Real Estate Transactions, Professor Rougeau, Fall 20081. Market Context

1.1. Three areas of concern:1.1.1. Perspective - You must think about the transaction from the point of

view of the various parties to the exchange

1.1.2. Purpose - You must have a clear understanding of the subject matter of the exchange and its ultimate objective

1.1.3. Planning - You must put together a strategy for achieving the client's purpose

1.2. Three factors to consider in the market context:1.2.1. Value

1.2.1.1. One indicator of how much we value something is price

1.2.1.2. However, this is subjective; someone may value your real estate more, but they cannot afford it

1.2.1.3. There is no such thing as "absolute price" in real estate

1.2.1.4. What gives something a particular price?

1.2.1.4.1. No factor drives the market for a house more than the school district

1.2.1.4.2. Desirable communities/location

1.2.1.4.3. Size of property

1.2.1.4.4. Condition of property

1.2.2. Utility - A measure of how much an individual values a particular good, service, or activity

1.2.2.1. Generally, money is used as a proxy

1.2.2.2. Ask: What is it that people want from this purchase?

1.2.3. Risk - You MUST be able to assess risk for your client

1.2.3.1. The more risks you're willing to take, the higher your potential return is likely to be

1.2.3.2. The more risks a buyer takes on, the lower the price

1.2.3.3. The more risks the seller takes on, the higher the price

1.2.3.3.1. General concept: The more risk I bear in a transaction, the more money I want to compensate me for that risk

1.3. Types of Costs1.3.1. Transaction costs - costs associated with undertaking a particular

exchange

1.3.1.1. Collecting information, negotiating, cooperating, regulatory compliance

1.3.2. Out-of-pocket costs - actual expenses incurred in doing a project

1.3.2.1. The cash surrendered

1.3.3. Opportunity costs - costs associated with the market choices one

gives up to pursue the selected choice

1.3.4. Sunk costs - costs that cannot be recovered when a party abandons a course of action

1.4. Transactional Misbehavior1.4.1. Occurs when a party to a transaction tries to change the dynamics

of the deal after the deal has been struck

1.4.1.1. The lawyer's objective is to structure the transaction to reduce the risk of such behavior

1.5. Categories of market risk1.5.1. Temporal risk - concerns factors related to time

1.5.1.1. Main idea: A dollar today is worth more than a dollar tomorrow

1.5.1.2. Types:

1.5.1.2.1. Past, or historical risk: An inability to be certain about historical information upon which particular business judgments rely in calculating the desirability of a current transaction

1.5.1.2.1.1. To lower risk: Search the title to find out if there are any ownership risks

1.5.1.2.2. Present risk: centers on information relied on for purposes of establishing the presence or absence of specific conditions that would affect the property or transaction

1.5.1.2.2.1. To lower risk: Do a survey of the property

1.5.1.2.3. Future risk: the risk of not being able to predict the future

1.5.1.2.3.1. To lower risk: Not much you can do; just make an educated guess

1.5.2. Transactional risk

1.5.2.1. Investor/Ownership risk - the risk of a person who is an equity stakeholder in the property

1.5.2.2. Marketplace risks - those associated with general market forces that affect the profitability of a transaction

1.5.2.2.1. Liquidity - the measure of how quickly a person can exchange investments for cash or other assets

1.5.2.2.1.1. In general, cash is very liquid, whereas real estate is not

1.5.2.3. Credit risks - the borrower's ability and willingness to pay

1.5.2.4. Transfer risks - potential problems that can arise from the actual mechanics of transfer

1.5.2.4.1. Warranties or promises that wind up being untrue, unenforceable, or not up to the expectations of the other party

1.5.2.4.2. Be aware of transactional misbehavior - using the law as a commodity simply to invest in - this is unethical

1.6. Lawyers' Professional Responsibilities1.6.1. Legal fees should be set out in a written agreement letter addressed

to the client

1.6.1.1. The client should sign off on this letter

1.6.1.2. Ex: Bohn v. Cody

1.6.1.2.1. Cody was held to owe a duty to the Bohns because he offered them legal advice

1.6.1.2.2. The fact that someone doesn't hire you doesn't mean you won't be bound to be representing them

1.6.1.3. Key idea: An attorney should advise an unrepresented party to seek independent counsel before discussing a transaction with thatparty

1.6.1.3.1. Make it clear to that party that you do not represent them, and that they should have their own counsel

2. Brokers2.1. General

2.1.1. Key role is performing the critical task of finding parties for the deal

2.1.2. The primary service they offer is market information

2.1.2.1. This smacks of an archaic understanding of the marketplace, because the internet has allowed people to research prices and available homes, which was information previously controlled by brokers

2.1.3. Two levels of licenses:

2.1.3.1. Broker - has a "full" license

2.1.3.2. Salesperson - has a license that permits him to act as a broker only under the supervision of a licensed broker

2.1.4. National Association of Realtors (NAR)

2.1.4.1. The term "realtor" is trademarked by NAR and means an NAR member, but is often used synonymously with "broker"

2.1.4.2. Brokers collect commissions of 5 to 7%

2.2. The Broker's Contract: A Listing2.2.1. Four Types of Listing Agreements:

2.2.1.1. Open Listing (nonexclusive listing) - Most Unfavorable for a broker

2.2.1.1.1. The broker earns a commission if she finds a ready, willing, and able buyer

2.2.1.1.2. Other brokers can be engaged by the seller, in which event the first one to procure a buyer earns the commission

2.2.1.1.3. The seller can sell his property by himself, without a broker's help, in which event no commission is payable

2.2.1.2. Exclusive Agency - contains a promise by the seller not to engage another broker during the term of the agreement

2.2.1.2.1. The owner may still sell by his own efforts and thereby avoid a commission

2.2.1.3. Exclusive Right to Sell Agreement - exclusive listing

2.2.1.3.1. Most protective of the broker's expectation of earning the commission

2.2.1.3.1.1. Most commonly used listing

2.2.1.3.2. The seller is obligated to pay the commission if any buyer purchases the property during the term of the agreement (usually 90 days), i.e., the broker gets paid no matter who sells

2.2.1.4. Net listing

2.2.1.4.1. Less common than the three other types

2.2.1.4.1.1. The commission is not specified as a percentage, and the seller agrees to pay the broker all amounts received in excess of a set price established by the broker and the seller

2.3. Multiple Listing Service (MLS)2.3.1. Facilitates the sharing of listings among MLS members

2.3.2. The broker who enters into the listing agreement is the LISTING BROKER

2.3.3. If a customer of another member broker buys the property, that broker is the SELLING BROKER

2.3.3.1. The MLS agreements require a division of the standard commission between the listing and selling broker

2.3.3.1.1. The selling broker is considered the listing broker's subagent

2.3.4. FSBO - For sale by owner - Fizzbo

2.3.4.1. Will not appear on an MLS search

2.4. Broker's Duties to Clients (Sellers)2.4.1. Explicit contractual duties

2.4.2. Fiduciary duties: disclosure, loyalty, confidentiality

2.4.2.1. The broker owes these duties to the SELLER, because he is the client

2.4.2.2. Dubbs v. Stribling and Associates

2.4.2.2.1. The broker/principal relationship and accompanying fiduciary duties can be severed by agreement of the parties or by unilateralaction of the principal

2.4.2.3. Dual Agency

2.4.2.3.1. Brokers can be dual agents, as long as it is disclosed to both parties and both parties agree

2.5. Transaction brokerage or nonagency brokerage2.5.1. The broker sells services but has no formal agency relationship with

either party

2.5.2. This type of brokerage avoids the creation of a fiduciary duty

2.6. Broker's Right to a Commission2.6.1. Basic rule: Commission is earned when a buyer is found who is

ready, willing, and able to pay on terms fixed by the owner; and the buyer enters into a binding contract to buy the property

2.6.1.1. In most sales transactions, the broker is paid commission at closing, even though the broker has finished his undertaking prior to closing

2.6.1.2. If the sale fails to close due to an unsatisfied condition in the contract, the broker is generally not entitled to a commission

2.6.1.3. A savvy seller would negotiate for a term in the listing K making closing an express condition to the payment of the commission

2.6.2. Minority rule (recent trend): For the broker to earn the commission, not only must he find a ready, willing, and able buyer, but the sale must also close

2.6.2.1. Exception: If failure to complete the sale is caused by the seller's wrongful default or interference, then a commission is still due

2.7. Brokers and the Unauthorized Practice Of Law2.7.1. Three tests used to define the scope of a broker's services:

2.7.1.1. Contracts v. Conveyances Test: The broke may prepare the contract of sale, but he may not prepare closing documents that convey interests in land

2.7.1.2. Simple-Complex Test: If the transaction is simple, the broker can select standard-form instruments and assist the parties in filling in the blanks. If the transaction is complex or has an unusual feature of a simple transaction, the broker cannot furnish documents.

