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Real Estate Transactions Kaufman Spring 2012

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Real Estate Brokers (Ch. 2) A. Types of Listing Agreements 1. Open listing (nonexclusive listing) a. Broker earns commission if he procures a ready, willing, and able buyer for the property b. Other brokers can be engaged by the seller, but the first one to procure a buyer earns the commission 2. Exclusive agency a. Promise by the seller not to engage another broker during the term of the agreement 3. Exclusive right to sell agreement a. Seller is obligated to pay the commission if any buyer purchases the property during the term of the agreement 4. Net listing a. Commission is not specified as a percentage b. Seller agrees to pay the broker all amount received in excess of a set price established by the broker and seller B. Brokers Duties to Clients 1. Duty of loyalty a. Broker should do his utmost to protect the client and advance the clients interest 2. Duty of disclosure a. When broker learns facts or other info that are material to the clients position or interests, the broker should promptly tell the client 3. Duty of confidentiality a. Absent clients consent, broker should not disclose to 3rd parties info about the clients objectives and the property C. Brokers Right to a Commission 1. Broker generally earns commission when he produces a ready, willing, and able buyer 2. Minority rule: broker must find a ready, willing, and able buyer and the sale must close a. Exception: if the failure to complete the sale is caused by the sellers wrongful default or interference, then a commission is payable D. Preparing to Contract (Ch. 3) 1. Contract for the sale of real estate must be in writing II. Contracts of Sale (Ch. 4) A. Statue of Frauds 1. Writing must include essential terms a. Names of parties b. Description of the property c. Intent to buy and sell 2. Writing must be signed by the party to be charged B. Equitable Conversion 1. Splits title to the property between the seller and the buyer at the moment the contract is signed a. Legal title: seller is still the owner of the property b. Equitable title: buyer
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2. Transfers risk of loss to the buyer only if the contract is specifically enforceable at the time of loss C. Contract Conditions 1. If a contract term is interpreted as establishing a condition precedent or a simultaneous condition, the parties will generally be released from any further obligations 2. If a covenant is breached and the breach does not destroy the entire value of the exchange, the parties may be obligated to proceed under the contract with only an allowance for the breach of the promise or warranty III. Condition of the Property (Ch. 5) A. Quantity: amount of land being transferred 1. Sale in gross: purchase a certain piece of property for a certain amount B. Quality 1. NY: escape clause gets seller out of duty to disclose C. Implied Duties to Disclose 1. Interstate Land Sales Full Disclosure Act a. Applies to the sale of unimproved lots in subdivisions with 25 or more lots; doesnt apply to build or sale of completed new homes b. Triggered when the developer uses interstate commerce, including mail and advertising that circulates in more than one state c. Requires the developer to file a registration known as a statement of record for approval by the govt before offering any lots for sale IV. Closing the Contract (Ch. 6) A. Elements of Conveyance 1. Deed must be in writing 2. Must name a grantor and a grantee 3. Must adequately describe the real property to the exclusion of all other 4. Must be an intent to convey by the grantor 5. Must be actual or constructive delivery 6. Grantee must accept the deed B. Doctrine of Merger 1. Everything that came before closing is merged into the documents exchanged at closing a. Exceptions: fraud, mistake, collateral rights C. Escrows 1. Loan escrow a. Used by lenders to collect and hold money from the debtor for paying annual real property taxes and fire and hazard insurance premiums 2. Escrow closing a. Parties have appointed an escrow agent to conduct the closing b. Escrow agent administers the contract of purchase and sale
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3. Contingency escrow a. Used to resolve a problem that arises at or before closing b. Usually consists of withholding part of the purchase price from the seller pending correction of the problem V. Contract Remedies (Ch. 7) A. Damages and Forfeiture of Payments 1. General measure of damages is the difference between the contract price and the fair market value of the property at the time of the breach 2. Forfeiture of deposit is rationalized as a valid consequence of the buyers default or the clause is considered to be a valid attempt by the parties to liquidate damages 3. Liquidated damages are damages that the parties to a contract agree to and quantify in advance of any breach B. Equitable Remedies 1. Specific performance a. Party seeking the remedy must be ready, willing, and able to perform b. P must have satisfied all contract conditions and requirements before demanding specific performance 2. Reformation a. Usually only in granted case of mutual mistake 