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Hedrick Re Transactions Fall 2020 Outline

Law Outlines > Real Estate Transactions Outlines

This is an extract of our Hedrick Re Transactions Fall 2020 document, which we sell as part of our Real Estate Transactions Outlines collection written by the top tier of Barry University School Of Law students.

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REAL ESTATE TRANSACTIONS
PARTIES INVOLVED & ROLES
CHAPTER 1: BUYING AND SELLING REAL ESTATE IN THE UNITED STATES
1) REAL ESTATE SALES: A PROCESS

IN

THREE ACTS

a) Act One
The three stages of a real estate sale are marketing, contracting and closing.
Usually, a property owner initiates a sale or lease by marketing the property through a broker.
b) Act Two
Known to lawyers as the Executory Period.
Begins the instant the parties sign the purchase and sale contract and concludes the moment the contract closes.
A contract closes when the buyer and seller perform their respective promises to each other.
Almost always, the buyer's offer is made contingent to her approval of a thorough physical inspection of the property and title report.
May also be contingent on receipt of suitable mortgage financing.
Generally, seller retains possession, the right to rents, and continuing liability for maintenance of the property until closing.
Sellers allowing buyers into possession before closing are well advised to execute formal lease agreements.
Settlement Statement
One of the most important closing docs
Enables buyer and seller to 'follow the money' by listing the funds paid by the buyer and showing how the funds are to be distributed.
To avoid unpleasant surprises at closing, each party needs to calculate its own
'bottom line' - even before signing a purchase and sale contract
Then to inspect the proposed settlement statement before closing date.
c) Act Three Begins at the instant of closing when the seller delivers, and the buyer accepts a deed to the property.
d) How Title Shifts During the Three Acts
Act one - only seller has title to property; buyer yet to be identified.
Act two - during executory period, technically, buyer and seller share interest in the property.
Common law - a realty buyer is not only entitled money damages from a recalcitrate seller, but also enjoys the equitable right of specific performance.
Courts regard the seller as holding bare legal title during executory period to protect buyer's right of specific performance.
Act Three - after the seller deeds title to the buyer, only the buyer has an interest in the property.
Exception with vendor financing, when - to secure payment of the unpaid balance of the purchase price - the seller retains a mortgage, deed of trust, or installment sale contract.
e) Deals that Fail to Close
One of the functions of the purchase and sale agreement is to set ground rules as to when, how, and at what cost the buyer or seller can back out of the deal.
Typically, contracts contain contingencies allowing buyers to cancel without penalty if they don't like what comes up during the 'due diligence' period - inspection of the physical condition of the property, a title review, and an examination of the seller's books and records.
Often, breaching buyer's liability is limited by contract to a fixed liquidated damage sum, typically the amount of the buyer's initial good faith deposit.
f) Options as Alternative to Purchase and Sale Agreements. Definitions: Puts and
Calls.
Purchase and sale agreements involve reciprocal promises to buy and sell, literally,
"buyer to buy" and "seller to sell".
Option embodies either but not both of the promises.
For a fixed, nonrefundable fee, an optioned may grant an optionee the right to compel a sale (a 'call'), or the optioned may pay the buyer for the right to compel the optionee to purchase (a 'put').
Optionees seeking to enforce their options will need to have paid consideration for their option rights that is distinct from what they will owe under their agreed purchase and sales contracts if they decide to exercise their option.
A home buyer would usually prefer a call option - a discretionary right to compel the seller to convey title.
A condo developer may prefer selling puts to buyers so they cannot insist upon his building a project for which there is insufficient demand, but he can force them to buy if he decides to build.
Almost always the optionee pays a fee for the option distinct from the purchase price.
An optionee who decides not to buy forfeits the option price, nothing more.
Optionees will have to exercise their options exactly within the time specified in the option contract or lose them unless the optioned allows an extension or waives the right to timely exercise.
The time for performing purchase and sale contracts is "a reasonable time" unless the parties provide otherwise.
g) Valuing Options In valuing options, consider the delta (how the price of an option will change as the price of the underlying asset/index changes); the kappa (how the value of an option changes as interest rates change) and the theta (how fast an options value will decline as expiration approaches).