2.7.1.3. Incidental Test: Broker drafting of instruments is authorized if it is incidental to the broker's business and the party pays no separate charge for this service

2.8. Lawyers Acting As Brokers2.8.1. In re Roth: An attorney is ethically obligated to perform only those

brokerage services that are incidental or ancillary to the performance of legal services in a given transaction on behalf of the same client

2.8.1.1. It follows that in such situations, an attorney may not be independently and separately compensated for brokerage services

3. Preparing to Contract3.1. Timeline

3.1.1. A) Precontract --> B) Executory Contract --> C) Closing the Contract --> D)Postclosing

3.1.1.1. Time period A --> B

3.1.1.1.1. The precontract stage is characterized by information gathering and negotiation

3.1.1.1.1.1. Both sides trying to gather as much info as possible; both sides trying to hold back as much info as possible

3.1.1.1.1.2. Seller has made it known she wants to sell, so buyer has the power

3.1.1.1.1.2.1. Once an offer is made, the seller is in the power seat

3.1.1.2. Time Period B --> C

3.1.1.2.1. The Executory Contract period runs from the moment of entering

into the contract until the moment of closing

3.1.1.2.1.1. Typically somewhere from one to three months, and typically has a formal writing that sets out the parties' relationship to each other and to the property

3.1.1.2.2. Doctrine of Equitable Conversion - Title is split, with the legal title remaining in the seller and equitable title in the buyer

3.1.1.2.3. Lots of information exchanged that couldn't happen before:

3.1.1.2.3.1. You can't investigate the house to the degree you'd like until you make a commitment to buy

3.1.1.2.3.2. You can't find out about title until you've made an offer

3.1.1.2.3.3. You can't go about getting a loan until you've made an offer

3.1.1.2.4. Conditions can be attached to the sale

3.1.1.2.4.1. For example, "I will buy your property for X, provided that I can secure a loan for X from MF Bank by August 23 at a rate from "Y to Y+.5%"

3.1.1.3. Time Period C --> D

3.1.1.3.1. Closing, or settlement, puts an end to the executory contract stage

3.1.1.3.1.1. This is the time when the title that was split by equitable conversion is brought back together and is vested in the buyer

3.1.1.3.1.2. Buyer gives money, seller gives title

3.1.1.3.2. Alternative arrangement: Escrow Closing

3.1.1.3.2.1. Each party can show up separately to deposit papers and money in escrow, with the closing officer having the responsibility of finishing the closing when everything is in place

3.1.1.3.3. Doctrine of Merger - Provides that all promises prior to closing are merged into the final documents taken at closing

3.1.1.3.3.1. Warranties in the instrument of conveyance replace the warranties that were in the contract

3.1.1.3.3.2. The contract merges into the deed

3.1.1.4. Time Period D --> onwards

3.1.1.4.1. Postclosing period

3.1.1.4.1.1. The job isn't over until the paperwork is done; some documents have to be filed in the public records

3.1.1.4.1.2. Final title insurance policy cannot be granted until the closing documents are available in the public records

3.2. Letters of Intent and Option Contracts3.2.1. Option contract

3.2.1.1. Granted on the basis of money paid in exchange for taking the property off the market

3.2.1.2. Options express uncertainty as to the ultimate purchase and sale of the property

3.2.2. Letters of Intent

3.2.2.1. It is wise to avoid them, since they resemble purchase

agreements

3.2.2.2. Usually given without financial consideration, though

3.2.2.3. Do NOT express uncertainty as to the sale and purchase of the property, and thus have heightened risk that they will serve as anactual contract of sale

4. Executory Contracts4.1. Most simple formulation: A deed conveying title is swapped

for cash

4.2. The need for a writing4.2.1. A basic legal rule is that an agreement for the purchase and sale of

real property must comply with the statute of frauds

4.2.2. The writing must be signed by the parties to be charged

4.2.2.1. E-signatures count

4.2.3. Property + Price will likely bind the parties

4.3. Equitable Conversion and Allocation of Risk4.3.1. Equitable conversion - doctrine which splits title to the property

between the seller and the buyer at the moment the contract is signed

4.3.1.1. The seller is still the owner of the property and retains legal title

4.3.1.2. The buyer has acquired equitable title

4.3.2. Risk Allocation

4.3.2.1. At the moment of equitable conversion, the buyer takes on the risks associated with anything that happens during the executory period

4.3.2.2. Each party to a real estate contract has an insurable interest

4.3.2.2.1. Ideally, the party who has the risk of loss should obtain insurance (in this case, the buyer), but it doesn't always happen this way

4.4. Major Contract Conditions4.4.1. Implied conditions, like equitable conversion

4.4.2. Express conditions

4.4.2.1. By putting express conditions in the contract, the buyer gains a direct cause of action against the seller should the informationprove to be false

4.4.2.1.1. It also provides some basis for arguing that particular items of information were material to the buyer's decision to purchase the property

4.4.2.2. Conditions are called "contingencies" in real estate contracts

4.4.2.2.1. Not all conditions provide for the termination of the contract in the event that a condition does not occur

4.4.2.2.2. Time for performance will generally be strictly enforced if there is a date certain stated in the contract, and the contract provides that "time is of the essence"

4.4.2.3. Examples of important conditions: Mortgage financing, title examination, and survey preparation

4.4.2.3.1. In the absence of any financing terms, the transaction is an "all-cash" exchange

4.4.2.3.1.1. All-cash exchange: The buyer undertakes to buy the property at the stated price and takes on all the risk of having the full amount of money in hand at closing

4.4.2.3.2. When financing conditions are included, the provision(s) should describe more loan characteristics than just the principal amount

4.4.2.3.2.1. Should also include the initial and maximum interest rates, and the term of the loan

4.4.2.3.2.2. It is advisable for a seller to insist on a RANGE for an interest rate

4.4.2.3.3. Financing condition is THE most important aspect of the contract

4.4.3. Covenants

4.4.3.1. Assign specific tasks to parties

4.4.3.2. As a general rule, breach of covenant doesn't allow a party to get out of a contract, but it depends upon the materiality of the breach

4.5. Assignability4.5.1. Typically contracts are assignable

4.5.1.1. If you have a K and don't want to go through with it, you can assign it to someone else if proper consideration is given

4.5.1.2. Limitations: If you have made any commitments that are personal to you, you cannot assign it to someone else

4.5.2. Purchase price is assumed to include fixtures

4.5.2.1. Fixtures can be specifically excluded by the terms of the deal

4.5.2.2. If any other personal property items are to be left, they ALSO should be specified in the K, or in a separate bill of sale

5. Condition of Property5.1. Default Rule: The buyer typically bears the risk of loss, unless

the contract states otherwise5.1.1. The K must address matters relating to both the quantity and quality

of the property

5.2. Quantity of Property:5.2.1. Presumed rule: An "in gross" sale

5.2.1.1. "Per acre" sales must be EXPLICIT

5.2.1.2. When property is sold at so much per acre, and there is a deficiency in the number conveyed, the purchaser will be entitled to compensation

5.3. Quality of Property5.3.1. Primary issues of concern: Structural soundness of improvements,

the environmental safety of improvements and land, and the availability of amenities such as utilities and access

5.3.2. Express Allocations of Risk of Quality

5.3.2.1. If a buyer accepts a property "as is," he accepts the property in its current condition, regardless of its defects

5.3.2.1.1. The buyer of real estate cannot reasonably rely upon the representations of the seller when the truth or falsity of the representation would be revealed by an inspection of the subject property

5.3.2.1.2. Inspect the property if you're going to accept it "as is"!

5.3.3. Disclosing Inaccurate Information (as an attorney)

5.3.3.1. You cannot provide misleading information to potential buyers who you know will rely on that information

5.3.4. Material Defects and the Duty to Disclose

5.3.4.1. Statutory Duty to Disclose - Interstate Land Full Disclosure Act

5.3.4.1.1. The developer of real estate must give each prospective purchaser a detailed "property report" that contains required disclosures about the lots and the overall real estate development

5.3.4.2. Implied Duty to Disclose

5.3.4.2.1. Caveat Emptor - Old Doctrine of "may the buyer beware"; gradually falling out of favor

5.3.4.2.1.1. Exceptions to caveat emptor:

5.3.4.2.1.1.1. Misrepresentation (fraudulent, negligent):

5.3.4.2.1.1.1.1. Something that goes to a material fact that would affect buyer's decision to purchase a property

5.3.4.2.1.1.2. Existence of a latent or patent defect

5.3.4.2.1.1.2.1. Latent being difficult to discover

5.3.4.2.1.1.2.1.1. Duty to disclose by seller

5.3.4.2.1.1.2.2. Patent being obvious

5.3.4.2.1.1.2.2.1. Buyer should try to discover these himself; seller has no obligation to tell the buyer

5.3.4.2.1.1.2.2.2. A normal investigation reveals patent defects, and the seller is not required to disclose these facts

5.3.4.2.2. Latent Defects

5.3.4.2.2.1. These give rise to a duty on the part of the seller, and must be disclosed

5.3.4.2.2.2. The nature of the defect and the ability of the parties to determine through reasonable inspection that a defect exists are key to determining whether or not the defect is latent