3. Rescission a. Usually granted only if the problem is sufficiently material so that continuation of the contract is not appropriate or feasible 4. Equitable liens C. Slander of Title and Lis Pendens 1. Slander of title is designed to protect the value of the property a. If anyone maligns or disparages the reputation of the property, the owner can take steps to protect its reputation and value 2. Lis Pendens is a method of asserting a potential claim or conflicting interest against title to real estate when litigation is filed and pending a. Designed to put a cloud on the owners title and thereby make it difficult or impossible to transfer or otherwise deal with the property b. Gives notice to any potential BFPs thereby destroying their ability to take without knowledge of the pending dispute VI. Allocating Title Risk (Ch. 8) A. Types of Title 1. Marketable title a. Sellers title must be marketable only at the closing 2. Contract title a. Insurable title i. Title insurance company willing to issue a policy b. Record title

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Requires proof of the status of title, gathered solely from deeds and other instruments that are recorded in the public records ii. Sellers title cant depend on an unrecorded instrument B. Encumbrances and Encroachments 1. Encumbrance a. Nonpossessory right or interest in the property held by a 3rd party that reduces the propertys market value, restricts its use, or imposes an obligation on the property owner i. Includes easements, real covenants, equitable servitudes, marital property rights, mortgage liens, tax liens, and other liens and charges 2. Encroachment a. An unauthorized extension of an improvement across a bounder line b. Constitutes trespass by the improver C. Deed Covenants of Title 1. General warranty deed a. Grantor promises that no one ever has messed up the property with respect to title that still exists b. Gives grantee the most amount of protection 2. Special warranty deed (Bargain and sale deed w/ covenants against grantors acts) a. Grantor promises that he has not done anything to mess up title from the moment he took it 3. Quitclaim deed a. No warranties of title, no covenants of title given D. Types of Covenants 1. Present covenants (speaks only to what is going on at the time the deed is delivered; do not run with the land; personal between the grantor and grantee; grantee can only sue immediately preceding grantor) a. Seisin i. Promise that grantor has good title to the estate b. Right to convey i. Promise that grantor has the legal right to convey the estate c. Covenant against encumbrances i. Promise that there are no encumbrances on the land 2. Future covenants (protect the grantee from specified events that may occur after the deed is delivered in the future; breach of future covenant means someone not in privity can sue) a. Covenant of quiet enjoyment i. Grantor promises that the grantee may possess and quietly enjoy the land ii. Breached if grantee is actually or constructively evicted from all or part of the land by the grantor by someone claiming under the grantor, or by someone with paramount title
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b. Covenant of warranty i. Grantor warrants the title to the grantee ii. Breached by an actual or constructive eviction c. Covenant for further assurances i. Grantor promises to give whatever further assurances may be required in the future to vest the grantee with the title the deed purports to convey ii. Remedy of specific performance is available as an alternative to damages VII. Public Records (Ch. 10) A. Index Systems 1. Grantor-grantee index 2. Tract index B. Types of Recording Acts 1. Race Statute a. The first grantee to record wins regardless of which interest is prior in time 2. Notice Statute a. The last BFP wins; a subsequent purchaser who takes w/out notice of the prior unrecorded interest wins b. Notice is evaluated at the time the grantee pays value c. Types of notice i. Actual notice: purchaser has actual knowledge of the prior interest ii. Constructive notice: purchaser is deemed to have notice of all recorded interests, whether or not the grantee in fact searches title iii. Inquiry notice: purchaser has knowledge of facts suggesting that someone might have an unrecorded interest; grantee has a duty to inquire and is charged with knowing whatever that inquiry would have revealed; duty to inspect the land 3. Race-Notice Statute a. The first BFP to record wins; subsequent purchaser must both record before the holder of the prior-in-time interest records and take w/out notice of the prior interest C. Bona Fide Purchaser 1. Takes w/out notice of any prior interest for value; some inquiry may be required D. Notice from Possession 1. When possession is consistent with record title, there is no duty of inquiry VIII. Title Products (Ch. 11) A. Title Abstracts (least protective) 1. Summary of all recorded deeds and other recorded items in the chain of title, including encumbrances B. Attorneys Title Opinions and Certificates 1. Attorney gives opinion based on his review of the title abstract 2. Not a guarantee that there is marketable title; if opinion is negligent, can sue for malpractice