2) USEFUL DEFINITIONS
Listing Agreement

A listing agreement defines the duties and rights of an agency relationship between a property owner (the principal) desiring to sell or lease and a broker (the agent).
Escrow

Any arrangement between two or more parties designating a third party to hold funds and documents for safekeeping pending the fulfillment or performance of specified acts or conditions outlined in the escrow instructions.
o Real estate escrow - agent holds the buyer's funds and the seller's deed on instructions to transmit these to the proper parties when.
Each has met its obligations.
Escrow Instructions

Three-party agreement by which buyer and seller authorize an escrow agent (the individual responsible for the escrow account) to help them implement the performance of the purchase-and-sale contract.
o Translate the terms of the contract into a series of tasks the escrow agent, buyer, seller, and lenders must perform to close the deal.
Deed

Document by which the seller signifies transfer of title to the grantee.
o Instrument of conveyance.
o To be effective, must be properly signed by the property owner and delivered to the buyer. Most states require notarization.
o Buyer records deed in her public land records.
Title Insurance

Buyers protect themselves against the possibility of defects in the seller's title through title insurance policies.
o Policies ensure the buyer that the seller is transferring marketable title, subject to general exclusions and specific exceptions detailed in the policy.
o Also insure buyer's lender

Before issuing the title insurance policy, title insurers prepare for the buyer a document usually known as a preliminary report which briefly lists defects in the property's title.
o Report shows buyer and lender what type of coverage the insurer is willing to provide.
o Schedule B of report lists exceptions to coverage
 Items insurer explicitly declines to cover.
 Buyer should not go through with the sale unless the seller cures those defects before closing, title insurer removes the specific exceptions, or title insurer issues an endorsement insuring any items previously excluded from coverage. 

A buyer who closes despite those uninsured defects accepts a flawed title.

Promissory Note

Figures into the closing documents.
o A written, unconditional personal promise by the buyer to repay a loan.
o States terms and conditions of the loan, including the principal amount owed, the applicable interest rate, and the schedule for repayment.
Mortgage

Mortgage confers a lien against the security property until the loan is fully repaid and authorizes the lien holder to order the property sold at a forced sale in the event of default on the note.
o If forced sale becomes necessary, the foreclosure sale proceeds are credited against what the borrower owes the lender.
o Two parties to a mortgage:
 Mortgagor = borrower
 Mortgagee = lender

Mortgagor is the owner granting the lien, mortgagee is the lender receiving it.
o Owner is called the mortgagor because only the owner can create a valid voluntary lien against their own property.
o Once mortgage debt is paid off, mortgagee is supposed to execute a recordable 'satisfaction' of mortgage.
o Defaulting mortgagors risk the mortgagee petitioning a court to order a foreclosure of the borrower's interest in the security property by public auction conducted by the sheriff.
Deed of Trust (DOT)
o Serves the same purpose as a mortgage, except there are three parties involved:
 Beneficiary = lender. DOT creates a lien securing repayment of a debt for the benefit of the lender, called the beneficiary.
 Trustor = borrower. Property owner, called trustor, creates the lien by pledging her property as security for the repayment of the debt.
 Trustee = third party appointed by lender to fulfill statutory requirements leading to foreclosure if borrower defaults.
Trustee holds a limited legal title to the security property.
 If trustor pays off the debt, the trustee is empowered to provide a recordable document evidencing that the obligation secured by the lien has been satisfied.
 Should borrower default, beneficiary will instruct trustee to foreclose.
A Mortgagor Usually Is, But Need Not Be, the Borrower.
o In most realty purchase financing, borrower and mortgagor are one and the same, as buyer secures her purchase money debt with a mortgage on the acquired property.
o Any owner could pledge property as collateral for someone else's debt without necessarily agreeing to repay that debt personally. 3) THE PLACE

OF LAWYERS IN REAL ESTATE TRANSACTIONS
Attorney in commercial real estate sale is requested to perform legal due diligence.
This type of due diligence is a two-step process:
o First, attorney collects every piece of paper relevant to the deal,
including leases, notes, mortgages, easements, franchise agreements, environmental reports, government records pertaining to the property, and applicable statutes.
o Second, attorney scrutinizes each one of these documents to make sure the client is receiving exactly what was promised in the purchase and sales contract.

CHAPTER 2: DECIDING TO BUY A HOME, FEDERAL TAX CONSIDERATIONS AND
NEGOTIATION POINTERS
1) TO OWN

OR TO RENT?
a) When is Leasing Office Space Better Than Owning It?
h) The Case for Home Ownership
High on the list of reasons to own a home are a desire for wealth accumulation,
social status, and self-esteem.
Owners enjoy security of tenure with no landlord interference, although purchasers of condos, co-ops, and houses in planned developments with HOAs surrender considerable autonomy to their co-owners.
i) The Case Against Home Ownership
Homeowners on average spend 10-12% of their gross income on maintenance,
insurance, utilities, and property taxes.