5.3.4.2.3. Disclosure forms - seller has a legal responsibility to make true and accurate disclosures, to the best of his/her knowledge

5.3.4.3. Implied Warranties

5.3.4.3.1. Express Warranties are part of the parties' bargain in fact (contract)

5.3.4.3.2. Implied Warranties arise from the situation or context in which a transaction takes place

5.3.4.3.2.1. Examples:

5.3.4.3.2.1.1. For residential properties, the house should be at least fit to live in

5.3.4.3.2.1.2. Default rule is warranty on new houses, for at least a year

5.3.4.3.2.1.3. The more serious the defect, the more likely the builder will be liable and have to repair (usually 3-5 years)

5.3.4.3.2.1.3.1. If the builder goes out of business, the buyer has no recourse

6. Closing the Contract***6.1. Six Important elements of effective conveyance:

6.1.1. The deed must be in writing

6.1.2. The deed must name a grantor and a grantee

6.1.3. The deed must adequately describe the real property to the exclusion of all others

6.1.4. There must be an intent to convey by the grantor

6.1.5. There must be actual or constructive delivery

6.1.6. The grantee must accept the deed

6.2. Multiple Representation6.2.1. The ABA MRPC suggest that a lawyer shall not represent a client if

the representation involves a concurrent conflict of interest

6.2.2. It is virtually impossible for one attorney to faithfully and withundivided allegiance represent both a buyer and a seller

6.3. Doctrine of Merger6.3.1. Everything that came before the closing is merged into the

documents exchanged at closing

6.3.1.1. As a consequence, all rights, warranties, and obligations from the executory contract are no longer operative between the parties

6.3.1.2. Once the closing occurs, the parties are left with only those rights, warranties, and promises expressed in the closing documents

6.3.2. Exceptions to merger:

6.3.2.1. Fraud

6.3.2.2. Mistake (mutual only)

6.3.2.3. Existence of collateral rights in the contract of sale

6.3.2.3.1. The collateral rights exception applies when the seller's performance involves some act collateral to the conveyance of title

6.3.2.4. Ambiguity in the final contract

6.3.2.4.1. Could warrant the introduction of parol evidence to remedy the ambiguity

6.4. Escrows6.4.1. Three types:

6.4.1.1. The loan escrow - used by lenders to collect and hold money from the debtor for paying annual real property taxes and fire and

hazard insurance premiums

6.4.1.2. The escrow closing - the parties have appointed an escrow agent to conduct the closing

6.4.1.2.1. Documented by a witness escrow agreement, which is signed by the buyer, the seller, and an escrow agent, and spells out the duties of all three parties

6.4.1.2.2. The escrow agent administers the contract of purchase and sale and has fiduciary duties to both the buyer and the seller

6.4.1.3. The contingency escrow - a process used to resolve a problem that arises at or before closing

6.4.1.3.1. When the problem consists of an unperformed obligation of the seller, the escrow usually consists of withholding part of the purchase price from the seller pending correction of the problem

6.4.2. Escrow Agents

6.4.2.1. Are trustees, and can properly execute their duties only as they are set out by the terms of the escrow agreement

6.4.2.1.1. Any deviation from the agreement without the requisite authority is per se unreasonable and cannot be one with reasonable prudence

6.5. Shifting nature of power at closing6.5.1. Power shifts from buyer to seller

6.5.1.1. Buyer will probably want a warranty deed

7. Contract Remedies7.1. Primary categories:

7.1.1. Damages (basic rule: Expectancy)

7.1.2. Forfeiture of the buyer's part payments (sometimes liquidated damages)

7.1.3. Equitable Remedies

7.1.4. Tort remedies related to the contract

7.2. Damages and Forfeiture of Payments7.2.1. All designed to make the party whole

7.2.1.1. Primarily expectancy damages

7.2.1.1.1. The difference between the contract price and the fair market value at breach

7.2.1.2. Liquidated damages

7.2.1.2.1. Cannot be a penalty

7.2.1.2.2. Must only be an estimate of the seller's damages

7.2.2. Sellers rely on a clause in the contract stating that if the buyer defaults, the seller has the right to terminate the contract and retain the earnest money or deposit already paid by the buyer

7.2.2.1. A typical range for earnest money is been 3 and 10 percent of the purchase price

7.2.2.1.1. Seller allowed to retain the buyer's payment under one of two theories:

7.2.2.1.1.1. Either the forfeiture of the deposit is rationalized as valid as a consequence of the buyer's default, OR

7.2.2.1.1.2. The clause is considered to be a valid attempt by the parties to liquidate damages

7.2.2.1.1.2.1. Liquidated damages are damages that the parties to a contract agree to and quantify in advance of breach

7.2.2.1.2. Standard clause: A vendee who defaults on a real estate contract without lawful excuse cannot recover his or her down payment

7.3. Equitable Remedies7.3.1. Specific Performance

7.3.1.1. Both the buyer and seller are generally entitled to specific performance

7.3.1.2. The party seeking the remedy must be ready, willing, and able to perform

7.3.2. Reformation

7.3.2.1. Typically, reformation is granted only if the plaintiff can establish a mutual mistake

7.3.3. Rescission

7.3.3.1. Contracts often include conditions that give parties an express right to terminate, or rescind, the contract

7.3.4. Equitable liens

7.3.4.1. A seller obtains a vendor's lien on the title to the real propertyto secure the unpaid purchase

7.3.4.1.1. After closing, if the seller has not received full payment, the lien attaches to the title conveyed by the deed

7.3.4.2. The buyer has a reciprocal right, known as a vendee's lien to secure the return of the down payment or the payment of reliance damages in the event the sale does not close

7.3.4.2.1. The priority of an unrecorded vendee's lien does not extend to those payments voluntarily made by the vendee after the lender properly records its mortgage

7.4. Slander of Title and Lis Pendens7.4.1. Lis Pendens - a method of asserting a potential claim or conflicting

interest against title to real estate when litigation is filed and pending

7.4.1.1. The lis pendens is a notice filed in the public records for real estate that gives notice that a legal action is currently pending, the outcome of which may have an impact on the status of title of the specifically described property

7.4.1.2. Designed to put a cloud on title

7.4.2. Slander of title - a tort action that is designed to protect the value of the property

7.4.2.1. If anyone maligns or disparages the reputation of the property, the owner can take steps to protect its reputation and value in a manner similar to that offered to defend her own good name

7.4.2.2. Can be a weapon against the lis pendens

8. Title Risk8.1. Title Under the Real Estate Contract

8.1.1. The starting point is the buyer's right to marketable title

8.1.1.1. This is an implied term of the contract

8.1.1.1.1. By entering into the contract, the seller impliedly promises that his title is marketable

8.1.1.1.1.1. This means that he has taken on the risk that a defect may be discovered that makes his title unmarketable

8.1.1.1.1.2. If this condition fails, the buyer has no further obligation and does not have to go forward

8.1.1.1.1.3. The seller's title must only be marketable at closing, not earlier

8.1.1.1.2. Marketable title does NOT mean that the title is perfect

8.1.1.1.3. Defects: Defects in record chain, mortgages, liens, easements, real covenants, equitable servitudes, eminent domain, adverse possession, encroachment, etc.

8.1.2. Contract title - the quality of title that the seller must furnish and the buyer accept

8.1.2.1. May be more lenient than marketable title, or more strict

8.1.2.2. Two common types:

8.1.2.2.1. Insurable title - The K may provide that a title insurance company's willingness to issue a policy fully satisfies the seller's title obligations

8.1.2.2.2. Record title - requires proof of the status of title, gathered solely from deeds and other instruments that are recorded in the public records for recording interests in real property

8.1.3. Encumbrances and Encroachments

8.1.3.1. Encumbrance - a non-possessory right or interest in the property held by a third party that reduces the property's market value, restricts its use, or imposes an obligation on the propertyowner

8.1.3.1.1. Courts generally define marketable title as an estate that is totally free from encumbrances

8.1.3.1.2. Includes: Easements, real covenants, equitable servitudes, marital property rights, mortgage liens, tax liens, and other liens and charges

8.1.3.2. Encroachment - an unauthorized extension of an improvement across a boundary line (constitutes a trespass by the improver)

8.1.3.2.1. Also generally render title unmarketable

8.1.4. Effect of Public Regulation on Title

8.1.4.1. Rule: Where a person agrees to purchase real estate, which, at the time, is restricted by laws or ordinances, he will be deemed to have entered into the contract subject to the same and he cannot

thereafter be heard to object to taking the title because of such restrictions

8.1.4.1.1. Accordingly, a zoning ordinance which regulates only the use of the property generally is NOT an encumbrance making the title unmarketable

8.1.5. Buyer's Remedies for Title Defects

8.1.5.1. General rule: When one party breaches, the other is entitled to recover expectation losses

8.1.5.1.1. English rule: Doesn't allow expectation damages

8.1.5.1.2. American rule: Does allow expectation damages

8.2. Deed Covenants of Title8.2.1. Warranty Deeds and Quitclaim Deeds

8.2.1.1. General Warranty Deed - covers the chain of title up to the time of delivery; no time restrictions as to the title defects

