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

 
Real Estate Transactions
Burkhart
Fall 2015
 
I. Real Estate Conveyancing
 
Realty Transfers:
1.                  The execution of a contract of sale
2.                  Inspections of the property and examination of the seller’s title by the buyer
3.                  The arranging of financing by the buyer
4.                  The closing or settlement
5.                  The recording of the deed and any mtg or other security instrument which the buyer has executed.
 
A. Real Estate Agents
They sell or lease someone else’s property for compensation
They can’t carry out the unauthorized practice of law but they can generally draft certain documents.
Agents get paid a percentage of the sale price. The % is negotiable but generally 6%.
UCCS: to have all agents agree to provide only a commission of 6% was an antitrust violation b/c it was price fixing.
 
Two types:
Broker: more education and experience
Generally they cannot practice law by giving legal advice or drafting contracts but in many jurisdictions they are allowed to fill out simple legal forms incidental to the service they are rendering.
Sales Person: beginner but licensed; works under the supervision of a broker.
Listing Real Estate w/ a Broker:
Seller executes a contract (listing agreement/multiple listing service form) appointing the broker to be their agent in obtaining a buyer.
Most states require it to be in writing due to the statute of frauds.
It can be negotiated like any contract
Make sure the form is filled out correctly b/c you will be liable for the representation of the property.
See Appendix I.
If successful the seller pays the broker a commission (percentage of the sale price).
The rationale is that agents will seek the highest price b/c the higher the selling price the higher the commission.
Usually, brokers have a legal duty to show, advertise, and market the property, but NOT enter into an actual contract of sale. They CANNOT go ahead w/ a sale if the seller refuses.
If the agreement (listing) has language that clearly gives the agent “power of attorney” to enter into a contract and consummate sales, they can.
Equal dignity rule/power of attorney: the power of attorney must be signed w/ the same formalities the deed requires (notarized w/ two witnesses).
Fee-for-service: brokers who unbundle the package of services typically offered and charge a fixed or hourly fee for specific services.         
This saves money but can be hindered by minimum service laws where the state mandates the services to be offered.
The National Association of Realtors carries considerable power and this is why many states have minimum service laws.
Three Types of Listings:
1.      Open Listing: seller agrees to pay the listing broker a commission if they sell the property (they must be the procuring cause of the purchase BUT retains the right:
a.       To sell the property himself, and
b.      Procure the services of any other broker in the sale of the property.
                                                                          i.      Since the agent may not get a commission, they may not try as hard to sell.
2.      Exclusive Agency Listing: Authorizes one broker to sell the property but the owner can sell the property himself w/out incurring a commission.
a.       This is best for the seller.
3.      Exclusive Right to Sell Listing: if the property sells during the contract period, no matter by whom, obligates the seller to pay a commission to the listing broker (effective if it says that commission is owed regardless).
a.       Most common, nearly all residential use this (best for agents).
b.      Must be expressly stated since it will be construed against the agent
 