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Real Estate Transactions Kaufman Spring 2012 C. Title Insurance (most protective)

1. Insurer searches the records and discloses its findings, and insures undisclosed risks 2. Exclusions and Exceptions a. Survey exception; there is no coverage for matters an accurate survey would show, such as encroachments, boundary line disputes, or shortages in area b. Zoning and building laws c. Rights of parties in possession not shown by the public records d. Rights or claims of which the insured has knowledge prior to issuance of the policy e. Taxes or assessments for the current year, which are not yet due and payable, and taxes or assessments that are not shown as existing liens by the public records f. Liens for work performed on the property and materials incorporated into the property (mechanics and materialmens liens) IX. Housing Products (Ch. 13) A. Single-family home 1. Home owners association (HOA) rights a. Enforce the governing rules and can bring legal actions against violaters b. Power to charge for actions taken and can place a lien against the property of a person who fails to pay B. Condominiums 1. Single unit in a multiunit project together w/ an undivided interest in common areas and facilities of the project 2. Owner generally has a fee simple title to the unit and owns a percentage share of the common property as a tenant in common w/ neighbors 3. Declaration of Condominium: legal doc where property owner declares the legally described property to be held in condominium form 4. Condo board rights a. Right of first refusal b. Restrictions of the declaration are given more deference than those passed by the association and its board c. Items passed by the board are subject to a higher standard and are enforced if: i. They comply with the procedures established for their promulgation ii. Reasonably relate to the promotion of the health, happiness, and welfare of unit owners C. Cooperative Housing 1. Joint ownership in which a unit owner has exclusive use of a dwelling together with rights to shared or common areas 2. Title to all the real estate is held by a nonprofit corp. with each shareholder having the right to a dwelling unit pursuant to a longterm lease from the corp.
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3. Co-op board rights a. Absolute right of approval X. Possession and Use of Mortgaged Property (Ch. 14) A. Types of Foreclosure 1. Strict foreclosure a. If mortgagor failed to redeem by the judicially set date, the mortgagees title became absolute B. Lien Theory vs. Title Theory 1. Title theory a. Common-law tradition holding that the mortgage instrument coveys fee title to the mortgagee 2. Lien theory a. Mortgagee prior to foreclosure has only a lien b. Mortgagor keeps legal and equitable title to the estate after signing the mortgage, and the mortgagees property rights are limited to the right to foreclose after default 3. Intermediate/hybrid theory a. Mortgagor retains title unless and until he defaults, and upon default the mortgagee automatically gets title C. Possession by Mortgagee 1. Mortgagee in possession: lender takes physical control of a debtors property prior to foreclosure XI. Residential Mortgage Markets and Products (Ch. 15) A. Points 1. Charged in addition to the interest on the loan 2. One point is equal to 1% of the loan amount 3. Borrower must pay the specified points before the loan is funded, so lenders collect them at or before the loan closing 4. Two ways to pay points a. Lender discounts the points by subtracting them from the face amount of the loan and disbursing funds equal to the difference b. Lender require the borrower use out-of-pocket cash to pay the points B. Mortgage Insurance 1. Protects a residential lender against risk of loss in the event a borrower defaults and the property is sold through foreclosure for a price less than the outstanding debt 2. Generally required for any loan that exceeds 80% of the appraised value of the property 3. Two major forms of mortgage insurance a. Offered by the public sector (FHA, VA etc.) b. Private mortgage insurance (PMI) C. Types of Residential Mortgage Products 1. Fixed rate mortgage (FRM) a. Fixed rate of interest on the borrowed money that never changes over the life of the loan b. All monthly payments are equal in amount and each payment consists of two parts (Amortization: borrower is

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paying money according to a schedule to reduce the loan balance) i. Interest charge for the prior month ii. An amount applied to reduce the principal c. Self-amortizing: if the loan goes to full term the last monthly payment will reduce the loan amount to exactly zero No-point mortgage a. Borrower gets the loan at the stated interest rate w/out being charged any points at the closing b. Benefits people who sell within a short period of time, such as four or five years Buy-down mortgage a. An offer to provide financing at a below-market rate of interest b. Requires that a fee be paid to a lender in exchange for offering a mortgage loan at a below-market rate of interest Adjustable rate mortgage (ARM) a. The interest rate changes during the term of the loan b. Three main components to consider i. Index: the reference source used for making interest rate