Real Estate Transactions
The real estate sale; a three act play
– Act One: A contract is signed
o FSBO war story #1:
§ Truth in advertising?
o FSBO war story #2:
§ My neighbor the master salesman
o But most sellers list their houses with real estate agents. Why?
o Enter Lucy and Barney Buyer
– Act Two:
o The executory period: the time between the date the contract is signed and the closing; the seller owns fee simple, legal title, but the buyer has an equitable interest by virtue of the contract
– Act Three:
o Post Closing. The buyer takes possession, the recording office returns the documents to the attorneys. The prior lender satisfies the underlying mortgage, the title insurance policies are issued. The parties receive their final documents. The buyer has legal title.
§ Listing agreement
· …a bilateral contract
· It defines the duties between the owner and the broker. The owner promises to maintain the property and allow access. The broker promises to advertise and show the property. The commission is contingent on producing a buyer. The broker does not promise to sell the property.
· “For Sale By Owner”: the seller advertises and attempts to sell the property without the assistance of a broker—to avoid the commission.
· The final procedure that completes the sale
o Documents are executed;
o Documents are delivered;
o The title is updated;
o Documents are recorded;
o The funds change hands;
o The keys are given to the buyer.
In South Carolina…
– Closings take a variety of forms:
o One attorney with the parties around the table; may involve “table funding”
o Two attorneys trade funds and documents;
o “Mail away” closings
– In other parts of the country—the seller delivers the deed and the buyer and lender deliver the funds to an independent escrow agent.
o Escrow Instructions;
o Closing Instructions:
§ …the document whereby the seller transfers title to the buyer. It must be properly signed, witnessed and delivered. It is recorded in the land records to provide notice to the world that the buyer now holds title. By recording the deed, the buyer protects her title from claims of others.
Mortgage: the document by which a property owner places a lien on property in favor of a lender
– If the borrower defaults, the lender can foreclose. A foreclosure is usually a judicial sale of the property. The proceeds of the sale are credited against the debt. In some states, mortgages can be foreclosed by non-judicial sales. Mortgages in those jurisdictions contain a “power of sale” provision.
– Mortgagor: property owner who pledges his property (usually, but not always, the borrower).
– Deed of Trust
o This document is used in other states (not South Carolina) to serve the same purpose as a mortgage. There are three parties to a deed of trust. A third party holds title to enforce and release (or reconvey) the lender’s interest. Foreclosure may be judicial or non-judicial.
– Trustee=third party appointed by lender
– Promissory note: a promise in writing executed by a maker to pay a specific amount during a limited time, or on demand, to a named person, or to order, or to bearer.
– Title Insurance: protection for the buyer or lender against a defect in the seller’s or mortgagor’s title. A title policy insures marketable title, subject to general exclusions and specific exceptions.
– Seller financing or “purchase money mortgage”: a mortgage given by the buyer to the seller to secure a portion of the purchase price.
– In some states, including South Carolina, a purchase money mortgage can also be given to an institutional lender.
o Institutional lenders: banks, savings and loan associations and other businesses which make loans to the public in the ordinary course of their business.
– Closing statements
o They are much more complicated than this!
o The buyer rarely pays the exact purchase price to the seller.
o The closing statement forces the closing attorney to “follow the money”.
o Software can be useful, but lawyers should know how to do the math!
o Cash sale of $100,000 with no mortgages
o Cash sale of $100,000 where the $60,000 is due to ABC Bank on seller’s mortgage, and a $5,000 tax lien and a $3,000 judgment are recorded against the seller
o Same as above, but Seller has no mortgage and Buyer obtains an $80,000 loan
o Same as above, but Seller agrees to loan Buyer $10,000 of the purchase price
o Same $100,000 purchase price, same liens, except the Buyer will assume the Seller’s $60,000 loan
Advantages of home ownership:
– Home ownership allows an individual to build equity (wealth accumulation)
– Home ownership gives the owner control of the property
– Homeowners have housing cost predictability
– Tax benefits: points, mortgage interest payment and tax payments are deductible. There is no tax on gain ($250,000 for individual; $500,000 for couple); Estate gets a stepped-up basis, which will reduce the gain when the house is ultimately sold. There is no tax on the imputed value of occupancy.
– Housing as a social good
– The housing industry provides jobs and 14% of the nation’s total production;
– When home values rise, the country’s consumer –based economy is strengthened.
– Homeowners contribute to community stability—they move less frequently than renters and are more likely to vote.
