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Real Estate Finance
Wayne State University Law School
Mager, George

REAL ESTATE FINANCING – Mager (Winter 2009)


Broker is an agent

Fiduciary duties:

Act in good faith

Can represent seller or purchaser

Must disclose who they are representing
Usually represent the seller


Licensed by the state


Service available to real estate broker

Broker Agreement (pg 3)

Purpose of agency
Listing period
Price and Terms
Price to include
Evidence of title

Seller usually pays rent from the time after closing until he moves out

Material defects and indemnification

Broker has a responsibility to disclose all defects known to the broker à therefore asks the seller to disclose and indemnify him for not properly disclosing

Compensation of broker

Standard commission = 6%

Usually split between buyer and seller agent

Creating incentives
Commission is earned according to the contract

Limitation on broker’s commission
Cooperating with other brokers
Forfeiture of earnest money
Cost of services

Negotiate advertising costs à relates to commission

Maintenance of property
Escrow closing
Smoke detectors
“For Sale” sign permitted
Duties and responsibilities of seller’s limited agent
Confidential information
Modification of this listing contract
Release of information
Entire agreement
Copies of agreement

Types of listings:

1) Open listing: the property owner agrees to pay 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 that property.
2) Exclusive agency listing: 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.

Broker’s authority to consummate sale

Does the phrase “contract to sell” give “power of attorney”?

Most courts say no, unless explicitly stated in the contract

When are commissions earned?
Drake v. Hosley:

The traditional rule is that a broker is entitled to a commission when he produces a buyer ready, willing and able to purchase the property on the seller’s terms, even if the sale is not completed.

Some courts have said that “willing and able” = closing
Dual agency: represent both the buyer and seller

Conflicts of interest à may not violate the duty of loyalty to either party
Transaction broker


Contract for the purchase and sale of real estate (single family residence) (pg 24)

Title quality

Common lien is the current mortgage

Title approval
Title insurance



This clause used to be standard. Now it is typically removed. Have your document reflect your transaction…not the transaction fit the document.

Seller disclosure and buyer’s inspection
Seller warranties/no warranties by seller
Risk of loss

If > X% of purchase price à Buyer may agree to go through with transaction if seller agrees to fix, or declare the agreement void.
If < X% of purchase price à Transaction will proceed if seller agrees to fix

Adjustments at closing
Real estate commissions
Complete agreement
Expiration of offer

Johnston v. Curtis:

The SOF was not applicable because of the Johnston’s part performance

To remove an oral agreement from the SOF, it is necessary to prove both (by clear and convincing evidence):

1) The making of an oral agreement; and
2) Its part performance

Partial performance of a contract by payment of a part of the purchase price and placing a buyer in possession o land pursuant to an agreement of sale and purchase is sufficient to take the contract out of the SOF.

The measure of damages for a vendee’s breach of an executory contract for the sale of land is the difference between the contract price of the land and its market value at the time of the breach, less the portion of the purchase price already paid.

What is sufficient writing for the SOF?

Any memorandum, which contains the necessary information about the contract and is properly signed will do; it doesn’t have to be the contract itself.

Letter, check, or other document even if not drawn for the purpose of memorializing the contract.

Rosenfeld v. Zerneck:

Typing your name in an email is sufficient writing.

Electronic Records in Global and National Commerce Act (E-Sign):
Uniform Electronic Transactions Act (UETA):
Essential elements require in the writing:

Adequate description of the property
Whatever else is relevant to the transaction



1) A loan from a third party (bank) lender to the buyer;
2) The “taking over” by the buyer of the payments on an existing loan which the seller or some former owner obtained from a third party lender;
3) Financing provided by the seller himself, in the form of a deferral of receipt of some portion of the purchase price.


Inchoate interest
Transfer by a debtor/oblitagor/mortgagor to a creditor/obligatee/mortgagee, a real estate interest, to be held as security for the performance of an obligation, normally the payment of a debt evidenced by a promissory note.
A mortgage is not valid/enforceable if there is not a debt/obligation.
Before you have a mortgage, you must have a debt/obligation.

Debt usually evidenced by a promissory note.

Most mortgages contain a clause “you agree to repay the debt”.
Monthly payment depend on:

1) Amount you borrow
2) Term of the loan
3) Interest rate

Sources of loans:

1) Banks
2) Savings and Loans
3) Mortgage companies

Home financing (pg 105):

1) All cash sale
2) Assumption or taking subject to existing mortgage
3) Seller financing

Installment land contract
Purchase money mortgage

4) Combination of assumption/subject to and seller financing
5) Wrap-around financing

Seller does not pay off existing mortgage at transfer.
Buyer makes payments at a higher interest rate than seller’s mortgage.
Does not work if seller’s mortgage has a “due on sale clause”.

Shrader v. Benton:

Wrap-around installment contract. However, seller’s mortgage had a “due on sale clause”.
The parties needed the consent of the mortgage company to do the wrap-around installment contract.

The lender can decide not to foreclose on the mortgage and instead sue based on the promissory note.
Equity of redemption
Statutory redemption



Objective third party acting in the best interest of all the parties.
Makes sure that all the documents and payments are presented in the correct order.

Money, deed, promissory note, mortgage…

d security for a debt?
Flack v. McClure:

Whether a deed is to be taken as a mortgage depends on the intentions of the parties.
In order to convert a deed absolute on its face into a mortgage, the proof must be clear, satisfactory and convincing and can come from almost every conceivable fact that could legitimately aid that determination.
The burden of proof rests upon the party asserting a mortgage where a deed absolute was conveyed.
Six factors to be considered by the trial judge to determine whether an equitable mortgage exists:

1) Whether a debt exists;
2) The relationship of the parties;
3) Whether legal assistance was available;
4) The sophistication and circumstances of each party;
5) The adequacy of the consideration; and
6) Who retained possession of the property.

The fact that the mortgage was made for a future debt or that there was no fixed time for repayment does not affect the status of an instrument as a mortgage.

Sannerud v. Brantz:

Factors to determine whether a transaction is a mortgage, intended as a security, or a conditional sale:

1) Change of possession;
2) Great disparity between the value of the property and price;
3) Whether the sale is accompanied by a defeasance, a provision for redemption or an agreement for a reconveyance; and
4) Whether a borrowing or lending accompanies the execution of the instrument or is contemplated at the time.

Downs v. Ziegler:

A deed intended as security for a debt will be found a mortgage no matter how strong the language of the deed or of any accompanying instrument.
The fact that a transfer was made subject to defeasance on a condition, may, for the purpose of showing that the transfer is a mortgage, be proved except against a subsequent purchaser or encumbrancer for value and without notice, notwithstanding that the fact does not appear by the terms of the instrument.
Parol evidence is admissible to show that a conveyance absolute on its face was intended as a mortgage even though the instrument was knowingly cast in the form of conveyance, and that the true nature of the transaction is a question of intention to be inferred from all the facts and circumstances surrounding the transaction.
Criteria used to determine whether a security device was intended:

1) The prior negotiations of the parties, to discern if such negotiations contemplated a mere security for a debt;
2) The distress of the maker;
3) The fact that the amount advanced was about the amount that the grantor needed to pay an existing indebtedness;
4) The amount of the consideration paid in comparison to the actual value or the property in question;
5) A contemporaneous agreement to repurchase; and
6) The acts of the parties in relation to each other.

Burden of Proof

Absolute deeds à Clear and convincing
Conditional sales à Preponderance of the evidence