stated in the agreement.
That said, to be effective, the memorandum of contract must be filed or recorded in the county property records where the property is located.
The memorandum of contract will specify the following information:
The names of both the seller and the buyer of the property
The common and legal address of the property
The date on which the agreement was entered
Additional terms may be inserted into the memorandum at the discretion of either party.
However, it should be noted that one of the reasons that memorandums are used is to keep the details of a transaction private.
While a memorandum of purchase can elaborate on the terms of the purchase, it isn’t necessary for it to do so.
The real purpose of the memorandum is to serve as a notice that a property is under a contract, such as a purchase agreement or seller-financed land contract.
Note that there is no law that requires a memorandum for a land contract to be valid.
2. Why Would you want to file a memorandum?
Buyers may consider a memorandum of contract since without one third parties won’t be aware that the buyer’s intended property is already under a contract.
In this case, an unscrupulous seller might impair the marketability of that property by taking a mortgage out on it.
The seller could also turn around and sell the property to another buyer for a higher price.
Once a memorandum of contract is filed, a lender or a prospective purchaser would know that a property has already been purchased or pledged when they complete a title search.
3. Why Might A memorandum Be important to the seller?
Sellers might record a memorandum of contract if they want their buyer to pay off an existing land contract by obtaining outside financing.
Most lending institutions require that a land contract is recorded before the bank will lend.
In addition, the bank looks for a minimum of 12 months of “seasoning.”
A loan is “seasoned” when there is a verifiable payment history for a specified length of time.
If this is not present, then the lender is not likely to lend.
Recorded memorandums serve as a way to legitimize the existence of a transaction.
They provide the essential terms of the underlying contract: start date, parties, property address, and amount of the sale.
4. What are the Cons of a memorandum of Contract?
While a memorandum of contract may sound attractive to you (as a buyer), it’s important to understand why these documents are rare.
The memorandum of contract puts a cloud on the chain of title that is usually only removed by recording a document that releases the memorandum.
If the original parties are not able to or unwilling to record this release, the owner of the property will have to go through a court process, such as quiet title, in order to remove the cloud.
Otherwise, the property’s marketability could be impaired.
This can be a costly and time-consuming process, and, for this reason, many sellers will likely be hesitant to execute and record such a document.
5. What does a memorandum of contract look like?
Are you looking for a sample memorandum of contract for your property?
Below is the text of a memorandum of contract with appropriate blanks.
Record & Return to
MEMORANDUM AND NOTICE OF AGREEMENT
BEFORE ME, the undersigned authority, on this day personally appeared ______________________________, who being first duly sworn, deposes and says that:
- On the ____ day of ___________, 20____, an agreement for the Purchase and Sale, Lease-Option, or Agreement for Deed was entered into by and between the Affiant, as Buyer, Optionor, or Lessor, and the Owner of Record, as Seller, Optionee, or Lessee of the real property described as (legal description below):
Also known as street address: __________________________________________________
- Per the terms of the agreement the closing date may be undetermined and may have a renewable term. If a purchase and sale, or an agreement with a pre-determined term, the closing shall take place on or before the ____ day of _____________, 20____.
- A copy of the said agreement for purchase and sale may be obtained by contacting…
FURTHER AFFIANT SAYETH NOT.
In witness whereof, signed, sealed, and delivered in the presence of:
STATE OF ____________
COUNTY OF ____________
Before me personally appeared __________________________________. He/She is personally known to me or has produced ____________________________________________ as identification, and who executed the foregoing instrument, and acknowledged to and before me that they executed said instrument for the purposes therein expressed.
WITNESS my hand and official seal in the state and County aforesaid, this _____ day of ______________, 20_____.
Notary Public: ________________________________
State of: _____________________________________
My Commission Expires: ________________________
6. What’s the termination process for a memorandum of contract?
If the individual who filed the memorandum of contract is willing to release you from the agreement and terminate the memorandum in a recordable way, you can record the termination or bring the termination to the closing.
The actual termination document should be reviewed by a title company, preferably one that a purchaser would be willing to use in connection with the sale.
If the parties who executed the memorandum are not willing to release and terminate the memorandum, then you’ll need to commence an action to clear the title.
7. What is a contract?
In the section below, we’ll discuss the core differences between a memorandum of contract and a contract.
First, however, we’ll define what a contract is, so you have a clear understanding.
A contract is a mutual agreement where two or more parties consent to a legally binding agreement.
The purpose of a contract is to document the obligations of both parties and distribute and minimize the risk if one party fails to abide by the contracted terms.
For a contract to purchase real estate to be legally binding, it must have the following:
An offer must be made
The offer must be accepted
It must be made with the intent to create a legal relationship
It must have consideration from both parties
8. What are the differences between a contract and a memorandum of contract?
A memorandum of contract offers a way to record the existence of a contract.
However, the memorandum itself is not necessarily a formal contractual relationship.
The document as a result should be drafted carefully to create the type of relationship that the parties desire.
Below, we’ll explain how a formal contract and a memorandum of contract differ.
Enforceability is the key difference between a contract and a memorandum of understanding.
Contracts are formed between two or more parties who intend to create a legally enforceable agreement.