adjustments throughout the life of the loan ii. Adjustment period: the frequency of the adjustments iii. Caps: limit on how much the interest rate can move at an adjustment period c. Convertible i. Loan starts out as an ARM, but at a stated date in the future it converts to a FRM at the then prevailing FRM interest rate Balloon mortgage a. Features regular monthly payments but has a much larger final payment due at the end of the term b. Not self-amortizing c. Balloon payment: big cash payment at the specified maturity date that the borrower has promised to pay Level payment adjustable rate mortgage (LPARM) a. Interest rate is adjusted throughout the life of the loan but the monthly payment remains the same b. Either the loan term is lengthened or shortened, or a balloon payment will be due at maturity c. Negative amortization: the underlying debt increases Shared appreciation mortgage (SAM) a. Lender gives a debtor a favorable interest rate on a loan in exchange for a percentage interest in the equity appreciation of the property Reverse annuity mortgage (RAM) a. Marketed to senior citizens who own their homes as a major source of wealth subject to little or no mortgage debt Growing equity mortgage (GEM) and graduated payment mortgage (GPM)
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a. Offers an affordable monthly payment during the first few years but then makes up for it by dramatically increasing the monthly payments by steps in succeeding years in accordance with a prescribed formula (not an index) 10. Price level adjustable mortgage (PLAM) a. Seeks to adjust the value of the outstanding debt to account for inflation b. Seeks to remove the risk of inflation from the setting of mortgage rates so that interest rates will reflect the actual cost of money 11. Interest only mortgage a. Requires the borrower to pay interest only each month during the term of the loan b. At the end of the term, or when the property is sold and the mortgage is paid off, the borrower must pay back all of the principal plus any accumulated negative amortization that may be applicable under the terms of the mortgage 12. Piggyback mortgage a. Involves making an 80% mortgage loan available to a borrower which does not require PMI, and simultaneously a home equity loan is funded for an additional amount needed by the borrower b. Used to get around PMI 13. Purchase money mortgage (PMM) a. Any mortgage in which credit is extended to enable the debtor to buy or acquire the property on which the mortgage is placed b. Used to acquire the property that is put up as collateral for the loan XII.Mortgage Obligations (Ch. 16) A. Usury 1. Limits the amount of interest a lender may charge on a loan 2. There is a usury violation if for any period the lender bargains for too much interest 3. If lender violates state usury laws, the lender forfeits the interest that is in excess of the maximum rate permitted by the usury statute 4. Possible causes of usury problems a. How interest is compounded on a loan i. If lender compounds interest more frequently there is usury b. Hidden interest B. Late Payment 1. Ways late payments may be calculated a. Percentage of the unpaid installment (most common) b. Setting a fixed charge for all borrowers c. Assessing a higher interest rate on the unpaid installment after default d. Assessing a higher interest rate on the entire principal balance after default
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2. Courts generally analyze late charges under the law of liquidated damages 3. For residential loans but not commercial loans state and federal regulations commonly apply to regulate late charges Prepayment 1. Borrower pays all part or all of the principal before the due date specified in the promissory note 2. Promissory note is cancelled, and the lender releases the mortgage 3. Involuntary prepayment: compelled by the lender 4. When a borrower may prepay a loan depends on the terms of the promissory note 5. Prepayment penalty or premium a. Express provision restricting prepayment by imposing a charge to be paid by the borrower if the borrower prepays b. Calculated as a percentage of the amount of the principal being prepaid or as advance interest on the prepayment for a certain number of months Non-debt Obligations 1. Mortgage may be granted to secure a debt that is not founded on agreement 2. Most courts require the obligation have an ascertainable monetary value Assumption of Loan 1. Buyer promises the seller that the buyer will pay all of the debt in accordance with its terms 2. Buyer expressly promises to pay the debt and is personally liable if he fails to do so Taking Subject to Mortgage 1. Buyer does not promise to pay the debt but agrees that the mortgage is permitted as an exception to good title and that the seller is not responsible for paying the debt 2. Buyer has no personal liability if he fails to pay the debt Wrap-Around Mortgage Loan 1. Buyer gives the seller a promissory note, secured by a second mortgage on the property, and the seller uses installment payments made by the buyer to pay the mortgagee under the prior loan 2. The mortgage is an encumbrance to title, which is to be removed when the seller pays off the debt Restrictions on Transfer by Mortgagor 1. Due-on-sale clause a. Provides that if the borrower sells the property without the lenders approval, the entire principal balance of the loan immediately becomes due and payable Acceleration 1. The process by which the lender, after default by the borrower makes the entire debt due and payable 2. Typically, the acceleration clause is contained in the promissory note
