Real Estate Transactions – Kaufman Spring 2012

I.

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 client’s interest 2. Duty of disclosure a. When broker learns facts or other info that are material to the client’s position or interests, the broker should promptly tell the client 3. Duty of confidentiality a. Absent client’s consent, broker should not disclose to 3rd parties info about the client’s objectives and the property C. Broker’s 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 seller’s 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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Escrows 1. Interstate Land Sales Full Disclosure Act a. Implied Duties to Disclose 1. including mail and advertising that circulates in more than one state c. Applies to the sale of unimproved lots in subdivisions with 25 or more lots. Loan escrow a. mistake. Sale in gross: purchase a certain piece of property for a certain amount B. Parties have appointed an escrow agent to conduct the closing b. Transfers risk of loss to the buyer only if the contract is specifically enforceable at the time of loss C. Contract Conditions 1. 5) A. collateral rights C. Condition of the Property (Ch. Doctrine of Merger 1. Closing the Contract (Ch. Must name a grantor and a grantee 3. Exceptions: fraud. If a contract term is interpreted as establishing a condition precedent or a simultaneous condition. Elements of Conveyance 1. 6) A. the parties may be obligated to proceed under the contract with only an allowance for the breach of the promise or warranty III. Escrow closing a. the parties will generally be released from any further obligations 2. Requires the developer to file a registration known as a statement of record for approval by the gov’t before offering any lots for sale IV. Deed must be in writing 2. Grantee must accept the deed B. Quantity: amount of land being transferred 1. Must adequately describe the real property to the exclusion of all other 4. doesn’t apply to build or sale of completed new homes b. Used by lenders to collect and hold money from the debtor for paying annual real property taxes and fire and hazard insurance premiums 2. Must be actual or constructive delivery 6. Quality 1.Real Estate Transactions – Kaufman Spring 2012 2. Escrow agent administers the contract of purchase and sale Page 2 of 13 . Must be an intent to convey by the grantor 5. If a covenant is breached and the breach does not destroy the entire value of the exchange. Triggered when the developer uses interstate commerce. Everything that came before closing is merged into the documents exchanged at closing a. NY: escape clause gets seller out of duty to disclose C.

Seller’s title must be marketable only at the closing 2. Party seeking the remedy must be ready. 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. willing. Usually only in granted case of mutual mistake 3. Title insurance company willing to issue a policy b. Designed to put a cloud on the owner’s title and thereby make it difficult or impossible to transfer or otherwise deal with the property b. Specific performance a. Contract Remedies (Ch. Gives notice to any potential BFP’s thereby destroying their ability to take without knowledge of the pending dispute VI. Allocating Title Risk (Ch. P must have satisfied all contract conditions and requirements before demanding specific performance 2. 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. Damages and Forfeiture of Payments 1. the owner can take steps to protect its reputation and value 2. Reformation a. Usually consists of withholding part of the purchase price from the seller pending correction of the problem V. Types of Title 1. Liquidated damages are damages that the parties to a contract agree to and quantify in advance of any breach B. Insurable title i. Rescission a. Contract title a. Equitable Remedies 1. If anyone maligns or disparages the reputation of the property. Contingency escrow a. Record title Page 3 of 13 . Slander of title is designed to protect the value of the property a.Real Estate Transactions – Kaufman Spring 2012 3. Forfeiture of deposit is rationalized as a valid consequence of the buyer’s default or the clause is considered to be a valid attempt by the parties to liquidate damages 3. Equitable liens C. Usually granted only if the problem is sufficiently material so that continuation of the contract is not appropriate or feasible 4. 7) A. Marketable title a. and able to perform b. 8) A. Slander of Title and Lis Pendens 1. Used to resolve a problem that arises at or before closing b.

Seisin i. Future covenants (protect the grantee from specified events that may occur after the deed is delivered in the future. equitable servitudes. mortgage liens. Special warranty deed (Bargain and sale deed w/ covenants against grantor’s acts) a. Constitutes trespass by the improver C. Covenant against encumbrances i. Types of Covenants 1. tax liens. Seller’s title can’t depend on an unrecorded instrument B. or imposes an obligation on the property owner i. Includes easements. Nonpossessory right or interest in the property held by a 3rd party that reduces the property’s market value. Right to convey i. grantee can only sue immediately preceding grantor) a. do not run with the land. Gives grantee the most amount of protection 2. marital property rights. Deed Covenants of Title 1. or by someone with paramount title Page 4 of i. No warranties of title. Covenant of quiet enjoyment i. Grantor promises that no one ever has messed up the property with respect to title that still exists b. Promise that there are no encumbrances on the land 2. Encumbrance a. personal between the grantor and grantee. An unauthorized extension of an improvement across a bounder line b. Quitclaim deed a. Present covenants (speaks only to what is going on at the time the deed is delivered. breach of future covenant means someone not in privity can sue) a. no covenants of title given D. restricts its use. Promise that grantor has good title to the estate b. and other liens and charges 2. gathered solely from deeds and other instruments that are recorded in the public records ii. Grantor promises that the grantee may possess and quietly enjoy the land ii. 13 . Grantor promises that he has not done anything to mess up title from the moment he took it 3. Promise that grantor has the legal right to convey the estate c. Encumbrances and Encroachments 1. General warranty deed a. Encroachment a. real covenants.Real Estate Transactions – Kaufman Spring 2012 Requires proof of the status of title. Breached if grantee is actually or constructively evicted from all or part of the land by the grantor by someone claiming under the grantor.

