Market Context:
Introduction:
RISK – main theme of course
Identify it
How to allocate it
By law
By contract
Role of the attorney – Advise client on risks and how to mitigate those risks, but not to tell client what to do
Risk and return:
Not inherently bad
“higher the risk, higher the reward”
Ex – buying stock – riskier stock pays higher dividends
Ex – if buyer cannot get financing – able to get out of contract without liability
Puts risk on seller
State of real estate market – affects perception of risk and return
Can be transferred
Ex – every document written as a lawyer transfers risks
Ex – deed transfers risks
Costs:
Some more obvious than others
Transaction costs – costs associated with undertaking a particular exchange
Ex – Transferring taxes, brokerage cost
Out-of-pocket costs – actual expenses incurred
Paper money – bidding amount of outstanding debt
Forgiveness of the debt
No new cash necessary
Often highest bidder = bank (no new capital necessary)
Opportunity costs – market choices one gives up to pursue the selected choice
Sunk costs –
Transactional misbehavior – attempt by one party to get out of deal after it was finalized
Risk – counter-party might try to get out
Documentation – created to prevent behavior
Problem – means parties are discussing potential misbehaviors
Categories of risks:
Liquidity risks:
Liquidity – access to ready capital
Real estate – not very liquid
Gain liquidity – get financing (ex – mortgage or home equity)
Brokers:
Broker or FSBO (for sale by owner):
What are brokers? — information specialists
Add value by providing information
Familiarity with local real estate market
Expertise that outsiders to market do not have
Regulated in every state – must be licensed
Typically compensated with a percentage of sale price
Very expensive
Brokers are fiduciaries – owe the classic fiduciary duties
Duty of care and loyalty
Disclosure
Confidentiality
Broker should be acting for benefit of client
To whom does the broker typically owe duties?
Owner hires broker – broker owes owner duties
Broker’s right to a commission:
Two basic rules:
Traditional rule – broker entitled when procuring a buyer who is ready, willing, and able to buy the property
Risk on seller
Minority rule – broker entitled to commission only at closing
Risk on broker
Under either rule – broker is not paid until closing
If commission earned – check comes at closing
Any agreement for a broker’s commission must be in the final contract written — Hillis v. Lake (MA Sup.Ct. 1995):
Cannot rely upon a commission from a previously written contract that failed to be fully executed
FSBO (for sale by owner):
How many people try to avoid broker cost – but does not work very well
Does not provide same access to market
Brokers have MLS (multiple listing service) association – single great advantage
Share listings
Will internet lead to end of brokers?
Four types of listing agreements (agency relationships):
Open listing – non-exclusive
Broker can sell it, but seller may sell it or someone else can sell it
Broker gets commission only if broker sells it
For owner – Protection from lazy broker
Exclusive agency – only broker is selling property
Broker is only agency entitled to commission, but not entitled if owner finds the buyer
Exclusive right to sell:
Broker get paid regardless of who finds buyer
For owner:
Incentive for broker to work harder to sell – guaranteed commission
Top brokers may only perform exclusive contracts
Less contacts to control
Limit length of listing to be as short as possible, ex- 90 days
Negotiating tactic – lower commission
Net listing:
Seller and broker agree on a price, but broker keeps all profit above a certain amount
Why?
Foreclosure sale – bank only cares about amount owed
Probably taxes
Long term capital gain – lower rate
Big exemption – 250,000 per person for sale of primary residence
Must make a lot in order to pay taxes on house
Problems for brokers:
Major problem – dual agency
Allowed in most jurisdictions
Allows broker to represent both buyer and seller
Major risks/conflicts of interest
Second major problem – broker hired by owner helps buyer to get financing
Seem to be representing buyer for that single occurrence
Conflict of interest
Single biggest problem – listing and selli
ntract
Provisions in contract but not in deed disappear
Post-Closing
Recording all relevant documents
Distinguish:
LOI (letter of intent) – non-binding
Options – enforceable contract
Typical kind – buyer can purchase an option from seller the property at a certain price under certain conditions
Opposite is true – seller can sell to buyer for certain conditions
Contractual right to buy property
GMH Associates v. Prudential Realty Group (Pa. Super. Ct. 2000):
LOIs cannot not usually be binding – usually explicitly state that either party can terminate negotiations at any time
Non-binding language must be conspicuously written
Buyers and sellers have a duty to negotiate in good faith
A definite promise to buy/sell must be made in order to be binding
An attempt to induce an offer from a buyer is not the same thing as an oral offer to sell
Elements of intentional misrepresentation:
Representation
Material to the transaction at hand
Made falsely, with knowledge of its falsity or recklessness as to whether it is true or false
With the intention of misleading another party into relying on it
Justifiable reliance on the misrepresentation
Resulting injury was proximately caused by the reliance
Executory Contracts:
Equitable conversion – once a document is an executory contract (signed and enforceable contract) – equity deems the contract completed, even before the closing
Default rule only
Not used if contract addresses risk of loss
Equity – superior to law and title
Ancient doctrine
Most important – risk of loss
Placed on buyer
Why?
Deal is done – buyer’s problem
Traditionally on buyer
Parties can allocate risk differently
Just place risk back on seller
Uniform Vendor and Purchaser Risk Act:
