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Real Estate Transactions
University of Illinois School of Law
McDonald, Ward F.

Real Estate Outline

I. Chapter 1-Market Context
a. Goal oriented nature of the transaction-capture wealth
b. 3 key elements of transaction
i. Perspective-alternative expectations/desires
ii. Purpose-clear understanding of subject matter and ultimate objective
iii. Planning-putting together a strategy for achieving purpose
c. value-capturing/creating value through transaction
i. ID costs (risks)
ii. Manage costs
iii. Protect expectations
d. types of profit-measures of success
i. accounting profit-covering costs of transaction
ii. economic profit-measure accounting profit vs. comparative return in different transaction
e. viewing transaction as a “market choice”
i. risk vs. return relationship
ii. higher risk à higher potential reward
iii. types of risks: environment, title defect, structural problem, zoning/land use, financing
f. utility—how much individual values a particular good
i. imperfect utility system because of unequal resources
ii. proxy system we use—willingness to pay PLUS ability to pay
iii. comparative advantage-ex. legal expertise of market is a comparative advantage that can be sold in the market
g. types of costs incurred
i. transaction-costs in the exchange (collecting info, negotiating, lawyer fee)
ii. out of pocket-actual expenses incurred in project
iii. opportunity-costs that are given up in the market to pursue transaction you select
iv. sunk costs-costs that cannot be recovered when party abandons course of action (part of the out of pocket category)
h. transactional misbehavior-parties’ attempt to change dynamics of deal after it has been struck—when party tries to improve position by changing price/risk previously agreed upon
i. rent seeking behavior-discover or manipulate legal opportunities in pursuit of economic gain (ex. change the zoning on property to increase its value)
j. categories of market risk
i. temporal risk-inflation
1. historical-credit risk/desirability of property
2. present-relying on information/law accurately
3. future-ex. find unexpected problem with property
ii. transactional risk
1. economic downturn, environmental issues, credit risk, marketplace risks
iii. Role of lawyer as “risk manager”
k. types of real estate law
i. residential
ii. commercial—more interdisciplinary
l. lawyer’s professional responsibility
i. Bohn v. Cody, 1992, WA- Bohn’s loaned money to daughter, and she didn’t repay it. Attorney was not representing parents but they paid him and seemed to think he was their lawyer. attorney should have advised parties to seek other counsel before discussing this transaction further

II. Chapter 2-Lawter’s Duties, Brokers, Roles/Customs
a. Role of broker
i. Larger role in the west—lawyer have no involvement until problems occur
ii. Finding the parties for the deal=intermediary
iii. Helps negotiate contract
iv. Organizes inspection/financing
v. Typical commission of 5-7%
1. cannot fix commissions
vi. FSBO (for sale by owner)
b. 4 types of listing agreements
i. Open listing-(nonexclusive) ask broker to list house-broker gets commission if he finds ready/willing buyer
1. also called nonexclusive agency
ii. Exclusive agency—agree to list with broker and pay commissioner for any sale they makeàseller can still sell directly and no pay commission
1. if owner uses another agent, the exclusive agent entitled to commission
iii. Exclusive right to sell-most listing agreements are this—most protective of broker—seller obligated to pay commission even if they sell property themself
iv. Net listing-commission is not specified as % of sale price, and seller agrees to pay broker all amounts in excess of a set sales price
c. increased # of FSBO (for sale by owner)
i. save about 7%-standard commission
d. MLS-multiple listing service
i. Shares listings
ii. Listing broker and selling broker-often each get 50% of commission
e. Duties of broker
i. Agency law
ii. Loyalty
1. usually broker just represents the seller—bar rule-can’t be broker and realtor on both sides without disclosure
2. dual agencyàmay represent buyer and seller in most states if full disclosure
3. 40 states require written disclosure
iii. Disclosure
iv. Self dealing-broker is prohibited from self dealing (where own self interest conflicts with fiduciary duty)
v. confidentiality
f. subagency-multiple brokers sharing job
i. selling broker is subagent of listing broker
ii. listing broker is paid and gives ½ to selling broker
g. transaction brokerage
i. nonagency brokerage
ii. broker sells services but has no formal agency—just intermediary
iii. avoids fiduciary duties
iv. doesn’t give advice to either party
v. risk reduction mechanism for the brokers
h. Dubbs v. Stribling & Associates, 2001 Ct. App. NY-looking at whether broker breached duty when he found seller who wanted to purchase next door unit as well. They did purchase next door unit, but used different broker, and broker didn’t know until this transaction closed. Holding-broker did not breach duty
i. When is broker entitled to $
i. American majority rule-favorable to broker—earns commission when he produces a ready, willing and able buyer
ii. Minority rule-sale must close for broker to get commission (NJ rule)-emerging trend
iii. Defaulting buyer-can be charged with tortuous interference (broker is 3rd party beneficiary)
iv. Hillis v. Lake, 1995, MA-broker Hillis is trying to recover commission. Sale failed to close because of underground gas leakage. Seller failed to meet terms about environmental cleanup but was not liable for commission to broker because default was unintentional
j. unauthorized practice of law
i. unclear line
ii. many states-K must be approved by attorney or bar association
iii. broker may prepare contract of sale or earnest money
iv. Tests
1. contracts v. conveyances test-broker can prepare K but not prepare deed/closing instruments
2. simple-complex test-broker can do simple transactions
3. incidental test-incidental to broker business
4. NJ-public interest test (see opinion 26)
v. In re Opinion No. 26 of the Committee on the Unauthorized P

ial terms
a. names, property description, intent to buy and sell
b. parol evidence rule may be factor
3. signed by party to be charged
a. E-sign actàinternet signing sometimes available
b. Voicemail message can act as legal signature
4. partial performance/equitable estoppel-enforce oral contract for equitable reasons when performance has already taken place
5. promissory estoppel
ii. other contract elements
1. adequate consideration
2. offer and acceptance
3. entire domain of contract law applies
iii. sale of personal property within real estate
1. ex. appliances- Uniform Commercial Code Article 9
iv. The FL Bar v. Belleville, 1991, S. Ct. FL- Cowan appeared to not understand when he signed contract that overwhelmingly favored buyer. He paid for buyers lawyer, and documents were so one-sided that they appeared Unconscionable. Court suspends lawyer Belleville for 30 days for involvement in unconscionable transaction
v. Equitable conversion-doctrine of splitting title between seller and buyer at the moment when contract is signed
1. buyer has “equitable title”àinitial interest in property
a. right to sell/assign interest
2. seller has “legal title”à
a. still has right to sell/assign interest
3. parties may want to limit these rights while K is in executory period
4. natural disasters
a. original rule-buyer takes risk at moment of eqitable conversion
b. dominant rule today-buyer takes most of the risk if it is specifically enforceable at time of loss
i. Seller cannot enforce if he is at fault
ii. Purchaser must pay if they are at fault
iii. 12 states use form of this
5. party who retains the risk should obtain insurance but this does not always happen
a. traditional rule-windfall to seller-allow them to collect and get money from buyer in addition if possible
b. majority rule now—insurance proceeds held in trust by seller for buyer and buyer receives credit if transaction goes through
6. Holscher v. James, 1993 S. Ct. 1daho- Holschers were selling home to James. James got insurance and took possession, but it hadn’t closed, and there was a fore. Court rules that purchase agreement placed risk on Holscher, and allows James to void agreement in case of damage. James can get out of buying house, but Holschers are 3rd party beneficiaries and can collect from state farm insurance on James’s policy.
vi. contract conditions
1. used to allocate risk between parties