– Social Status and self esteem
Disadvantages of home ownership
– “Ninety-nine percent of everything that is done in the world, good and bad, is done to pay a mortgage. The world would be a much better place if everyone rented.” -Christopher Buckley, Thank you for Smoking
– Disadvantages …
o Time and effort
o Uncontrollable costs (taxes, insurance, maintenance, adjustable mortgage rates)
o Loss of mobility
o The federal government could reduce tax breaks
o Capital losses on the sale of a residence are not deductible
o Mortgage interest is paid with after-tax dollars
There is a natural friction between real estate agents and closing attorneys
– Real estate agents are important!
– What do agents do?
– What do agents earn?
– Let’s look at how the numbers work for a typical sale
o What if the property is worth $100,000 and the seller had a 95% loan?
– We discussed last week reasons a seller would hire an agent, but here is an important reason we didn’t discuss:
o Brokers will assist sellers in complying with required disclosure obligations.
– Some costs are unavoidable: advertising; 50% commission to selling agent.
– Should the buyer hire an agent?
– Do you see anything wrong with this picture so far? Why would attorneys not be involved in negotiating contracts???
– Multiple Listing Services (MLS): clearinghouses that maintain data bases of properties available only to dues paying members of the service.
– State licensing laws
o An agent or broker must have a license in order to prove a claim for a real estate commission. And practicing without a license is a criminal offense.
Distinction between agents and brokers
o Exceptions to the licensing laws
o South Carolina requirements
§ They cover licensing, education and trust accounting.
§ These requirements are long and detailed. What does that tell us?
§ §40-57-30(1) defines “associated licensee”
§ §40-57-30(3) defines “broker”
§ §40-57-30(4) defines “broker-in-charge”
· . . . so a broker-in-charge has two main duties
o 1. to manage associated licensees and staff members; and
o 2. to manage the firm’s real estate trust accounts.
§ §40-57-135 also requires a broker-in charge to establish an office in a specific location and to be available to the public during office hours. I
wn an offer even a very small amount lower than the full listing price. So, when the listing agreement expires, the seller is free to sell at a lower price.
– Brokers may include
o anti-price discrimination clauses to avoid this result: “I agree not to sell the property at a lower price (for some period of time) unless I also authorize the agent to lower the price.”
– Brokers may also include extension override clauses to prevent the seller from postponing a closing until the listing has expired. These clauses are also called “tail clauses”, “tail period clauses” “protection period clauses”, “override clauses”, and “safety period clauses”.
o These clauses typically state that the commission is earned if the property is sold to a purchaser with whom the broker has negotiated or who was introduced to the seller by the broker. The broker will provide a list of individuals he has worked with—”spot exceptions”.
§ The seller is free to list the property with another agent, attaching a list of the spot exceptions to avoid a double commission.
The legal liability of brokers arises from:
o Contract law (the listing agreement)
o Agency law
o Tort law
o Licensing laws, rules and regulations; and
o Other state statutes
– As to agency law, brokers may be characterized as:
o Dual agents
o Exclusive buyers brokers.
– Fiduciaries: this is the toughest standard. Fiduciaries owe their principals the highest ethical standard, “utmost good faith, integrity, honesty and loyalty”;
– Subagents: (this important). Until the 1990s, listing agreements routinely characterized the buyer’s broker as subagents of the seller’s broker. This was a method to allow the buyer’s broker to earn a commission. But it often thwarted the buyer’s expectation that her broker was working for her! More recent forms allow the buyer’s broker to be an agent of the buyer.
– Dual agents: In most states, brokers can act in behalf of sellers and buyers and are known as dual agents. Both parties must consent to the dual representation.
– Exclusive buyers’ brokers: These agents accept no listings. They act only for buyers. These are rare because most real estate brokers want to accept listings.
– Brokers are lobbying for a new status that would free them from agency law altogether. They want to be transaction brokers or facilitators.
The role of attorneys in real estate transactions, focusing on South Carolina law
– In a growing number of states, home buyers and sellers are seldom represented by attorneys unless a controversy arises—and your text says that the absence of lawyers does not appear to have done any harm
– With residential transactions, when attorneys do get involved, they get involved mid-transaction – after the contract has been signed. The attorney begins by interpreting the contract. And the attorney’s role is limited by the contract.
– In commercial transactions, the attorney’s role is more like other areas of corporate and commercial practice.
o A commercial real estate practice entails a balancing of business and legal concerns in the context of reviewing the title to the property, drafting documents, dealing with regulatory issues and negotiating loan terms and covenants.