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Real Estate Transactions
University of Iowa School of Law
Gorman, Jerry

Prof. Jerry Gorman – Fall 2016
Part I. Pre-Contract Stage and Basics
Seller puts property on the market
Information gathering period and listing agreement with broker
For residential transactions, listing agreement between seller and broker, broker prepares disclosures, offer
For commercial transactions, extensive negotiations, letters of intent, option contracts, contract
Letter of Intent: agreement to enter into a contract with no consideration required
Important terms are agreed to without binding effect
Option Contract: right to purchase, but requires consideration by buyer-optionee
Full details of the contract not required
Role of the Real Estate Attorney
Be engaged with the client at the closing and explain everything
Perspective: focus on what the client ultimately wants
Facilitate the transaction
Purpose: understand the legal components and the core nature of the transaction
Protect the client
Planning: be organized and hit the deadlines and delicate timeframes
Critical junctures to decide if transaction should go forward
Calendar the key events
Risk Management: “I.R.S”
Manage expectations in residential transactions
Manage risk in commercial transactions
Investigate risk
Determine the “bundle” of rights: liens, utilities, covenants and restrictions, defects, encumbrances, etc.
Some questions to ask:
What does the party want with this property? Can they do it?
What will the cost me? Monthly, upfront?
Are there any defects or repairs required?
Can the buyer sell at a later date?
Fee Structure: usually flat fee for residential ($500 to $800) in the engagement letter
Payment usually at closing
Chinese Drywall Hypo (pg. 11)
Facts: Florida house for $725,000, but 10% chance of being contaminated and it costs $150,000 to repair.
Risk reduction:
State-mandated disclosure forms
Failure to disclose known defects à avoidance of the contract
Negotiate lower price
Seller credit for 10% of $150,000 for the cost of the chance
Home inspection right at buyer’s expense
But may not reveal the issue
Insurance warranty by seller
Warranty of $150,000 by seller (bad option because too risky for seller)
Escrow money if it was something cheap
Homeowner’s protections
Attorney Approval: each party has a limited timeframe to review, suggest or require contract changes
Usually 5 days à may create issue of when the contract was formed
Attorney may not require a change in purchase price
Attorney should document all statements and disclosures made to client
Material misrepresentation will allow avoidance of the contract after signed
Real Estate Attorney’s Duty
Dual Agency and Conflict of Interests
Marsh v. Wallace
Marsh buying $4.9 million properties from Wallace. Wallace suggested using his attorney Howell, but did not say that Howell owed Wallace $28,000 in past legal fees.
I. Marsh sued Wallace for fraud because income substantially lower than what he was told by Wallace
Held: no fraudulent documents. Failed expectations is not fraud.
II. Marsh sued Howell for breach of fiduciary duty
Held: breach by representing both Wallace and Marsh because Howell did not:
Disclose the conflict of interest in representing two adverse parties, and
Obtain informed consent of his dual representation
Best Practices: disclose conflicts of interest or dual agency in the engagement letter
Required Disclosures Before Contract Signed
Creates a duty in the seller to buyer through affirmative representations about knowledge of material defects
Ongoing duty requiring updates if seller becomes aware
But no duty to investigate
Disclosures are not warranties, but information for buyer to fairly negotiate price/terms. Disclosure intended to reflect current conditions, not previous problems.
“am aware” = actual knowledge or notice, but no specific investigation
“material defect” = substantial adverse effect on value our would impair health/safety unless seller reasonably believes the defect has been corrected
Remedy for error is a fine if based on reasonable belief
Failure to produce disclosure reports is grounds for termination of contract
1-year statute of limitations after the conveyance or occupancy, whichever is earlier
Residential Real Property Disclosure Report
1-4 residential units qualify
23 questions for typical problems in IL
Most important document for the buyer to assess price and terms
Earlier disclosure allows the parties to fix issues and closer faster
Delivered to buyer before offer is made

tion, but sometimes synonymous with a “broker”
Broker’s Fiduciary Duties
Duty of Loyalty: honesty, fidelity, protection, creation of value
Duty of Disclosure: promptly tell client material facts
Duty of Confidentiality: privacy and the economic value of secrecy
Breach Cause of Action
(1) existence of a duty arising from a fiduciary relationship
(2) failure to observe the duty (breach)
(3) injury resulting from the breach
Wolk v. Paino
Mold-sensitive buyer Campbell’s trustee Wolk waived home inspection after being presented with the contract by broker Lacy, but mold was later discovered and required 1 year of remodeling
I.  Wolk sued Lacy claiming breach of broker’s fiduciary duty by failing to direct Wolk to obtain home inspection
Held: no breach because Wolk was sufficiently informed
Broker adequately informed buyer of rights through the waiver provision
Holmes v. Summer
Seller’s broker did not disclose $1.14 million mortgage debt on property to buyer à could not transfer marketable title unless (1) mortgagors agreed to short sale or (2) seller had extra $392,000 to put in escrow.
Rule: Despite broker’s duty of confidentiality, seller’s broker must disclose material facts (substantial risk seller cannot transfer title free and clear) affecting the value or desirability (broad, not just physical) of the property if either:
(1) known only to him, or
(2) seller knows buyer does not know and not within constructive knowledge
Held: disclosing the mortgages would not breach broker’s duty to seller because they are in the public record; broker should have disclosed.
But seller’s broker does not have general fiduciary duties to buyer
But in IL, not obligated to tell buyer’s agent about nuisances
Unclear what issues affecting desirability must be disclosed such as murders, bad schools
Agency of Brokers