8.2.1.1.1. This gives the grantee the maximum amount of protection, with the seller taking on all the risk

8.2.1.2. Special Warranty Deed - offers less protection to the buyer than the general warranty deed

8.2.1.2.1. It reflects a sharing of title risk between the parties

8.2.1.2.2. All the grantor is promising is that since the moment he acquired title, he has not done anything to dilute or impair that title

8.2.1.3. Quitclaim Deed - has no covenants of title

8.2.1.3.1. The grantee bears all risk associated with quality of title

8.2.1.3.1.1. If it turns out the property is subject to liens or encumbrances, the grantor is not liable

8.3. Types of Covenants8.3.1. Present Covenants - Do NOT run with the land (only the grantor can

be sued)

8.3.1.1. Seisin - grantor promises he is seized of the estate the deed purports to convey; most courts view this is a promise of good title

8.3.1.2. Right to convey - the grantor promises that he has the legal right to convey the estate the deed purports to convey

8.3.1.3. Covenant against encumbrances - the grantor promises that there are no encumbrances on the land

8.3.2. Future Covenants - run with the land (the grantor and any remote grantor can be sued that affected the covenants)

8.3.2.1. Covenant of Quiet Enjoyment - the grantor promises that the grantee may possess and quietly enjoy the land

8.3.2.1.1. Breached by actual or constructive eviction

8.3.2.2. Covenant of Warranty - Grantor warrants the title to the grantee

8.3.2.2.1. Same scope as quiet enjoyment

8.3.2.3. Covenant for Further Assurances - 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

8.4. Magun v. Bombaci (Running with the land)8.4.1. For something to pass appurtenant to (run with) land, two

conditions must be satisfied:

8.4.1.1. It must be something which the grantor has the power to convey, and

8.4.1.2. It must be reasonably necessary to the enjoyment of the thing granted

8.5. Title insurance covers all these issues, unless specifically excluded

9. Land Descriptions9.1. General:

9.1.1. Both real estate contracts AND deeds must contain a description ofthe land

9.1.2. One of the requirements imposed by the statute of frauds is a written description; it is not sufficient that the parties orally agree to the location and size of the parcel

9.2. Types:9.2.1. Metes and Bounds Description - describes every boundary line of

the parcel

9.2.1.1. Each boundary line is defined by length and "course" (direction given by reference to a compass)

9.2.1.2. All boundaries do NOT have to be straight lines

9.2.1.3. Basically describes what the parcel looks like if you walk around the perimeter

9.2.1.3.1. Boundaries must be identified to describe adequately a parcel of land; thus, all good land descriptions are metes and bounds descriptions

9.2.2. Government Survey System

9.2.2.1. Divides land into townships and sections, using a system of square and rectangular grids

9.2.2.2. The starting point for every government survey description is the intersection of a PRINCIPAL MERIDIAN (P.M.), a line of longitude which runs north-south, and a BASELINE (B.L.), a line of latitude which runs east-west

9.2.2.2.1. Each PM and BL is identified by a distinctive number or name

9.2.2.3. Under this system, the basic units of area are townships and sections

9.2.2.3.1. Each township is a square with sides that are approximately six miles away

9.2.2.3.2. Each township is located by reference to the intersection of a principal meridian and a baseline

9.2.2.4. The term "range" denotes east-west along the baseline, and "township" denotes distance north-south along the principal meridian

9.2.2.5. Each township is divided into 36 sections

9.2.2.5.1. Each section is a one-mile square

9.2.2.5.2. The sections within each township are numbered

9.2.2.5.2.1. Section one begins in the northeast corner (upper right) of the township, and the numbers snake back and forth so sections bearing consecutive numbers are always contiguous

9.2.2.6. Example of a description:

9.2.2.6.1. The southern half of the northeast quarter of Section 17, Township 3 North, Range 2 West, 5th Principal Meridian

9.2.2.6.2. Written As: S 1/2 NE 1/4, (Section symbol)17, T.3N., R.2W., 5th P.M.

9.2.3. Reference to subdivision maps, or PLATS, which are filed as part of the public land records

9.2.3.1. Lots in the subdivision are then described by referring to the recorded plat

9.3. The Survey9.3.1. A survey is the process of evaluating real property evidence in order

to locate the physical limits of a particular parcel of land

9.3.1.1. Evidence considered is physical field evidence, written record evidence, and field measurements

9.3.1.2. A survey is a professional opinion, and one opinion may be better or worse than another

9.3.2. Why do a survey?

9.3.2.1. The existence of the property

9.3.2.2. The relationship of the property to adjoining parcels

9.3.2.2.1. All parcels of land exist in relation to the parcels surrounding them

9.3.2.2.2. General rule: The description in a senior deed or prior conveyance controls over any discrepancy in a later one

9.3.2.3. The relationship of occupied lines to record lines

9.3.2.3.1. A land survey should always show the occupied lines, the deed record lines, and the extent of any mismatch

9.3.2.4. The location of physical improvements

9.3.2.4.1. Necessary to determine the presence of features which may limit the value or use of the property and to determine conformity with local ordinances regarding minimum building setbacks

9.3.2.5. Unrecorded easements and other facts not of record

9.3.2.5.1. There are numerous unrecorded rights that can affect title to land which may not show up in a title search but will become obvious upon an inspection of the property

9.3.3. Conflicting Title Elements: Judge-made Priority Ranking

9.3.3.1. (1) Call for a survey; (2) Call for monuments; (3) Calls for directions and distances; (4) Calls for directions; (5) Calls for distances; (6) Call for coordinates; (7) Call for area

9.3.3.2. McGhee v. Young

9.3.3.2.1. Monuments control over paper descriptions

9.3.3.2.2. Man set monuments as landmarks before he invented paper and still today the true survey is what the original surveyor did on the ground by way of fixing boundaries by setting monuments and by running lines (metes and bounds) and the paper "survey" is intended only as a map of what is on the ground

10. Public Records10.1. At common law, the general rule was "first in time, first in

right"10.1.1. Exception to letting time decide priorities:

10.1.1.1. Between a prior equitable claim and a subsequent legal claim held by a bona fide purchaser without notice of the prior claim

10.1.1.1.1. The BFP wins

10.1.1.1.2. Rationale: Because both grantees have an equity but only one has legal title, the legal title should control to break the tie

10.1.2. Two basic functions of the recording system:

10.1.2.1. Title assurance

10.1.2.2. To establish priorities when there are successive transfers of interest

10.1.2.2.1. Priority - the law determines who among various claimants has the superior, prior interest

10.2. Title Search Process10.2.1. Chain of Title Concept

10.2.1.1. Four common steps to a chain of title search

10.2.1.1.1. Title examiner must discover the chain of title

10.2.1.1.1.1. The first link is the sovereign and the last link is the current owner

10.2.1.1.1.2. The search typically goes back a set period, usually 50 or 60 years

10.2.1.1.2. Look for adverse recorded transfers by the present owner and by all prior owners in the chain of title

10.2.1.1.2.1. Check the records of the deeds and other instruments in the county where the land is located

10.2.1.1.3. The searcher must study full copies of all recorded instruments previously uncovered, both links in the chain of title and adversetransfers

10.2.1.1.4. The searcher must consult other records, in addition to recorded instruments, for adverse interests

10.2.2. Index Systems

10.2.2.1. Grantor-grantee indexes

10.2.2.1.1. Uses only the names of the parties to the deeds and other instruments

10.2.2.1.2. Construct a chain of title by working backward from the present owner

10.2.2.1.2.1. Take the name of the grantor in the deed and look for that name in the grantee indexes to find how that owner acquired the property

10.2.2.1.2.2. Use the grantor indexes to check for the presence of adverse record transfers by each owner

10.2.2.2. Tract Indexes

10.2.2.2.1. Divides all the land in the county into parcels and organizes deeds and other instruments according to the parcel or parcels they affect

10.2.2.2.1.1. These are much better and easier to use than name indexes

10.2.2.2.1.2. Most states do NOT use tract indexes

10.2.2.3. Miscellany - In most states, probate (wills) transfers of land are documented only the probate court records, so you'll also haveto consult those

10.3. Types of Recording Acts10.3.1. Common law rule: Subsequent legal bona fide purchaser (BFP)

cuts off a prior equity

10.3.2. Race Statute

10.3.2.1. "The first to record wins"

10.3.2.1.1. The first grantee to record wins, regardless of whether he has notice of the other claimant and regardless of which interest is prior in time

10.3.2.1.2. Status as a BFP is irrelevant

10.3.3. Notice Statute

10.3.3.1. "The last BFP wins"

10.3.3.1.1. A subsequent purchaser who takes without notice of the prior UNRECORDED interest wins

10.3.3.1.2. Notice is evaluated at the time the grantee pays value

10.3.3.1.2.1. Actual notice: The purchaser has actual knowledge of the prior interest

10.3.3.1.2.2. Constructive notice: The purchaser is deemed to have notice of all recorded interests, whether or not the grantee in fact searches title

