REAL ESTATE TRANSACTIONS OUTLINE
I. INTRODUCTION TO REAL ESTATE TRANSACTIONS
· 1. Go to RE Broker and list property.
· 2. Property is shown & offers are made.
· 3. Binders
o Attorneys Required?
§ NJ Law:
§ NY Law:
§ Common Law:
§ Approval Clause (3 days) – the parties are not bound until they present contract to their attorneys, and the attorneys agree to the terms. Renegotiate if attorney objects.
· 4. Examination of property.
o Seller Concerns price, tax consequences
o Buyer Concerns price, time of closing, condition of the property, state of title (easements, encumbrances), personal property, cost of operation, financing
· 5. Financing.
o Mortgage Contingency (Buyer concern) You do not lose your down payment and get your money back if you are unable to obtain financing.
o Inspection Contingency Right to inspect the property within a certain period of time after the Contract of Sale. Ex: “A defect in the property revealed by the professional inspection that costs more than $X,000 to repair.”
· 6. Title Search.
· 7. Closing.
o Documents to ask for – Seller’s Attorney:
§ Copy of deed
§ Copy of survey
§ Certificate of occupancy
§ Title Insurance policy
§ Existing Leases
§ Service Contracts
o Major Documents Required for Closing
§ Seller’s Attorney new deed
· Commercial only: actual leases, assignment of leases, assignment of service of contracts (privity of contract, NOT privity of estate)
§ Buyer’s Attorney title insurance policy
§ Lender’s Attorney note, mortgage
§ Other Docs HUD-1
§ Mortgage-Brokers help clients secure financing for a fee. Paid a commission if buyer gets the loan – therefore they have an interest. Negotiating with the Lender may help you secure a lower interest rate.
II. THE CONTRACT STAGE
A. BROKERAGE AGREEMENTS AND BROKERS’ DUTIES
· Fiduciary Duties of RE Broker
o NYRPL § 442(d) No person may bring an action to recover compensation for services rendered in connection with purchasing, selling, or leasing real estate unless they are duly licensed.
o 3 Fiduciary Obligations
§ Full Disclosure to his Principle
o Daubman v. CBS Real Estate:
· Recovery of Brokerage Commissions
o Depends on type of listing btwn Broker and Principle
§ Open Listing
· A Ready Buyer
· An Able Buyer
· A Willing Buyer
o Bona Fide Willingness Typically, the courts say “parties have come to agreement as a matter of law that proves willingness.” However, if the broker misrepresented the rent role, there was misinformation and therefore no agreement. This rarely happens because Broker rarely misrepresents terms to extent that Buyer would be unwilling to buy. Hard to prove its not a bona fide agreement.
§ Exclusive Listing
§ Exclusive Right to Sell
a broker owns their commission no matter who effected the sale or if the listing agent procures a ready, able, or willing buyer on terms authorized by the listening or terms.
o Cal. Civ. Code § 1086
· Brokerage Duties
o When Does a Broker Earn Their Commission:
§ 2 Standards:
· Standard 1: If Buyer is “Ready, Willing, & Able” (Silent)
o Ability is tested as of closing date, not agreement date.
o Seller bears risk of Purchasers default if silent because they must pay if the buyer was ready, willing, and able.
· Standard 2: “If, As, When” Closing Occurs Clause
· The agreement has no mortgage contingency and as closing approaches, the Purchaser defaults because they do not have the funds to complete the purchase.
· Buyer changes their mind and no longer wants to buy.
· Seller changes mind and refuses to close because they no longer want to move.
o Procuring Cause Standard
a Broker has not earned his commission unless he produces a buyer who is ready, able, and willing to buy on terms satisfactory to the Seller. Proving readiness and willingness is easy because its proven by oral/written agreement (emails? Even if nothing complies with SOF, some writing will help). Burden on Broker to prove willingness and capability, NOT on Seller to disprove.
§ Closing Contingency
§ Exception to Procuring Cause Standard If sale is not completed and it is Sellers fault (e.g., refuses to transfer title), this does not alter obligation of seller to pay commission if sale. He has not acted in good faith so there is liability. This is equally true when “if as when” standard. Even if we aren’t sure that Buyer was able, court decides this ambiguity in favor of Broker. Seller must be careful not to arbitrarily refuse sale because they could be obligated to pay commission.
· How to Avoid Paying Brokerage Commissions – Arguments
o Statute of Frauds
§ Majority & NY: A brokerage listing does not have to be in writing. The listing agreement does not come under the SOF because it provides for the brokers services in connection with the sale of land services, not the actual interest in the transfer of land.
· NY General Obligations Law § 5-701: Every agreement is void unless it is in writing if it is a contract to pay compensation for services rendered in negotiating a loan OR the purchase/sale/leasing of real estate.
o (10) This provision shall not apply to a contract to pay a compensation to a duly licensed RE Broker or RE Salesman. They are excused from the writing requirements!
o The Procuring Cause
The Broker 1) introduced the parties and 2) was so involved in the negotiations that they played a role in securing the parties agreements (even if parties played the major role).
§ Burden of proving willingness and financial capability is on the Broker (easy because by oral/written agreement).
§ Most courts hold that merely indicating the location of a possible property for sale does not lead you to be the procuring cause of an actual agreement to sell.
§ Some courts will allow commis
so the PURCHASER must sign, not the Lender.
· FL SOF: 2 subscribing witnesses required.
§ Initials are sufficient?
o 2) Parties Identified
§ We need to know the parties to the contract.
§ You don’t have to say who is the Seller/Purchaser, but they must be identified.
§ Typically full name and residence, but residence not required because handwriting can be checked. Corporations typically identified by corporate name and state of incorporation.
§ A common name, such as HPI for a company, may not be proper identification. We don’t know their state of incorporation or their principal address, and it is possible many corporations throughout the US and world have the same name.
o 3) Parcel Identified
§ A description of the parcel is required because the court must be fairly certain it is transferring title to the correct parcel.
§ 3 types:
· Metes and Bounds Description (most typical)
Surveyor surveys property and gives a description of the outer boundaries.
· Description by Plat Reference
Private owner subdivides property. Lot is divided. Owner then causes a map or plat to be made in which, after anchoring the exterior limits of the area being mapped, the several portions of the area are mapped in their exterior dimensions and receive designations.
· Street Address
This is okay, but the courts prefer a more detailed description when they order a conveyance of title.
o 4) Consideration
§ Sale price?!!!! FIND OUT!!!!
o 5) Essential Terms
SOF does not say this, but courts have. A writing does not comply with SOF unless it contains all essential terms of parties agreement. Especially necessary for § 703-2.
§ An essential term is a term without which the party would not agree to be bound. If this were not part of the agreement, the party would never have agreed.
§ Ex: If financing amount is included but not the interest rate, then an essential term was probably left out and the writing is not sufficient to be enforceable.
· “Contingent upon 75% financing” is good.
· “Contingent upon necessary financing” is NOT.
§ Unless state otherwise:
· Closing date is not an essential term.
· Assume seller is promising to convey title.
· Typical deed is sufficient to convey title without full warranty specified.
§ “Usual Transaction” – Is the Binder enforceable under SOF?
· Typical Binder has date, Seller & Purchaser name and address, Parcel by address, Sale Price, Signature lines.