Title Products (Ch. 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. Not a guarantee that there is marketable title. Summary of all recorded deeds and other recorded items in the chain of title. can sue for malpractice Page 5 of 13 . Bona Fide Purchaser 1. The first BFP to record wins. Notice from Possession 1. 10) A. grantee has a duty to inquire and is charged with knowing whatever that inquiry would have revealed. there is no duty of inquiry VIII. The first grantee to record wins regardless of which interest is prior in time 2. a subsequent purchaser who takes w/out notice of the prior unrecorded interest wins b. The last BFP wins. if opinion is negligent. Types of Recording Acts 1. Tract index B. 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. Breached by an actual or constructive eviction c. Takes w/out notice of any prior interest for value. 11) A. Actual notice: purchaser has actual knowledge of the prior interest ii. Race-Notice Statute a. Notice Statute a. Attorney gives opinion based on his review of the title abstract 2. whether or not the grantee in fact searches title iii. Title Abstracts (least protective) 1. including encumbrances B. Covenant of warranty i. some inquiry may be required D. Inquiry notice: purchaser has knowledge of facts suggesting that someone might have an unrecorded interest. Remedy of specific performance is available as an alternative to damages VII. Grantor warrants the title to the grantee ii. Types of notice i. duty to inspect the land 3.Real Estate Transactions – Kaufman Spring 2012 b. Notice is evaluated at the time the grantee pays value c. Race Statute a. Public Records (Ch. Index Systems 1. When possession is consistent with record title. Attorneys’ Title Opinions and Certificates 1. Constructive notice: purchaser is deemed to have notice of all recorded interests. Covenant for further assurances i. Grantor-grantee index 2.

Joint ownership in which a unit owner has exclusive use of a dwelling together with rights to shared or common areas 2. 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. Taxes or assessments for the current year. Page 6 of 13 . and insures undisclosed risks 2. and welfare of unit owners C. Declaration of Condominium: legal doc where property owner declares the legally described property to be held in condominium form 4. Insurer searches the records and discloses its findings. happiness. which are not yet due and payable. Single unit in a multiunit project together w/ an undivided interest in common areas and facilities of the project 2. Cooperative Housing 1. They comply with the procedures established for their promulgation ii. such as encroachments. Home owner’s association (HOA) rights a. there is no coverage for matters an accurate survey would show. Title to all the real estate is held by a nonprofit corp. Housing Products (Ch. Exclusions and Exceptions a. Condo board rights a. Condominiums 1. Right of first refusal b. 13) A. Liens for work performed on the property and materials incorporated into the property (mechanics’ and materialmen’s liens) IX. Restrictions of the declaration are given more deference than those passed by the association and its board c. Zoning and building laws c. and taxes or assessments that are not shown as existing liens by the public records f. Title Insurance (most protective) 1. boundary line disputes. Items passed by the board are subject to a higher standard and are enforced if: i.Real Estate Transactions – Kaufman Spring 2012 C. Single-family home 1. or shortages in area b. Reasonably relate to the promotion of the health. Rights or claims of which the insured has knowledge prior to issuance of the policy e. 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. Survey exception. Rights of parties in possession not shown by the public records d. with each shareholder having the right to a dwelling unit pursuant to a longterm lease from the corp.