10.3.3.1.2.3. Inquiry notice: If the purchaser has knowledge of facts suggesting that someone might have an unrecorded interest, the grantee has a duty to inquire and is charged with knowing whateverthat inquiry would have revealed

10.3.3.1.2.3.1. The most important aspect of inquiry notice is a duty to inspect the land

10.3.4. Race-Notice Statute

10.3.4.1. "The first BFP to record wins"

10.3.4.1.1. The subsequent purchaser must record before the holder of the prior-in-time interest

10.3.4.1.1.1. This means the BFP must do three things to prevail:

10.3.4.1.1.1.1. Pay value

10.3.4.1.1.1.2. Without notice of the prior claim

10.3.4.1.1.1.3. Record first

10.3.5. Nonrecordable Interests

10.3.5.1. Two types:

10.3.5.1.1. Those that cannot be created by instrument, such as claims of AP and marital property rights

10.3.5.1.2. Instruments not eligible for recording

10.4. Bona Fide Purchaser Status10.4.1. Notice from Records

10.4.1.1. A purchaser has constructive notice of any interest that is VALIDLY recorded

10.4.2. Defects in Recorded Instruments

10.4.2.1. All states limit recordation to documents that are properly acknowledged

10.4.2.2. A defectively acknowledged deed does not impart constructive notice because it should not be there

10.4.2.2.1. An acknowledgment to a trust deed taken before an officer who is himself a trustee therein, with power to sell to pay debt, is void and does not entitle the deed to be recorded

10.4.3. Notice from possession

10.4.3.1. The purchaser is bound by whatever rights would have been uncovered by diligent inquiry of the possessor

10.4.3.1.1. There is one general exception to the duty to inquire of possessors

10.4.3.1.1.1. When possession is consistent with record title, there is no duty of inquiry

10.4.4. BFPs must give VALUE

10.4.4.1. i.e., Gifts are excluded. You cannot be a BFP by receiving a gift.

11. Title Products11.1. Title Abstracts

11.1.1. A written distillation of the record search process

11.1.1.1. Summarizes all recorded deeds and other recorded items, including those believed to have no present operative effect on title

11.1.2. Interpretation of the abstracted instruments is left to the reader, who must review the entire abstract and infer the present condition of the title

11.1.3. A title abstractor is liable in negligence to her clients and to third

parties who can be expected to rely on the abstractor's work product

11.1.3.1. However, it is silly to rely on an abstract prepared for someone else

11.2. Title Opinions and Certificates11.2.1. An attorney's title opinion does not guarantee to the client that the

title is in fact marketable; rather, it only reflects the attorney's professional opinion that based on the information she has, it appears to be marketable

11.2.1.1. All the attorney promises, by implication if not expressly, is that she has done competent, professional work

11.2.1.2. She is liable only if her failure to find or failure to properly evaluate is negligent

11.3. Title Insurance - The preferred method of title assurance; it should ALWAYS be recommended to clients11.3.1. A vehicle for stating an opinion of title within the context of an

insurance policy

11.3.2. Two main functions

11.3.2.1. The insurer searches the records and discloses its findings

11.3.2.2. The insurer insures against undisclosed risks

11.3.2.2.1. The insurer has absolute liability for insured defects, regardless of whether it was at fault

11.3.3. The Commitment and the Policy

11.3.3.1. While the contract is executory, the buyer contracts a title insurer and orders a title insurance commitment

11.3.3.1.1. Only after doing a title search will the company issue a commitment or binder, which is the company's promise to issue a policy

11.3.3.2. A title policy is issued only after closing

11.3.3.3. Typically, BOTH BUYERS AND LENDERS will obtain title insurance

11.3.3.3.1. Title insurance does NOT insure against FUTURE events!

11.3.4. Key parts of the policies:

11.3.4.1. Insuring provisions

11.3.4.2. Conditions and Stipulations

11.3.4.3. Exclusions from Coverage

11.3.4.4. Exceptions to Coverage

11.3.4.5. Endorsements, if any

11.3.5. Most Common and Significant Exclusions and Exceptions:

11.3.5.1. Survey exception. No coverage for matters an accurate survey would show

11.3.5.2. Zoning and building laws

11.3.5.3. Rights of parties in possession not shown by the public records

11.3.5.4. Rights or claims of which the insured has knowledge prior to the issuance of the policy

11.3.5.5. Taxes or assessments for the current year which are not yet due or payable

11.3.5.6. Liens for work performed on the property

11.3.5.6.1. For most policies, the exclusions and exceptions are the key determinant of coverage

11.3.5.6.2. As a general rule, if a title matter affects the insured land and the policy does not exclude it from coverage, then it is an insured risk

11.4. Improving the Efficiency of the Title System11.4.1. Weaknesses of the recording system

11.4.1.1. Stale recorded interests accumulate over time

11.4.1.2. Off-the-record risks

11.4.1.2.1. Deeds and other instruments may be void or voidable for reasons such as nondelivery, incapacity, fraud, or adverse possession

11.4.2. Title Standards

11.4.2.1. About half the states have adopted statewide standards

11.4.2.2. The purpose of the examination of title and of objections, if any, shall be to secure for the examiner's client a title which is in fact marketable which is shown by the record to be marketable, subjectto no other encumbrances than those expressly provided for by the client's contract

11.4.3. Title Curative Acts

11.4.3.1. In response to the problems stemming from defective instruments of record, many states have passed title curative acts, which provide that instruments bearing certain defects are conclusively presumed valid after the passage of a specified number of years after the recordation

11.4.3.1.1. With curative legislation, more titles are marketable because searchers may safely disregard evidence of old defects

11.4.3.1.2. The statute itself might preserve certain types of interests

11.4.4. Marketable Title Acts

11.4.4.1. Goals are to limit the period of time covered by title searches and to render more titles marketable by eliminating stale interests

11.4.4.1.1. A period of 40 years is most common

11.4.4.1.2. The marketable title act operates to extinguish interests and defects that are older than the "root of title," which is the most recent deed or other instrument in the record chain of title that is more than 30 (or 40 or 50) years old

11.4.4.1.2.1. However, if all documents refer back to the same guiding document that is older than 40 or 50 years old, the old interest is not extinguished

11.4.4.1.2.1.1. Think of the Sunshine Vistas case, where every muniment made reference to the recorded plat imposing the restriction on the property

11.4.4.1.3. All marketable title acts have exceptions, which substantially undercut the fundamental goal

11.4.4.2. Most common exceptions: ROUGEAU EMPHASIZED THIS AND THEY WILL COME UP ON EXAM

11.4.4.2.1. Interests of the United States Government

11.4.4.2.2. Interests of State and local governments

11.4.4.2.3. Utility and railroad easements

11.4.4.2.4. Mineral rights

11.4.4.2.5. Visible easements

12. Housing Products12.1. The Single-Family Home

12.1.1. Probably the most highly desired type of home in America

12.1.2. Recent rise of the Planned Unit Development (PUD)

12.1.2.1. Contains numerous restrictions going far beyond typical zoning requirements - covenants that run with the land that control every aspect of the development

12.1.2.2. Can promote a certain "lifestyle"

12.1.2.3. Ultimately controls the type of people that will live in the PUD

12.1.3. Homeowners Association (HOA) - implements and enforces the various rules and regulations

12.1.3.1. Typical organized as a nonprofit corporation

12.1.3.2. Every unit and owner is made a part of the HOA; usually every unit is given one vote

12.1.3.3. HOA has power to charge for actions taken and can place a lien against the property of a person who fails to pay

12.1.3.3.1. This lien can be foreclosed upon

12.1.3.4. Every unit is assessed a fee in the form of monthly or annual assessments or dues

12.1.4. As a general rule, courts defer to the HOA unless they are being arbitrary or capricious in some way

12.2. Condominiums12.2.1. A condominium is a single unit in a multi-unit project with an

undivided interest in common areas and facilities of the project

12.2.1.1. Owner usually has a fee simple title to the unit and owns a percentage share of the common areas

12.2.1.2. All states have statutes that govern the creation and operation of condominiums

12.2.1.3. Great deference is given to the Condominium Board

12.2.2. Declaration of Condominium

12.2.2.1. Filed in the local real property records

12.2.2.2. Establishes a Condominium unit owners association

12.2.2.3. Restrictions established in the declaration are given more

deference than those passed by the association and its board

12.2.2.3.1. Where repairs have been found to be reasonable, consent of the members is not required

12.2.2.3.2. Each member may be required to pay an appropriate share of the expenses of repair

12.2.3. Distinguishing feature - Common elements

12.2.3.1. The land, building systems, and project amenities

12.2.3.2. Two types:

12.2.3.2.1. Common elements - all those portions of the condo property that are not defined in the declaration as part of a unit

12.2.3.2.2. Limited common elements - those common elements defined in the declaration as being for the limited or exclusive use of a particular unit while not in themselves being part of the unit