Multiple Listing Service (MLS)
A card of information is published on MLS (operated by local realtors) where all members brokers and their salespeople will see it.
Trade Associations
·         They create forms and lobby the legislature
·         Local trade association can specify how commission will be split b/n seller and buyer agents
o   Generally 3% for the Listing Agent (seller’s) and 3% for the Selling Agent (buyers)
o   If an agent issued, the agent’s broker takes a share:
§  1.5% for the listing and 1.5% for the selling
o   When buying, you don’t need a buyer agent but can do it yourself.
§  This will allow you to negotiate for 3% commission for the seller’s agent b/c you are doing the work that the buyer agent would have done to receive 3%.
·         Cons:
o   You have to do much of the leg work
o   They may have access to the MLS listings before they are made public.
o   When selling get an agent:
§  You get the expertise of their network
§  Your property is listed on MLS (this is the #1 marketing tool).
§  If you show the home, buyers may not feel comfortable saying how they really feel.
Perfect Tender Rule
·         The obligation to perform on a contract is based on the other side performing. If the buyer wants to claim the seller breached the agreement, they are required to make complete tender under the agreement. Thus, the Seller cannot defend by stating b/c the buyer did not tender the seller does not have to tender.
o   This is if the other side threatens to breach
Commission paid when – “Ready, Willing, and Able” or Dobbs
·         Traditional Rule: a buyer is ready, willing, and able when the purchase agreement is signed. If the buyer defaults the seller still has to pay commission.
o   The rational is that once the seller enters into a contract of sale w/ the buyer, the buyer is ready will and able b/c the seller is estopped to deny based on qualifications since they were willing to enter into a contact.
o   How Sellers Protect Themselves:
§  Require the earnest money as the commission. Earnest money is generally paid at the time the purchase agreement is signed to show the buyer is serious. Clause stating that if the buyer defaults, the seller keeps the money.
§  State in the contract that the commission is payable only upon sale (closing).
§  Ask for proof that the buyer has the money before signing the purchase agreement.
·         Dobbs Rule (Minority): the commission should only be paid when the deal closes; absent a default by the seller, the broker’s right to commission comes into existence only when the buyer closes.
o   Regardless, make SURE the agreement says the commission is ONLY paid at closing.
o   Arguments against:
§  If the seller didn’t want this they would have contracted around it
§  The agent’s expertise is marketing and should not be an insurer of the property
o   Policy of Dobbs:
§  Agents are better able to absorb the cost of default; otherwise it would come out of the homeowner’s pockets.
§  Agents are better able to check out the financials of the buyer
§  It is expected that the commission will come out of the sale proceeds
§  Seller cannot really know if the buyer is ready, willing, and able until closing.
Agency Relationships
·         Agency Relationships in Real Estate Transaction form
o   Mandated by the legislature; discloses whether they represent the Buyer or Seller.
·         Duties:
o   Seller = principal
o   Agent = agent (fiduciary, owes seller fiduciary duties)
§  If represent Seller = Must find the highest price for the property

t w/ Hosley. 10% commission if Hosley located a buyer willing and able OR if seller enters into a binding sale during the term. Hosley found a group of buyers and Drake signed the purchase agreement. There was a judgment encumbering the title that would be paid w/ the purchase money.
§  Held: the seller defaulted so the agent is entitled to commission
§  Rule:  Dobbs Rule
·         Duty to Disclose
Easton, the agent has a duty to conduct a reasonable competent and diligent inspection of the residential property and to disclose anything to the buyer if it will affect the value or desirability of the property.
Brokers are liable for statements that turn out to be false (exculpatory clauses will not help them out of this.
§  Silverman: divorced husband put the house up for sale w/ a broker who was having a romantic relationship w/ the husband’s divorce attorney. The broker was found liable for compensatory and punitive damages.
§  Brazal: the broker new a real covenant prohibited keeping more than one dog but did not tell the buyer who they knew had four. The broker was liable for damages when the sale fell through.
§  Lombardo: the buyer’s broker was held liable to the seller for not disclosing adverse financial information they knew about the buyer making them unable to qualify for the loan.
 
B. Purchase Agreements
There is tension b/n having too much and too little. They more you have to discuss the less likely the property will sell or sell quickly.
 
No laws say that parties must have a contract at all BUT there is usually a detailed written agreement of sale, filled in on a printed form.
Generally 30-90 days or more passes b/n the contract’s execution and its performance at the closing. This is when the seller gets their money and the buyer gets the title by a deed.
Reasons for the delay (execution period) and need for a contact:
1.      The buyer wants to know that the seller really owns the property and that the title is good, clear, and marketable.
2.      The buyer needs to borrow part (usually most) of the money needed to buy the house. MOST lenders won’t even consider the application until the buyer has signed a purchase agreement.
 
Two types of real estate sales contracts:
Short-term/earnest-money/deposit receipt/binder/marketing contract
Permits the parties to prepare for the transfer of title by making the arrangements.
Usually provides for closing to occur w/in a short time after contract signing (60-90 d).
Real estate installment contract/contract for deed (mtg substitute).
It contemplates that the buyer will go into possession immediately, make payments to the seller on a regular basis (monthly) over a long time period (ten to twenty years), and receive a deed when the last instalment is paid.
The seller is financing the purchase and the contract is being used much like a mtg, to secure the buyer’s obligation to pay the installment as they fall due.