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Real Estate Transactions
University of Minnesota Law School
Burkhart, Ann M.

Real Estate


Fall 2012

Contracts for the Sale of Land

Tuesday, September 04, 2012

2:29 PM

Mortgage: A loan backed by a security interest in land.

Mortgage law is governed mainly by common law.

Mortgage – what finance law is – agreement to repay loan to buy (contract) – gets collateral for the loan (house) — mortgage creates security interest for the lender in your land

Used to do this shit because land is easy to find and traditionally appreciates

Can earn right to sell it at a foreclosure auction if you don’t repay

Many traps for unwary today because of the ancient nature of law (most can be contracted around)

High malpractice rate

Sometimes real estate lawyers act as herders for all of the actors in the process

Steps of Real Estate Sale Process

(1) Listing Agreement: Process by which the seller lists the property for sale through the services of a real estate agent

(2) Purchase Agreement: Buyer agrees to pay $X for the property, subject to certain closing conditions

Enters the executory period, which allows time for title examination, inspection of property, arranging of financing

(3) Closing (or the “Settlement”): Buyer pays the closing price, and seller transfers title to the property

Listing process – involves execution by the seller of a contract appointing the broker to be his or her agent in obtaining a buyer.

If successful, the seller will be obligated to pay the broker a commission (usually a % of sales price)

Brokers may not practice law – can only fill out simple legal forms incidental to their services as a broker

A Real Estate Agent is:

(1) somebody who sells somebody else’s property

(2) with the expectation of compensation

· Doesn’t have the right to sell the property unless power of attorney has been executed (instead only have the power to show, advertise etc ) Power of attorney must be very clearly stated

· Broker cannot force the sale to happen, but may nonetheless be owed a commission

· Must be licensed by the state in order to act as an agent/broker (may trigger criminal or civil liability if you practice without a licence)

· EXCEPTION: Finder fee permits an unlicenced person to recover compensation)

Often times the biggest thing that an agent does is give a seller access to the MLS – creates a monopoly of sorts (courts have not found antitrust issues)

· MLS may require that the listing be based on an exclusive right to sell agreement

MLS liability: mistakes on the form may open seller/broker for suit in reliance on misrepresentations

Certain states require consumers to purchase brokerage services – limit consumer choice

Typically offer:

1) Marketing

2) Reviewing contracts

3) Negotiating

4) Locating potential homes for buyers

5) Arranging inspections

6) Comparison reports, valuation reports, compliing information

7) Educating on financing and financing alternatives

8) Forming offers, counter offers, and acceptances and using strategy for these

9) Assisting with closing – paperwork etc

Fee-for-service brokers – those willing to sell a subset of the above for a per service price

· Great, because very clear about what they will and will not do – its in their interest to clearly defind this and let their customers know

Minimum service provisions are laws or regulations that dictate the services that a consumer must purchase when entering into a relationship with a real estate broker (9+ states)

· Do not ensure quality

· Could instead foster competition by enforcing existing state licensing, continuing education, and disciplinary rules

Lawyers who want to help clients sell property need to get real estate licenses

· MN, along with some other states, have an exemption for lawyers

Real Estate Broker is like a Partner

· Stuff

Real Estate Agent is like an Associate

· Newer to the profession

· May only operate under the supervision of a broker

· Many licences hold condition that they cannot sue for a commission on their own behalf, but rather the broker must sue on their behalf

· Need to be a broker to get a commission (finders fee exception)

· Agreeing to share a commission with an unlicensed person is grounds for denying the commission entirely, even to the licensed person

· Broker can only deal in realty – cannot sell parts of a REIT (exception for some personal property such as household items

Brokers’ Associations

· Associations for real estate agents

· Occurs locally, but there is a national association of realtors

o Only members of the national association of realtors may call themselves realtors

o The trade association also sets membership requirements, including the requirement of a 50/50 split of commission between selling agents and listing agents

· Real estate trade associations are #1 in political contributions nationally

· Commission – cannot fix compensation or %age of sale — antitrust shit

o Typically ends up at 7%ish – higher or lower tends to mess with incentives

· If you set it at 2%, even other agents know this and know your agents motivations

· More expensive the property = more negotiable the rate

Seller –> listing agent

Buyer –> selling agent

Sellers commission payment gets split between listing and selling agent

Associations may set rules about how to split that commission

Between agent and broker is more negotiable

How to save money

· Try to get the same selling and listing agent and have only ½ commission be paid

· If acting as own selling agent – ask to knock 3% off the purchase price

Agent must present all offers to seller so add the ½ commission as a term and they have to give it to seller

· Reasons not to try to save money:

o Agents get knowledge of a house a few days before it hits the market

o Knowledge gap – need to know about loans, inspections, etc and contacts at each

o Listing wont get published on the MLS

People being under water on mortgages has caused a move toward a “pay by service” arrangement

Few states don’t allow this

Dobbs v. Hosley

· Rule of Law: (From the Dobbs court) In the absence default by the seller, the broker’s right to commission comes into existence only when his buyer performs in accordance with the contract of sale.

· A broker is entitled to a commission if “improper or frustrating conduct” by the owner prevents title from passing.