12.2.3.2.2.1. Ex: Patios, balconies, parking spaces

12.2.4. Reviewed under a Business Judgment Rule Standard

12.3. Cooperative Housing12.3.1. Distinguishable from other forms of ownership based on its use of

a corporation as the vehicle for ownership

12.3.1.1. Purchase of a unit involves the acquisition of a stock certificate in the cooperative entity; stock owners carry a right to a long-term lease in a particular unit

12.3.1.2. Decisions are reviewed under the business judgment rule

12.3.2. Buying into a co-op requires the approval of the cooperative board

12.3.2.1. Discrimination based on race, ethnicity, or religious affiliation is still illegal, though

12.3.2.2. Under the Fair Housing Act, you cannot discriminate on the basis of handicap, either, and must make buildings handicap-accessible

12.4. Time-Share Housing12.4.1. Divides a unit's air space into blocks of time

12.4.1.1. The purchaser gets the right to occupy the unit for a designated period of time each year

13. Residential Mortgage Markets & Products, and Credit Crisis13.1. Lending

13.1.1. Loans are interest front-loaded, so the interest is getting paid back during the early stages of the loan

13.1.1.1. The Govt. has always been a participant in the residential lending market (see FNMA and FHLMC)

13.1.2. Gold standard of the residential real estate market:

13.1.2.1. 30-year, level payment, fixed rate, self-amortizing loan

13.1.3. Fundamentals of making a loan

13.1.3.1. The lender needs the borrower to bear some risk in the possibility of loss

13.1.3.1.1. One way borrower can demonstrate that is by putting up a large sum of capital at the outset (typically 20%)

13.1.3.1.2. Another way lender protects itself is by getting interest up front

13.1.3.1.3. Another way lender protects itself is by looking at the market (is it doing well?)

13.1.4. Current crisis:

13.1.4.1. Over time, the size of the down payments started to drop, and the lenders started to take on more risks

13.1.4.2. The lenders did this because there was a perception that the values in the housing market were constantly rising

13.1.4.3. Now, for many people, it makes more sense to allow foreclosure on a house that's worth $100,000 when they still owe $200,000

13.1.5. The mechanics of lending

13.1.5.1. Points - simply prepayments of interest

13.1.5.1.1. They make it easier for you to pay your interest later, because your interest rate that you'll have to pay back will be much lower

13.1.5.1.2. Since you're paying the lender up front, the lender is willing to charge less interest throughout the life of the loan

13.1.5.1.3. One "point" is essentially the same as one percent, except it's paid up front

13.1.5.2. Adjustable rates

13.1.5.2.1. Interest rate that fluctuates based on the market

13.1.5.2.2. Typically offered at a "teaser rate" - a very low rate at the beginning

13.1.5.2.3. Ask: How often does the rate adjust? What is the standard on which it is adjusted? Are there any caps on the adjustment? The lifetime adjustment of the loan should be capped as well

13.1.6. Predatory lending/Subprime lending

13.1.6.1. Redlining - the practice of denying the extension of credit to specific geographic areas due to income, race, or ethnicity of itsresidents

13.1.6.2. Reverse redlining - the practice of extending credit on unfair terms to those same communities

13.1.6.2.1. The targets of predatory lenders are usually people who have substantial equity in their homes due to rising real estate values or due to the reduction of purchase money debt, but who are short on cashbecause of their low or fixed incomes

13.1.6.3. Loan-splitting - a situation where the debtor wants, requests, and expects to get a single loan consummated in a single transaction, but the lender instead documents and makes disclosures for the loan as if it were two separate transactions

13.2. Mortgages

13.2.1. What is a mortgage?

13.2.1.1. A lien on the property that can be foreclosed upon in the event of a default upon a debt

13.2.1.2. Secures the debt on a promissory note

13.2.1.2.1. The note is the promise to repay

13.2.1.2.2. Mortgage gives the lender the right to have the property sold on default

13.2.1.3. What is a deed of trust?

13.2.1.3.1. It is like a mortgage, except it appoints a private trustee who declares a mortgage in default

13.2.1.3.1.1. Once that declaration is made, the law allows a private sale of the property

13.2.2. Access to Mortgage Markets

13.2.2.1. Factors that a lender is interested in: WILLINGNESS and ABILITY to pay

13.2.2.1.1. Ability - looks at a borrower's income, outstanding debts, employment history, credit history, and savings or net worth

13.2.2.1.1.1. 28% rule - most lenders will not extend a loan that requires a monthly mortgage payment exceeding 28% of the borrower's gross monthly income

13.2.2.1.1.2. 36% rule - most lenders will not extend a loan to a debtor whose total debt payments would exceed 36% of his gross income

13.2.2.1.2. Willingness - much more subjective

13.2.2.1.2.1. Credit and employment history are evaluated, and past credit problems or payment disputes must be cleared up to the lender's satisfaction

13.2.3. Primary Mortgage Markets

13.2.3.1. Saving by households and others

13.2.3.2. Lending by organizations and institutions

13.2.3.3. Borrowing by households and others

13.2.3.4. Selling mortgages and notes through the secondary market

13.2.4. Secondary Mortgage Markets

13.2.4.1. Created by the federal government to allow more Americans to have access to loans

13.2.4.2. Most lenders now sell the majority of their loans to investors in the secondary mortgage market. Implications:

13.2.4.2.1. The lenders view their secondary mortgage market investors as their key customer base, and thus try to make the mortgage terms and options appealing to them, rather than the borrower

13.2.4.2.2. Rather than holding loans and profiting by collecting interest, lenders have increasingly concentrated on up front fee-generating activities

13.3. Mortgage Products13.3.1. Points and Annual Percentage Rate

13.3.1.1. Points

13.3.1.1.1. Also called "loan processing fee," the "loan discount," or "loan origination fee"

13.3.1.1.2. One point is equal to one percent of the loan amount, but is paid up front

13.3.1.1.2.1. A point is also referred to as 100 basis points

13.3.1.1.3. A borrower must pay before the loan is funded, and can pay in one of two ways:

13.3.1.1.3.1. Commonly, the lender discounts the points by subtracting them from the face amount of the loan

13.3.1.1.3.2. Alternatively, some lenders require that the borrower use out-of-pocket cash to pay the points

13.3.1.2. Annual Percentage Rate

13.3.1.2.1. A calculation of the cost of a loan using a federal formula set forth in the Real Estate Settlement Procedures Act (RESPA)

13.3.1.2.2. All the points and expenses are treated as if they were interest

13.3.2. Mortgage insurance

13.3.2.1. Protects a 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

13.3.2.2. Generally, lenders require insurance for any loan that exceeds 80% of the appraised value of the property

13.3.2.2.1. Mortgage insurance offered by the public sector, such as the FHA and VA, covers 100%

13.3.2.2.2. Private mortgage insurance covers only 20-25%, and usually once the outstanding debt falls below 80%, the borrower may discontinue the PMI

13.3.3. Fixed Rate Mortgage

13.3.3.1. The benchmark for housing finance

13.3.3.1.1. Offers a fixed rate of interest on the borrowed money that never changes over the life of the loan

13.3.3.2. Amortization - the borrower is paying money according to a schedule to reduce the loan balance

13.3.3.2.1. The FRM is said to be self-amortizing because if the loan goes to full term the last monthly payment will reduce the loan amount to exactly zero

13.3.4. No-point mortgage, and buy-down mortgage

13.3.4.1. No-point mortgage - the borrower gets the loan at the stated interest rate without being charged any points

13.3.4.2. Buy-down loan - involves an offer to provide financing at a below-market rate of interest

13.3.4.2.1. Requires that a fee be paid to the lender in exchange for offering a mortgage at below-market rates

13.3.5. Adjustable Rate Mortgage

13.3.5.1. Mortgages in which the interest changes during the term of

the loan

13.3.5.2. Three main components: Index, Adjustment Period, Caps.

13.3.5.2.1. Index - The Index is the reference source used for making interest rate adjustments throughout the life of the loan

13.3.5.2.2. Adjustment period - The parties must agree on the frequency of the adjustments

13.3.5.2.3. Caps - Most ARMs have "caps" that limit how much the interest rate can move at an adjustment period

13.3.5.2.3.1. A typical cap would be 2% in either direction

13.3.5.2.3.2. There may also be a lifetime cap

13.3.5.3. Convertibles. A hybrid mortgage that starts out as an ARM, but at a stated date in the future, usually after several years, it becomes an FROM at the then-prevailing FRM interest rate

13.3.5.4. Often the borrower has the option to decide whether to invoke the conversion

13.3.6. Balloon mortgage

13.3.6.1. The borrower has promised to make a BIG cash payment at the specified maturity date, which is called the balloon payment

13.3.6.2. Obviously NOT self-amortizing

13.3.7. Reverse Annuity Mortgage (RAM)

13.3.7.1. A mortgage which is marketed to senior citizens who own their homes as a major source of wealth subject to little or no mortgage debt

13.3.7.2. The lender makes payments to the debtor until the limit of a pre-established credit line is reached; the lender expects to be paid in full at the owner's death or when the home is sold