They enter into contracts after an offer has been considered and accepted.
Following that, they are expected to comply with the terms and conditions of the agreement.
If a term or condition of a contract is breached, then the parties involved will face legal consequences.
Alternatively, a memorandum of contract is not typically intended to create such legally enforceable obligations.
Rather, it merely records the presence of a contract that does.
Outline of expectations
A memorandum of contract is a document used to articulate an agreement between two or more parties.
It will likely list the date a purchase and sale agreement was created, the parties involved and the expected closing date
If a memorandum is created before parties are ready to make a formal agreement, it may also outline expectations and responsibilities, but it often does not.
Alternatively, the point of any contract is to outline terms and obligations to which both parties must adhere.
9. How do you record a memorandum of contract?
Here are the steps involved:
Step 1: Have your lawyer draft an Affidavit and Memorandum of Agreement of Purchase and Sale
Step 2: Complete the document with the following information:
- The names of the buyer and seller
- The date the agreement for purchase and sale was signed
- Your name, address, and phone number as the person from whom a copy of the agreement can be obtained
Then, you should attach a separate piece of paper with the title: Exhibit “A” Description of Real Property.
Finally, insert the description of the property that was used in the Agreement of Purchase and Sale.
Step 3: Get the document notarized
Step 4: Go to the courthouse of the county where the property is located
File the Affidavit and Agreement of Purchase and Sale with the county clerk for real-estate records and pay the requested fee.
10. How do you close on a land contract?
Have you identified a piece of land that you’re interested in moving forward with but you’re not sure about the legal process of transferring property under a land contract?
Land contracts require a “closing” process to prepare, sign, and file all necessary documents.
Here are the common steps that a buyer and seller should take to close on their land contract purchase.
Make a purchase agreement
A land contract should begin with a purchase agreement.
This legal document is signed by a potential buyer who makes an offer on the real property for sale.
The purchase agreement should include that the offer is for a land contract.
It should also state the purchase price, initial cash down payment, length of the payment term, and any other terms of sale.
A seller will then accept the terms of the buyer’s purchase offer and sign it to make it an official purchase agreement.
During this time, they may be required by law to provide certain disclosures.
For example, the existence of any lead-based paint on the property.
Sign a land contract
A land contract is a separate legal agreement or contract with all the terms and conditions agreed to between the buyer and seller.
Here are some of the items that a land contract should include:
- address of the real estate
- full legal description of the property
- purchase price
- down payment amount
- monthly payment amounts and terms
- number of payments to be made
- any balloon payment required
Furthermore, the contract should also state how the payments are supposed to be made (including the due date, grace period for late payments, late payment fees, and where the buyer should deliver each payment).
File a memorandum of land contract (if applicable)
A memorandum is an abbreviated legal document that notifies the public of the buyer’s interest in the property without the parties having to publicly disclose and record the full land contract and all of its terms (including price).
Prepare other forms to transfer rights in the property under a land contract
Depending on where the property is located, additional steps may be needed, such as:
1. Draft the deed: The deed transfers the legal title of the property from the seller to the buyer.
Depending on the terms of the land contract, it may be drafted and signed by the seller at closing.
If this is the case, it will then be held in escrow until the final payment is made on the land contract and filed with the appropriate government agency (i.e. county clerk) where the property is located.
2. Prepare the closing statement: A closing statement shows an accounting of the debits and credits to the buyer and seller as part of the land contract transaction.
Often, an attorney or a title agency will prepare this statement for the parties.
3. Arrange the title insurance: Often, a buyer will need title insurance, which is a form of indemnity insurance that protects lenders and property buyers from financial loss sustained from defects in a title to a property.
Even if the buyer doesn’t necessarily want this, lenders often require the buyer to get it.
There you go!
That’s everything you need to know about a memorandum of contract, which can help you protect yourself as you enter into a sale.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
4 thoughts on “Memorandum of Contract: 9 Things (2023) You Need to Know”
In Texas, doesn’t a memorandum of contract to buy land have an expiration date, same as the purchase contract closing date? Please verify this.
Hello Pat, unfortunately, since I’m not a lawyer, I can’t answer a more specific question such as this; however, I would recommend speaking with a local real estate attorney.
Advising individuals why/how record instruments that could affect the marketability of title of another individuals real property is something I don’t recommend. As you said you’re not an attorney, and I’m sorry but the article/videos would qualify as going legal advice. Over the last two years ” buyers ” have tried their hand in wholesaling, by recording such document searching for an assignee while clouding a title only to come back days before closing and tell you they couldn’t get funding or back out for any other reason, has created some new laws. I do not recommend anyone record any document that could affect legal title to someone else’s real property, whether it’s with best intentions or not. PEOPLE need to understand, once a document like this is recorded, ” RELEASE ” or ” Legal Termination/Cancelation ” is the only way to restore marketability without having to to quiet title. It’s not a quick process, it’s not a good thing. AVOID THIS AT ALL COSTS. Anything could happen to the person who recorded it. On most counties only that person can release it [ without having to involve the court that is, ] but why even promote such an idea?
Thank you for your comment, Michael. I’ve updated our article to better reflect the downsides of this document.