REAL ESTATE TRANSACTIONS
Instructor: Jerry Gorman
Term: Spring 2015
Chapter 1: Market Context for Real Estate Transactions
§ Problem 1A (p. 11)
· Assume that defective drywall has been found in only one room of the house and that the defective drywall cannot be repaired for another forty-five days
Ø These facts are bad for Rick in two ways
v The delay in repairs may necessitate that Rick reapply for a loan at a higher interest rate
v The fact that the house is defective in some way may cause the loan-to-value ratio to change to Rick’s detriment
ª The loan-to-value ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased
Ø You may set up an escrow account to hold money that covers the cost of the repairs that will be made later in order to facilitate completion of the transaction under the circumstances described above
· Suppose that Rick wants to try to get a concession from the seller of the property and does something like tell you to ask the seller of the property to discount the property
Ø Keep in mind that the price of a property is always negotiable
Ø You may have the seller of the property purchase a warranty
v Professor Gorman: Rick may additionally buy a warranty
· You should protect yourself by composing a letter to Rick that (1) sets forth the problem and Rick’s proposed plan of action to solve the problem, and (2) provides that Rick understands the risks of his proposed plan of action
· Keep the following in mind:
Ø A broker is entitled to a commission when he or she brings a ready, willing, and able buyer to the transaction
v Professor Gorman: Rick constitutes a willing buyer because he signed a purchase contract at $725,000
ª This suggests that the broker is entitled to a commission
Ø A seller is always the party who pays a broker’s commission
v A listing agreement like the Exclusive Right to Sell Listing Agreement protects a broker by binding a seller to pay a commission to the broker when either the seller or his or her broker produces a ready, willing, and able buyer
Ø An earnest money deposit is heavily relied upon in the real estate world
§ Marsh v. Wallace
· Kirk David Marsh, Kirk Russel Marsh and Marsh Investment Group, LLP entered into a $4.9 million transaction with Alden “Bubber” Wallace for the purchase of approximately one hundred and fifty residential properties which Wallace owned
· Wallace recommended to the Marshes that attorney John Howell do the title work on the properties, and possibly close the transaction. Russel met with Howell briefly and discussed with Howell his doing the title work for the transaction.
· It became apparent that the Marshes would not be able to acquire financing for the purchase. Wallace suggested that the Marshes assume the existing debts on the properties and give Wallace a note on the remainder of the $4.9 million purchase price, to which the Marshes agreed.
Ø There were preexisting debts on the approximately one hundred and fifty residential properties
· Around this time, Russel became concerned that if they were to purchase the properties outright, there could be a problem with due-on-sale clauses in the existing mortgages on the properties, and instead of buying the properties directly, they should purchase the LLCs in which the properties were held. The parties’ transaction changed to a purchase of the LLCs, with assumption of existing debt and seller financing of the remainder of the purchase price.
Ø New buyers—Kirk David Marsh, Russel, and Marsh Investment Group, LLP—with whom the lender—Charles Young with Citizens Bank in Meridian—was not previously familiar were allowed to assume existing debts on properties
v Many lenders use due-on-sale clauses, which constitute mortgage protections, that provide that the full principal amount of a mortgage will be due and payable if the property in question is conveyed to a third party
o Procedural History:
· The Marshes alleged that Howell breached his fiduciary duty of loyalty to them by undertaking to represent them in their transaction with Wallace while burdened with conflicts of interest arising from the fact that he had a personal interest in recovering $36,000 in overdue legal fees which he hoped to recover out of the proceeds of the Marsh/Wallace closing, and also because, as to the subject transaction, in addition to representing the Marshes, he was representing his long-time client, Wallace, whose interests were adverse to the Marshes’.
Ø The Marshes claimed that Howell had a financial interest in the transaction
Ø Howell clearly represented Wallace, but he additionally did a lot of things on behalf of the Marshes
o The United States District Court for the Southern District of Mississippi:
· “While Howell’s personal fina
§ Chicago Bar Association v. Quinlan and Tyson, Inc.
o Procedural History: The Chicago Bar Association filed a complaint to enjoin a real-estate brokerage firm, Quinlan and Tyson, Inc., from engaging in the unauthorized practice of law. Quinlan and Tyson, Inc. argued that filling out the following, which came in standardized forms that were drawn or composed by lawyers, did not amount to the practice of law because their performance by real-estate men had become an established custom and no harm to the public was shown to have resulted: contracts of sale, deeds, bills of sale for personalty, escrow agreements, applications for mortgages, and affidavits waiving possible objections to title. It further asserted that the service of filling out the documents listed above was a necessary incident of the real-estate business and a simple matter for which ordinary business intelligence was sufficient.
o The Supreme Court of Illinois: “[W]hen the broker has secured the signatures on the usual form of preliminary contract or offer to purchase, completed by the insertion of necessary factual data, he has fully performed his obligation as broker. The drawing or filling in of blanks on deeds, mortgages and other legal instruments subsequently executed requires the peculiar skill of a lawyer and constitutes the practice of law. Such instruments are often minuments of title and become matters of permanent record. They are not ordinarily executed and delivered until after title has been examined and approved by the attorney for the purchaser. Their preparation is not incidental to the performance of brokerage services but falls outside the scope of the broker’s function.”
o Professor Gorman:
· A real-estate brokerage firm like Quinlan and Tyson, Inc. is permitted to do things like collect earnest money and handle contracts
Ø It is not permitted, however, to transfer title to buyers after contracts are signed because transferring title to buyers constitutes a legal action