13.3.8. Purchase Money Mortgage

13.3.8.1. Any mortgage in which credit is extended to enable the debtor to buy or acquire the property on which the mortgage is placed

13.3.8.1.1. People in real estate refer to a PMM only when the SELLER is the one lending to the buyer

13.3.8.1.2. RAMS or Home Equity loans are not PMMs

14. Mortgage Obligations14.1. Payment of the Debt

14.1.1. Usury laws limit the amount of interest a lender may charge on a loan

14.1.1.1. General ceilings of 10 to 12 percent

14.1.1.2. Where lenders run into problems:

14.1.1.2.1. Loans with variable or adjustable interest rates often present usury problems

14.1.1.2.2. how interest is compounded may raise usury problems

14.1.1.2.3. There is a usury violation if the lender bargains for too much

for ANY period

14.1.1.2.4. Hidden interest is anotehr area where lenders sometimes get into trouble

14.1.1.2.4.1. "Points" such as origination fees, processing fees, or discount points count as interest

14.1.1.3. Penalties are often severe

14.1.1.3.1. The lender may have to pay damages that are double or even triple the amount of excess interest

14.1.1.3.2. In some states, no interest can be collected on the loan

14.1.1.3.3. In New York, the lender can't even recover the principal!

14.1.1.4. Exceptions:

14.1.1.4.1. In most states, a purchase-money loan is not subject to the usury laws

14.1.1.4.2. The purchase and sale transaction is not separable (b/c the lender IS the seller)

14.1.1.4.3. The difference between the cash and credit price is called the "time-price differential"

14.1.1.5. Usury is typically not a factor these days because lending rates are so low

14.1.1.5.1. Normally commercial transactions are not included under usury laws, because the parties are assumed to be sophisticated

14.1.2. Late Payment

14.1.2.1. Many lenders include loan provisions that impose extra costs on borrowers who pay late

14.1.2.2. The late payment does NOT represent in any way a penalty, but instead is there because it is difficult to predict or calculate the harm the lender would suffer because of late payment

14.1.2.2.1. As long as the fee is

14.1.2.2.1.1. A product of the agreement of the parties AND

14.1.2.2.1.2. It is not extraordinarily excessive

14.1.2.2.2. It will be accepted by the court

14.1.3. Prepayment

14.1.3.1. The borrower pays part or all of the principal before the due date specified in the promissory note, and may be total or partial

14.1.3.2. Prepayment premiums

14.1.3.2.1. Some lenders require a prepayment premium if the borrower attempts to pay early

14.1.3.2.2. Lenders want to protect themselves based on fluctuations in interest rates

14.2. Nondebt Obligations14.2.1. The mortgagor (borrower), in addition to promising to pay the debt,

makes other promises:

14.2.1.1. To pay real property taxes

14.2.1.2. To insure the improvements

14.2.1.3. Not to commit waste

14.2.1.4. Not to sell or transfer the mortgaged property without the mortgagor's consent

14.2.2. The mortgage must secure some underlying obligation

14.2.2.1. A mortgage is valid without any note or bond, so long as it secures an existing debt

14.3. Assumptions and "Taking Subject To" Mortgage Obligations14.3.1. When mortgaged property is bought and sold, two things can

happen:

14.3.1.1. The mortgagor might pay off the debt

14.3.1.2. The sale might close with the existing debt remaining in place

14.3.2. Three ways in which the parties may handle the debt if it remains in place:

14.3.2.1. The new buyer may "assume" the mortgage debt, in which case the buyer promises the seller that the buyer will pay all of the debt in accordance with its terms

14.3.2.1.1. The buyer "assumes" the obligations to pay the debt and becomes liable on it in place of the seller

14.3.2.1.2. Key idea: The purchaser assumes the primary liability on the debt; the seller stays liable on the debt only as a surety for his buyer

14.3.2.1.3. Swanson v. Krenik

14.3.2.1.3.1. When an original mortgagor transfers mortgaged land to a grantee who assuems the mortgage, the assuming grantee becomes the principal mortgage obligor and the mortgagor becomes a surety

14.3.2.1.3.1.1. You, as seller, are a primary surety for the person (buyer) you deal with initially, and then a subsurety for the person that your buyer sells to

14.3.2.2. The new buyer may also "take subject to" the mortgage debt

14.3.2.2.1. Seller stays liable on the debt, but the buyer tells the seller that he will pay the mortgage

14.3.2.2.2. Key idea: The buyer does not assume personal liability on the debt, but the property is still subject to foreclosure if there is a default on the mortgage

14.3.2.2.3. The buyer who takes "subject to" usually pays the debt, because if she doesn't pay, she risks losing the property to the mortgagee, who may chose to foreclose

14.3.2.3. When the mortgage debt survives the closing, the mortgagor/debtor is still required to pay it

14.3.2.3.1. "Wrap-around mortgage loan" - the buyer gives the seller a promissory note, secured by a second mortgage on the property, andthe seller uses installment payments made by the buyer to pay the mortgage under the prior loan

14.3.2.3.1.1. This is used when the buyer takes the property "subject

to" the mortgage

14.3.2.3.1.2. The second mortgage is designed to pay the first mortgage debt; designed to secure the promise made by the buyer to pay the debt that is owed by the seller

14.3.2.3.2. Buyer pays seller; seller pays bank

14.4. Modification and Extension of Mortgage Debt14.4.1. Under suretyship principles, the general rule is that any extension

of the maturity date for payment of debt discharges the surety, unless the surety agrees to that extension

14.5. Restrictions on Transfer by Mortgagor14.5.1. General rule: The mortgagor's interest in the property is freely

alienable

14.5.1.1. This policy CAN be curtailed by the parties' contract

14.5.1.2. Most common type of restraint is the "due-on-sale clause," which provides that if the borrower sells the property without thelender's approval, the entire principal balance of the loan immediately becomes due and payable

14.6. Default Clauses14.6.1. The promissory note and the mortgage are the places where

"default" is defined

14.7. Acceleration14.7.1. Acceleration is the process by which the lender, after default by

borrower, makes the entire debt due and payable

14.7.1.1. Acceleration is a key step in the foreclosure process

14.7.1.2. Typically, the acceleration clause is contained in the promissory note

14.7.2. Two basic types:

14.7.2.1. Entire debt shall be due and payable if a specified event happens, such as a certain type of default

14.7.2.1.1. The language is such that acceleration happens automatically if the event occurs; no action by the lender is necessary

14.7.2.1.2. This type is not commonly used today

14.7.2.2. The lender has the option of accelerating maturity of the debt

14.7.2.2.1. If the lender does not take an affirmative act to legally accelerate the loan:

14.7.2.2.1.1. Prior to the moment of acceleration, the borrower has the right to cure the default and, if he does so, the lender cannot accelerate

15. Foreclosure15.1. General

15.1.1. Foreclosure is the process, after default, by which the lender gets value from the collateral to repay part or all of the debt

15.1.2. Along with the foreclosure, the mortgagee will want a judgment

equal to the shortfall - a deficiency judgment

15.1.3. The opposite of a deficiency is a surplus, which goes back to the mortgagor or, in some cases, to his other creditors

15.1.4. All states have foreclosure statutes that define and govern foreclosure proceedings

15.1.5. The parties' contract also often affects how the lender may foreclose

15.2. Types of Foreclosure15.2.1. Strict foreclosure

15.2.1.1. Old English foreclosure

15.2.1.2. If the mortgagor failed to pay by the judicially set date, the mortgagee could simply keep the property (didn't have to sell it)

15.2.1.3. Not in widespread use today

15.2.2. Judicial foreclosure

15.2.2.1. The mortgagee brings an action asking the court to issue an order calling for a sale of the mortgaged property

15.2.2.1.1. A court-supervised sale (usually an auction) occurs

15.2.2.2. Prior interests are not terminated or affected by the foreclosure; junior interests ARE cut off

15.2.2.2.1. Persons who hold junior interests are "necessary parties" and must be joined as defendants

15.2.2.2.1.1. If a party is necessary and is not joined, there is a right of re-foreclosure

15.2.2.2.2. Persons who have rights or duties with respect to the property or the debt but who are not necessary parties are "proper parties"

15.2.2.2.2.1. The significance of labeling a person as a "proper party" is that she can be joined without her consent

15.2.2.3. Said another way:

15.2.2.3.1. Proper parties have a SUPERIOR interest which was given PRIOR to the mortgage

15.2.2.3.2. Necessary parties have an INFERIOR interest which was given AFTER the mortgage

15.2.2.3.2.1. The interests of the necessary parties will be cut off because of the foreclosure proceeding

15.2.3. Power of Sale Foreclosure

15.2.3.1. In widespread use

15.2.3.2. Allows lenders to foreclose by selling the property without court involvement

15.2.3.2.1. Can be employed 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

15.2.3.3. Governed by state statutes, which the parties cannot contract around

15.2.3.4. Deeds of Trust typically involve power of sale foreclosures

15.2.3.4.1. Really means "document of trust" - it's not a deed that conveys property or any interest

15.2.3.5. The foreclosure sale, if done with proper procedure, is presumed to net a fair price

15.3. Equitable Subrogation15.3.1. The substitution of one person/entity to the position of another, an

obligee, whose claim he has sustained

15.3.2. A lender who extends funds to help you avoid defaulting on a loan from another lender can step ahead of that original lender in terms of the priority of liens