· Reasoning/Analysis: Even if Hosley did agree to the April 11 deadline (disputed), there is no evidence that Hosley was representing the buyers when making such a statement

· Comments: Split of authority – the common law rule recognizing the broker’s claim for commission despite the failure to close is still alive and well, despite the inroads of Dobbs-like cases

LIEN – interest in property that gives you a triggered option to sell the property to satisfy a debt

Custom – seller uses proceeds to pay off liens thus:

unclear titles (that have liens on them) can qualify as clear titles so as not to breach a contract provision

Listing Agreements

Monday, September 10, 2012

2:32 PM

Statute of Frauds in almost all states requires the listing agreement to be in writing

Not a contract for real property so doesn’t need a legal description of the land – common address suffices

Types of Real Estate Listing Agreements (look to commission clause to determine type)

1. Open listing – the property owner agrees to pay to the listing broker a commission if that broker effects the sale of the property but retains the right to sell the property himself as well as the right to procure the services of any other broker in the sale of the property

Presumed if not otherwise noted

2. Exclusive agency listing – (which is for a time certain) authorizes only one broker to sell the property but permits the property owner to sell the property himself without incurring a commission

3. Exclusive right to sell listing – the sale of the property during the contract period, no matter by whom negotiated, obligates the property owner to pay a commission to the listing broker ** almost all residential properties are listed this way

MLS may require the listing to be exclusive right to sell

Open Listing Agreement – commission only if that agent finds the buyer (must be the “procuring cause” of the purchase – question of fact) (presumed if not otherwise specified)

Exclusive agency listing – commission only if that agent finds the buyer, but no other agent may be commissioned

Exclusive right to sell listing – commission if buyer found, either by agent or seller

· If you change your mind and do not want to sell your property, you can, but must then pay a commission for frustrating the purpose of your agent

· Equal Dignities Rule: If you appoint an agent to act on your behalf (i.e. give someone your “power of attorney”), the power of attorney must be executed with all the same legal formalities as an attorney-in-fact.

o *** Look this up… don’t get it

How long should you tie up your property in a contract?

· Depends on the type of property… tie to industry standards

o 6 months is fairly typical for residential properties

Listing contracts: Common Provisions

· Exclusive right to negotiate

o Broker is more sophisticated, knows what needs to be disclosed; won’t let dumb things break the deal

· Broker must live up to a “reasonable skill and care,” but this is subjective; but include objective criteria – do not use the “reasonableness” standard!

· The “Price and Terms” provision delineates the price & conditions that a buyer must agree to in order to trigger liability for a commission (most regulatory bodies require price and length of contract)

o Any terms and

ayable (even in a Dobbs jurisdiction) even if the buyer/etc defaults later

· Can contract around this and only make some of it payable each time an installment is paid

You Could contract that commission can only come out of the earnest money and cannot exceed it – getting around the majority/minority rules.

A broker is still entitled to a commission if the seller does something to mess it up – broker did his part

Perfect Tender Rule: For you to claim that the other side of a contract is in default, you must show that you are ready to fully perform (i.e. make “perfect tender” of your performance)

· Exception may exist where the other side cannot possibly perform

Lien: an interest in real or personal property

Nature of Agency Relationship

Tuesday, September 11, 2012

3:06 PM

Seller’s agent is a Listing Agent

Buyer’s agent is a Selling Agent

· Selling Agent is also the seller’s agent, because both agents are paid from a commission derived from the selling price

· Selling Agent is the seller’s “subagent”

· DANGER: seller could be responsible for the actions/representations of the “subagent”

Dual Agency – The common law permits this, but all the potential conflicts surrounding the transaction in question must be disclosed

· Disclosure requirements are very stringent and hard to meet

· Confidential information about price, terms and motivation for pursuing a transaction will be kept confidential unless one party instructs broker in writing to disclose specific information about him. Other information will be shared.

· Easy to accidently fuck over one party or the other

· Have to disclose the problems that are likely to arise

· Conflicts of interest give rise to private liability and discipline from state licencing body

· If loss to the principal à broker loses commission and judgment for damages

Agent is an agent is an agent

· Fiduciary duties to principal

· Loyalty – clients best interests

· Obedience, disclosure, confidentiality, reasonable care, accounting

o Problems with these:

· Whose agent is who?

· Whose agent is the selling agent and who does he owe fiduciary duty?

· Normally the seller – that’s who is paying them

· Selling agent is actually a listing agents “subagent”

· -disclose buyers information (his top bid)

· -creates surprise liability for the seller when a subagent makes misrepresentations

· MN mandates a disclosure form so people know what’s going on and who represents who

o Without buyer broker contract-buyer should keep mouth shut and watch out since his “agent” is working for the seller

· Buyers Broker – usually gets his commission out of the sellers commission

o Seller does not have to split their commission since the buyers broker is not a subagent of the listing broker

o Thus, often the buyer needs to separately pay the buyers broker (owes him a commission when they buy a house (with the buyers broker’s help or not))

o Problem: If planning to get paid from the sellers commission and the seller broker refuses to split with the buyers broker, the buyers broker may never present the house to the buyer

o Special case: PA signed, buyer backs out – buyer may be able to recover his commission from the buyer directly (Mississippi case)

· Transactions Broker or Nonagent Broker – acts simply as a facilitator

o Still cannot disclose confidential info

Should we even call them agents when compensation is based on percentages?

· Act more as facilitators or deal-makers

· Perhaps alternative compensation schemes would allow for real agent relationships

o We see this more in the commercial context


· Lenders lawyer at the closing is not there to do justice. Simply there to represent the lender

o Lawyer should send a letter to other parties so that they know who he represents – avoid PR suits