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3. Traditional rule applied by almost all courts is that maturity of future installments cannot be accelerated 4. Two types of acceleration clauses a. Entire debt shall be due and payable if a specified event happens, such as a certain type of default i. Acceleration happens automatically if the event occurs; no action is necessary b. Lender has the option to declare an acceleration or it may forebear Foreclosure (Ch. 17) A. Types of Foreclosure 1. Strict foreclosure a. Mortgagee could keep the property; not required to sell the property b. If the mortgaged property is worth more than the debt, the mortgagee has no duty to account to the mortgagor for the surplus value 2. Judicial foreclosure a. Mortgagee brings an action asking the court to issue an order calling for a sale of the mortgaged property b. A court-supervised public sale of the property occurs 3. Power of sale foreclosure (nonjudicial foreclosure) a. Allows lenders to foreclose by selling the property w/out court involvement b. Can be used only if the mortgage instrument authorizes the procedure by granting a power of sale to the lender or to a third party such as a trustee B. Deficiency Judgments 1. If the value of the property is less than the debt foreclosure will likely result in a deficiency, therefore, along w/ foreclosure the mortgagee wants a judgment equal to the shortfall C. One Action Rule 1. Limits the mortgagee to a single action that must include foreclosure and may include, if appropriate, a deficiency judgment 2. Compels the mortgagee to satisfy the debt out of the mortgaged property first, before chasing other assets owned by the mortgagor D. Statutory Redemption 1. Post-foreclosure redemption rights given to the mortgagor after the foreclosure sale 2. Primary principles a. Existence of right to redeem b. Time period: fixed time period after foreclosure for exercise of the right to redeem c. Redemption price: foreclosure sales price plus interest and foreclosure costs d. Right to possession: mortgagor has the right to possession during the statutory period

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e. Who can redeem: redemption right is granted only to the mortgagor or sometimes junior lienors f. Effect of redemption on liens: revives pre-foreclosure liens other than the lien foreclosed upon g. Compliance with statutory requirements: minor flaws in following requirements will not disqualify mortgagors and lienors who act to redeem E. Deed in Lieu of Foreclosure 1. Lender gets title right away and can keep or sell the property however it wishes w/out following public foreclosure sale procedures 2. In exchange for the transfer, the borrower receives satisfaction of all or part of the debt F. Parties to Foreclosure 1. Necessary parties a. Have to be joined as Ds to accomplish the goal of transferring title to the buyer in the condition it was in when the mortgage was granted b. Persons who hold junior interests 2. Proper parties a. Has rights or duties with respect to the property or the debt but is not a necessary party b. Holders of prior interests in the property and persons who are liable on the debt but who do not presently have an ownership interest in the mortgaged property Junior Mortgages (Ch. 19) A. Secondary Mortgage Financing 1. There is already a first mortgage that is secured by the property 2. Primary type is a junior mortgage B. Mortgage Subordination 1. For corporate finance and personal property financing, an agreement that establishes or modifies the relative rights of the creditors in their dealings with the borrower and the property that serves as collateral Basic Commercial Real Estate (Ch. 20) A. Dragnet and Cross-Collateral 1. Dragnet clause is a clause stating that a mortgage secures all the debt that the mortgagor may at any time owe to the mortgagee a. This mortgage secures this loan of $XXX and any other monies that may now or in the future be owing by the borrower to the lender b. Creates cross-default (default under junior loan if there is a default under the senior loan) B. Construction Loan 1. Short-term loans funded in the expectation of success for a project that has not even been built 2. Typically structured as recourse loans and are funded as drawdowns against the full loan amount a. Recourse loan: borrower has personal liability on the promissory note in the event of a default
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b. Draw-down loan: full loan amount is not released to the borrower at the time of closing on the loan C. Leases as Financing Devices 1. Project to be developed or managed will be constructed on or transferred to a leasehold estate a. Ground lease: lease the ground instead of building on the land b. Sale lease back: lender becomes the owner of the property and the landlord under a long-term lease

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