15.3.2.1. Operates in contradiction to the legal rule of first in time, first in right

15.4. Statutory Mortgagor (Debtor) Protections15.4.1. One-Action Rule

15.4.1.1. Limits the mortgagee to a single action that must include foreclosure and may include, if appropriate, a deficiency judgment

15.4.2. Statutory Redemption

15.4.2.1. Up until the moment of the foreclosure sale, the equity of redemption means the mortgagor has the right to pay the debt and obtain a release of the mortgage

15.4.2.1.1. In some states, the borrower may have an additional right of "statutory redemption" that comes into play AFTER the foreclosure sale

15.4.2.1.1.1. Usually for some time period ranging from a few months to 18 months

15.4.2.1.1.2. The redemption price is the foreclosure sales price plus interest and foreclosure costs

15.4.2.1.1.3. The mortgagor has the right to possession during the statutory period

15.4.3. Limits on deficiency judgments

15.4.3.1. Anti-deficiency judgment acts simply bar any deficiency judgment for a class of mortgage loans

15.5. Deed in Lieu of Foreclosure15.5.1. The lender gets the title right away and can keep or sell the

property however it wishes without following public foreclosure sale procedures

15.5.1.1. In exchange for the transfer, the borrower receives satisfaction of all or part of the debt

15.5.2. NB: The deed will NOT cut off junior interests that are subsequentto the mortgage as a judicial foreclosure would

16. Mortgage Substitutes16.1. General

16.1.1. If the parties' transaction is basically a loan, with real property as security if the borrower fails to repay, then mortgage law applies,

regardless of how the parties label or characterize their deal

16.1.1.1. This is a "disguised mortgage" or "equitable mortgage"

16.2. Sales and Disguised Mortgages16.2.1. The class case is the loan that masquerades as a straight-out sale

16.2.2. The lender orally promises to re-convey to the borrower if the borrower timely repays the debt

16.2.2.1. Parol testimony is admissible, despite the statute of frauds

16.2.2.2. One justification is that the testimony "explains" rather than "contradicts" the deed

16.3. The Negative Pledge16.3.1. The lender identifies a particular asset owned by the borrower, and

the borrower promises not to convey or encumber that asset until the loan is repaid

16.4. Installment Land Contracts16.4.1. An installment land contract, also known as a contract for deed, is

one type of arrangement for buying land

16.4.1.1. It is an executory contract under which the purchase price is payable in installments, with the seller obligated to transfer title by deed when final payment is made

16.4.1.2. The buyer takes possession of the real estate at the outset of the transaction when the contract is signed; gets use and enjoyment of the land before he makes all payments

16.4.2. Rarely used for transfers of commercial property, but may become more common in the modern residential market

16.4.3. For an installment contract, the parties have agreed to postpone the closing for a number of years

16.4.4. The basic concept behind the installment land contract is that theseller does not part with title until all of the purchase price is paid

16.4.4.1. After taking possession, the contract buyer has only contractual rights while the seller still has legal title, but themortgagor buyer has legal title subject to the seller's mortgage

16.4.5. Problems:

16.4.5.1. The longer a person occupies the property, the greater their losses would be

16.4.5.1.1. Because of the long-term nature of the contract, the contract buyer builds up substantial equity in the property, which may be forfeited if he breaches

16.4.5.1.2. Basically like they're in an executory contract period until they pay it off

16.4.5.1.3. Low income people get involved in these transactions; it will come up more and more in the modern market context

16.4.5.1.4. Courts prefer judicial foreclosure to installment land contracts, because the risk of loss is so great on default

16.4.5.1.4.1. The result of foreclosure would be more equitable

17. Basic Commercial Real Estate17.1. Concerns of a developer

17.1.1. First, the developer wants to limit her personal liability

17.1.1.1. As a result, the developer usually selects a form of business that limits liability, like a corporation

17.1.2. Second, the developer wants to protect as many business and corporate assets as possible

17.2. Dragnet Clauses17.2.1. A dragnet clause is a clause stating that a mortgage secures all the

debts that the mortgagor may at any time owe to the mortgagee

17.3. Leases As Financing Devices17.3.1. Ground Lease

17.3.1.1. After entering into a ground lease, the developer as landlord will enter into subleases that allow tenants to occupy space in in the contemplated improvements

17.3.1.1.1. The "attornment" provides that all the subtenants must agree to attorn to or look to the lender if the lender should take over the project, primarily as the result of a default by the developer

17.3.1.1.2. The "nondisturbance agreement" flows in the opposite direction, in that it obligates the lender to leave the subtenantsundisturbed in their leases

17.3.1.2. Triple Net Lease - the costs of (1) property taxes, (2) insurance, and (3) maintenance are all shifted from the fee owner to the tenant

17.3.2. Sale and Leaseback

17.3.2.1. The monthly payments are for rent rather than a mortgage payment, but the payment will come close to being the same as a comparable mortgage payment for a similar amount of cash amortized over a similar term

17.3.2.1.1. At the end of the leaseback period, the original owner will have the right to buy back the building at some nominal amount

17.3.2.1.2. The lender becomes the owner of the property and the landlord under a long-term lease

17.4. Commercial Financing - The drive of commercial real estate is financing17.4.1. Construction Loans

17.4.1.1. Short-term loans range from 6 to 24 months

17.4.1.2. A construction lender must be able to supervise the construction process throughout the term of the loan

17.4.1.3. In a "draw-down" loan, the full loan amount is not released to the borrower at the time of closing on the loan

17.4.1.3.1. While construction proceeds the lender makes periodic

disbursements, called "draw-downs"

17.4.1.3.2. The lender limits its loss exposure at any given time and makes it easier to supervise the progress of construction

17.4.1.3.2.1. If a developer fails to meet any of a serious of conditions precedent to a draw, the lender will be excused from making any further disbursements or advances under the loan

17.4.1.3.3. Construction loans typically expire at the time schedule for completion of construction

17.4.1.3.3.1. At this time, the borrower will not have cash on hand to repay the loan

17.4.1.3.3.1.1. The borrower usually arranges to repay the construction loan by obtaining a permanent loan on the property

17.4.1.4. Permanent loans

17.4.1.4.1. Generally have a term that is anywhere between 10 and 30 years

17.4.1.4.1.1. The project is completed by the time the permanent loan is made, so there is no need to supervise work production

17.4.1.4.1.2. The permanent loan will be paid back on a regular basis, usually monthly

17.4.1.4.1.3. These monthly payments are expected to be paid out of income revenues for the property

17.4.1.4.2. Often a permanent loan is structured as a "nonrecourse loan"

17.4.1.4.2.1. This means that the developer will not typically have to make any personal guarantee on the loan; instead, the lender will take the property with its income stream as the sole collateral for the loan

17.4.1.5. Take-Out Arrangements

17.4.1.5.1. The high-risk construction loan business is dominated by commercial banks, savings and loans, and other major primary financial market participants

17.4.1.5.2. The permanent loan business is comprised of major insurance companies as well as pension funds

17.4.1.5.2.1. Permanent funding is a stable long-term source of income flow with relatively low risk

17.4.1.5.3. The process by which the permanent lender steps in to pay off the construction loan and roll the debt over into a long-term permanent loan is referred to as the "take-out"

17.4.1.5.3.1. The permanent lender literally takes the construction lender out of the deal by paying off the mortgage debt

17.4.1.6. Three types of take-out arrangements:

17.4.1.6.1. Lock-in: The developer first obtains a firm commitment from a permanent lender to take over the construction loan by paying off the construction lender and rolling the debt into a long-term mortgage obligation

17.4.1.6.2. Stand-by: A loan commitment that the developer hopes will not have to be used

17.4.1.6.2.1. The permanent lender must be prepared to fund a take-

out if called on to do so, and sets out terms and conditions that have to be met prior to the lender's having to fund

17.4.1.6.3. Open-ended: Basically means that there is no commitment for a permanent loan takeout of the construction loan

17.4.1.7. Three-Party Agreements

17.4.1.7.1. The general case is that the permanent loan has to be arranged first

17.4.1.7.2. A construction lender is not likely to agree to do its part unlessit knows that a take-out is in place

17.4.1.8. The written agreement that binds together the developer, the construction lender, and the permanent lender is the three-party agreement

17.4.1.8.1. It is designed to put each of the parties in privity with each of the others

17.4.1.8.2. It is designed to give each party a right of specific performance against each of the others

17.4.1.9. Coordination of Independent Loans

17.4.1.9.1. The two loans are dependent on each other

17.4.1.9.1.1. When financing is "circled," the parties orally agree that they will do the transaction on the specified terms

17.4.1.9.1.1.1. It is the custom in the financial community that once the parties circle a deal, neither party tries to change the interest rate that has been agreed