All monthly payments are equal in amount and each payment consists of two parts (Amortization: borrower is Page 7 of 13 . VA etc. Possession by Mortgagee 1. Types of Residential Mortgage Products 1. Title theory a. 14) A. Charged in addition to the interest on the loan 2.) b. Types of Foreclosure 1. Points 1. Title Theory 1. Two major forms of mortgage insurance a. Generally required for any loan that exceeds 80% of the appraised value of the property 3. so lenders collect them at or before the loan closing 4.Real Estate Transactions – Kaufman Spring 2012 3. Borrower must pay the specified points before the loan is funded. Two ways to pay points a. Mortgagor retains title unless and until he defaults. Possession and Use of Mortgaged Property (Ch. and upon default the mortgagee automatically gets title C. Fixed rate of interest on the borrowed money that never changes over the life of the loan b. One point is equal to 1% of the loan amount 3. Mortgagee prior to foreclosure has only a lien b. and the mortgagee’s property rights are limited to the right to foreclose after default 3. Lien theory a. If mortgagor failed to redeem by the judicially set date. Lender require the borrower use out-of-pocket cash to pay the points B. Offered by the public sector (FHA. Absolute right of approval X. Private mortgage insurance (PMI) C. Residential Mortgage Markets and Products (Ch. Lender discounts the points by subtracting them from the face amount of the loan and disbursing funds equal to the difference b. Intermediate/hybrid theory a. Mortgage Insurance 1. Mortgagor keeps legal and equitable title to the estate after signing the mortgage. Common-law tradition holding that the mortgage instrument coveys fee title to the mortgagee 2. Strict foreclosure a. Co-op board rights a. Lien Theory vs. the mortgagee’s title became absolute B. 15) A. Fixed rate mortgage (FRM) a. Mortgagee in possession: lender takes physical control of a debtor’s property prior to foreclosure XI. 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.

Negative amortization: the underlying debt increases Shared appreciation mortgage (SAM) a. An offer to provide financing at a below-market rate of interest b. 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) Page 8 of 13 . The interest rate changes during the term of the loan b. Interest charge for the prior month ii. Convertible i.Real Estate Transactions – Kaufman Spring 2012 2. Either the loan term is lengthened or shortened. Index: the reference source used for making interest rate adjustments throughout the life of the loan ii. 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. 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. Features regular monthly payments but has a much larger final payment due at the end of the term b. Interest rate is adjusted throughout the life of the loan but the monthly payment remains the same b. Loan starts out as an ARM. Benefits people who sell within a short period of time. 6. 5. but at a stated date in the future it converts to a FRM at the then prevailing FRM interest rate Balloon mortgage a. paying money according to a schedule to reduce the loan balance) i. 3. Borrower gets the loan at the stated interest rate w/out being charged any points at the closing b. Caps: limit on how much the interest rate can move at an adjustment period c. 7. Balloon payment: big cash payment at the specified maturity date that the borrower has promised to pay Level payment adjustable rate mortgage (LPARM) a. Not self-amortizing c. Adjustment period: the frequency of the adjustments iii. 9. such as four or five years Buy-down mortgage a. or a balloon payment will be due at maturity c. 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. An amount applied to reduce the principal c. Three main components to consider i. 8. 4.

Purchase money mortgage (PMM) a. Limits the amount of interest a lender may charge on a loan 2. or when the property is sold and the mortgage is paid off. Any mortgage in which credit is extended to enable the debtor to buy or acquire the property on which the mortgage is placed b. 16) A. Percentage of the unpaid installment (most common) b. Assessing a higher interest rate on the unpaid installment after default d. 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. Hidden interest B. the lender forfeits the interest that is in excess of the maximum rate permitted by the usury statute 4. If lender compounds interest more frequently there is usury b. How interest is compounded on a loan i. Ways late payments may be calculated a. Seeks to adjust the value of the outstanding debt to account for inflation b. Usury 1. 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. Assessing a higher interest rate on the entire principal balance after default Page 9 of 13 . and simultaneously a home equity loan is funded for an additional amount needed by the borrower b. Used to get around PMI 13. Requires the borrower to pay interest only each month during the term of the loan b. Piggyback mortgage a. Interest only mortgage a. Involves making an 80% mortgage loan available to a borrower which does not require PMI. Price level adjustable mortgage (PLAM) a. Setting a fixed charge for all borrowers c. Used to acquire the property that is put up as collateral for the loan XII. Possible causes of usury problems a. Late Payment 1. There is a usury violation if for any period the lender bargains for too much interest 3. If lender violates state usury laws.Real Estate Transactions – Kaufman Spring 2012 a.Mortgage Obligations (Ch. 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. At the end of the term.

2. E. 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. Involuntary prepayment: compelled by the lender 4. the acceleration clause is contained in the promissory note Page 10 of 13 . Buyer gives the seller a promissory note. which is to be removed when the seller pays off the debt Restrictions on Transfer by Mortgagor 1. and the seller uses installment payments made by the buyer to pay the mortgagee under the prior loan 2. Courts generally analyze late charges under the law of liquidated damages 3. I. G. 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.Real Estate Transactions – Kaufman Spring 2012 C. Provides that if the borrower sells the property without the lender’s approval. The mortgage is an encumbrance to title. H. Buyer expressly promises to pay the debt and is personally liable if he fails to do so Taking Subject to Mortgage 1. Mortgage may be granted to secure a debt that is not founded on agreement 2. Buyer promises the seller that the buyer will pay all of the debt in accordance with its terms 2. Promissory note is cancelled. Express provision restricting prepayment by imposing a charge to be paid by the borrower if the borrower prepays b. and the lender releases the mortgage 3. For residential loans but not commercial loans state and federal regulations commonly apply to regulate late charges Prepayment 1. Prepayment penalty or premium a. When a borrower may prepay a loan depends on the terms of the promissory note 5. Borrower pays all part or all of the principal before the due date specified in the promissory note 2. F. Most courts require the obligation have an ascertainable monetary value Assumption of Loan 1. Buyer has no personal liability if he fails to pay the debt Wrap-Around Mortgage Loan 1. The process by which the lender. D. Typically. secured by a second mortgage on the property. after default by the borrower makes the entire debt due and payable 2. Due-on-sale clause a. the entire principal balance of the loan immediately becomes due and payable Acceleration 1.

the mortgagee has no duty to account to the mortgagor for the surplus value 2. Post-foreclosure redemption rights given to the mortgagor after the foreclosure sale 2. Types of Foreclosure 1. before chasing other assets owned by the mortgagor D. If the value of the property is less than the debt foreclosure will likely result in a deficiency. if appropriate.Real Estate Transactions – Kaufman Spring 2012 XIII. Judicial foreclosure a. Acceleration happens automatically if the event occurs. Limits the mortgagee to a single action that must include foreclosure and may include. One Action Rule 1. Primary principles a. 17) A. a deficiency judgment 2. Time period: fixed time period after foreclosure for exercise of the right to redeem c. Statutory Redemption 1. If the mortgaged property is worth more than the debt. A court-supervised public sale of the property occurs 3. Lender has the option to declare an acceleration or it may forebear Foreclosure (Ch. Right to possession: mortgagor has the right to possession during the statutory period Page 11 of 13 . Allows lenders to foreclose by selling the property w/out court involvement b. 3. Existence of right to redeem b. therefore. Mortgagee could keep the property. Mortgagee brings an action asking the court to issue an order calling for a sale of the mortgaged property b. Deficiency Judgments 1. Redemption price: foreclosure sales price plus interest and foreclosure costs d. Traditional rule applied by almost all courts is that maturity of future installments cannot be accelerated 4. Entire debt shall be due and payable if a specified event happens. such as a certain type of default i. along w/ foreclosure the mortgagee wants a judgment equal to the shortfall C. Power of sale foreclosure (nonjudicial foreclosure) a. 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. no action is necessary b. Compels the mortgagee to satisfy the debt out of the mortgaged property first. Strict foreclosure a. Two types of acceleration clauses a. not required to sell the property 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. Dragnet and Cross-Collateral 1. For corporate finance and personal property financing. XV. Short-term loans funded in the expectation of success for a project that has not even been built 2. Construction Loan 1. Deed in Lieu of Foreclosure 1. the borrower receives satisfaction of all or part of the debt F. 20) A. Has rights or duties with respect to the property or the debt but is not a necessary party b. “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. Have to be joined as D’s to accomplish the goal of transferring title to the buyer in the condition it was in when the mortgage was granted b. Proper parties a. 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. There is already a first mortgage that is secured by the property 2. Compliance with statutory requirements: minor flaws in following requirements will not disqualify mortgagors and lienors who act to redeem E. Lender gets title right away and can keep or sell the property however it wishes w/out following public foreclosure sale procedures 2. 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. Creates cross-default (default under junior loan if there is a default under the senior loan) B.Real Estate Transactions – Kaufman Spring 2012 XIV. 19) A. Effect of redemption on liens: revives pre-foreclosure liens other than the lien foreclosed upon g. Persons who hold junior interests 2. Secondary Mortgage Financing 1. Mortgage Subordination 1. Recourse loan: borrower has personal liability on the promissory note in the event of a default Page 12 of 13 . Parties to Foreclosure 1. Primary type is a junior mortgage B. Typically structured as recourse loans and are funded as drawdowns against the full loan amount a. Necessary parties a. e. In exchange for the transfer. Who can redeem: redemption right is granted only to the mortgagor or sometimes junior lienors f.

Sale lease back: lender becomes the owner of the property and the landlord under a long-term lease Page 13 of 13 . Project to be developed or managed will be constructed on or transferred to a leasehold estate a. Leases as Financing Devices 1. Ground lease: lease the ground instead of building on the land b. Draw-down loan: full loan amount is not released to the borrower at the time of closing on the loan C.Real Estate Transactions – Kaufman Spring 2012 b.

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