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Property II
South Texas College of Law Houston
Festa, Matthew J.

Property II Outline – Fall 2014

Professor Festa

Chapter 7: The Land Transaction

A. Introduction to Buying and Selling Real Estate

· Property=social institution describing legal relationship btwn ppl with respect to things

· Property Theory: want freedom, efficiency, and property to go to its highest and best use

· Generally have free market exchange, but transaction costs impede this

· Way to overcome transaction costs to make system work:

o Property Rights

§ Possess

§ Exclude

§ Use

§ Alienate

Property Rights must ensure these conditions.

· Function of real estate contract process:

1. Ensure property rights are protected

2. Find out problems with property (inspection, representation)

· Real estate contracts are executory

1. Title is not immediately transferred b/c both parties must do certain things btwn contract and closing; even though paperwork has been done, possession is not always transferred/conveyed.

§ Transfer of possession doesn’t occur until the closing

· Most Ks of sale contain a mortgage contingency, which says if purchaser cannot obtain mortgage loan within given time, he can rescind K and get back deposit

Good Residential Real Estate K Should Include:

1. Purchase Price

2. Legal description of property so can know exactly what you are buying/paying for

3. Good title by seller

a. Want to know that seller actually owns what he is trying to sell; done by title search

i. Title search usually done after K is singed; buyer makes seller promise he has good title; after signed, if seller lied, buyer has remedies

4. Warranties of title

5. Date of transfer of possession

6. Assignment of risk

a. Sell a house in West, TX and plant explodes; who bears risk/loss?

7. Itemization – of furnishings, fixtures, and personal property included in K

a. Ex.) Fridge, stove, etc. that comes with property purchase

8. Escrow agreement

a. Give money to 3rd party to hold and do what agreement says

9. What will happen if K falls through

10. Parties’ signatures

From class:

Q: Why might buyer care about seller’s marital status?

A: want to know all owners b/c potentially marital property and someone else may have interest in it

Q:B1 and B2 have equitable title when K is signed; B1 dies and S tries to back out; K doesn’t indicate how Bs were to take title; does it matter?

A: Yes

Q: Developer offers B standard form giving developer discretion to substitute material, make changes, apply delays; should B accept?

A: already built in duty of good faith, but probably want to ask for other things you want; maybe insist on warranties; b/c standard form, may not have much bargaining power

B. Brokers

i. Why have brokers in real estate transactions?

1. Uniqueness of real estate

a. Computers made by the many, but the house on the corner is the house on the corner; it’s not fungible/easily replaceable, so need experts

2. Infrequency of transaction

3. Importance of transaction

a. High value of real property to parties

b. High emotional content

4. Brokers help provide information – that’s their business

a. They have specialized knowledge

ii. Broker’s Duty: Real estate broker is fiduciary of the seller (Licari)

1. Duty of fidelity of good faith with respect to the principle (generally the seller)

a. Applies to “subagents” too

b. Subagents & brokers violate their duty by not disclosing higher offer

c. Must put seller’s interests above their own

2. Broker has legal obligation to make full, fair, and prompt disclosure to client of all facts which may be material

a. Breach of duty:

i. Broker liable for any consequential loss

ii. Precludes recovery of commissions

b. “Listing Broker” – duty to seller (contracts w/ seller to sell their property

c. “Selling Broker” – duty to seller (introduces buyer to seller’s property

i. Even if buyer believed broker works for them

3. Selling broker has a duty to inform seller how much buyer is willing to pay (so don’t tell broker “I’ll pay x” b/c will tell seller)

4. Types of Listings

a. Open Listing

i. L


iv. Hazardous waste doesn’t render title unmarketable

b. Equitable Conversion

i. If there is a specifically enforceable K for sale of land, equity regards as done that which ought to be done

iii. Duty to Disclose Defects

1. Caveat Emptor

a. The traditional rule w/ real property is Buyer Beware

b. Exception:

i. Affirmative misrepresentation (lie) by seller

2. Why? To encourage buyers to educate themselves about what they’re getting into

3. Caveat Emptor is mostly superceded by statutes/case law

4. Duty to Disclose can trump Caveat Emptor when:

a. “Defect” is created by seller

b. Seller’s knowledge

c. Materially impairs value of K

d. Undiscoverable by reasonable buyer

5. Modern Trend: Seller has duty to disclose material defects known by seller when not readily observable by prudent buyer

a. More protection for buyers; nondisclosure=fraud

b. Becomes question of fact:

i. What’s material?

1. Reasonable person standard, OR

2. Subjective impact on Property Value

ii. What’s readily observable?

c. Negatives of Modern trend:

i. More transaction costs, legal liability, disincentivizes market participation, increases cost of homes

d. Justifications for burden on seller:

i. Better positioned to know facts; buyer relies on their expertise

ii. No longer dealing w/ simple land transactions

iii. Cheapest cost avoider

6. Merger

a. When buyer accepts deed, the K “merges” into the deed

b. Prior promises no longer matter once you get title

c. Exceptions:

i. Fraud

ii. Contractual promises deemed collateral to deed