4) FEDERAL INCOME TAX CONSEQUENCES

OF

HOME OWNERSHIP

a) The Tax Breaks Described
Home mortgage interest deduction.
o Law allows the taxpayer to deduct from adjusted gross income all
'qualified residence interest' on debt incurred to buy, build, or improve a home.
Gain on Scale.
o Homeowners aren't taxed on the first $250,000 of gain ($500,000 for a couple filing a joint return in the taxable year of the sale).
Stepped-Up Basis.
o If house appreciates and the owner dies still owning it, the devisee receives a stepped-up basis to the home's FMV at the date of death.
o Reduces the devisee's capital gains tax liability when and if the devisee ever sells the house.
o Could still be estate taxes to pay.
Deduction for property taxes.
o Homeowner can deduct property taxes from gross income for federal tax purposes.
j) More About the Home Mortgage Interest Deduction
Basic qualifying rules.
o Homeowners are entitled to deduct interest paid on most loans on acquisition indebtedness secured by a main or second home. To qualify, the taxpayer must itemize deductions.
Taxpayer must be legally liable to repay the underlying debt and not just making the payments on behalf of someone else.
o Mortgage must be secured by the taxpayer's primary residence or second home, and it must be recorded.
o Homeowners are allowed to deduct the home mortgage interest, as if the loan were a home acquisition debt, as long as the purchaser borrows the money within 90 days before or after taking title to the home.
o Acquisition is defined to include acquiring, constructing, or substantially improving the residence.
o If homebuyer uses proceeds to build or improve the home, the interest will qualify for the home acquisition indebtedness deduction.
o Interest only deductible on mortgage loans of up to $1 million or the value of the home, whichever is lower.
o Homeowner is entitled to deduct interest on home equity debt
(debt incurred for purposes other than to buy, build, or improve a home).
 Debt cannot exceed FMV of home
 Only taken for interest attributable to an indebtedness of
$100,000 or less ($50,000 or less if married filing separately)
Deductibility of Home Mortgage Interest Upon a Refinancing.
o Any secured debt which the taxpayer uses to refinance a home acquisition loan will also qualify as deductible home acquisition debt, but only up to the amount of the balance of the old mortgage principal just before the refinancing.
The IRC allows home buyers to deduct points (a one-time interest charge) in the year of purchase, rather than amortized over the life of the loan as 'points' in business loans are deducted.
o o

5) THE NEGOTIATION PROCESS
a) Pricing
"The Comps"
o Competition in the neighborhood.
Reservation price - what a buyer can afford and is willing to pay for housing.
o Based on each party's best alternative to making this deal.
The difference between the cost of renting and buying the same or similar property is the ownership premium.
o Prospective buyer should estimate the cost of renting a dwelling comparable to the one they are buying. Ascertain the annual rental value of the property, and discount that number to its present value by dividing the net operating income by the same percentage return the buyer could make if she invested her money elsewhere in a venture of comparable risk.
Properties sometimes trade at prices higher or lower than expected for various reasons, often related to one of the three D's: Death, Debt, or Divorce.
k) Should Buyers and Sellers Negotiate Directly, Through or With an Agent?
Broker serves as a messenger for the parties.
Helps avoid buyer-seller animosity. l) Negotiation Pointers
Open with a bid that neither appears to overreach nor manages to underachieve.
Consider buyers stretch position - the price they would grudgingly pay to avoid losing the deal.
Opening bid unaccompanied by any indication of how you arrived there lacks substance. Good rational often derives from a thorough written appraisal.

CHAPTER 3: MARKETING RESIDENTIAL AND COMMERCIAL REALTY:
REAL ESTATE BROKERS, LISTING AGREEMENTS AND SECURITIES
LAWS
1) COMPARING RESIDENTIAL

AND COMMERCIAL BROKERS
Residential brokers only sell homes or condos, and they tend to concentrate on properties located within a particular area and price range.
Commercial brokers specialize by type of property - warehouse industrial, retail,
apartments, office buildings, and hotels/resorts.
Brokers solicit listings from potential sellers, share those listings with prospective buyers, arrange showings for potential buyers, negotiate the deal, offer a complete set of documents necessary to complete a transaction in full and oversee compliance with state laws concerning realty sales.
FSBO seller must perform the functions of a broker, and faces many risks, including:
(1) ineptly delaying or losing the deal, (2) selling for too little on unfavorable terms and conditions, and (3) becoming liable for failure to comply with myriad public regulations concerning closings and disclosures.
'courtesy to broker' on add signifies sellers' willingness to pay a commission to the buyers' broker.

6) THE MULTIPLE LISTING SERVICE
Listing: a property description written for marketing purposes, prepared by the seller's broker with the seller's consent.
A residential MLS will provide a form (called a setup or data sheet) which each broker fills out for every new listing.
o Includes asking price, a photo, and basic property facts (including location, number of beds and baths, and special features such as pool, air conditioning, or views).
o Also indicates number of days property has been on the market.
By prior agreement with the MLS, listing brokers agree to split their commission with any member broker who is the first agent to find an acceptable buyer for a listed property.
o Customary split = 50/50

Occasionally = 60/40 (favoring listing broker)

7) BROKER LICENSING REQUIREMENTS
a) State Licensing Laws
In all states RE agents and brokers must acquire and maintain an agent's or broker's license.
Qualifying for a license is not difficult for anyone without a criminal record.

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