RE Transactions Notes

8/6/2019 RE Transactions Notes

1/22

y Final examo Essay format 8-10 questions

There WILL be point allocations DO NOT correspond to suggested minutesy 100 total points

Mostly fact pattern some policyo

Wont ask

question

sth

at were not discu

ssed in cla

ss.

o If insufficient info, make an assumption and answer based on the assumptiono 217 586 1125o 217 352 1800o Dont worry too much about mortgage products (Chapter 16)

y Lawyers are obstructionists in the sequence of real estate closingso Brokers are interested in completing the transactiono Lawyers find problems that hamper the transaction

y Most title companieshave been bought up (in Chicago = Fidelity)o The title company is really an agent of the parento Consumers cant actually shop for a title company

y Is ordering a title policy = practice of law (w/o a license)?y 2major types of real estate:

o Residential Lawyer involvement ishighly variable from region to region

y Western states = Broker, title company, escrow company, lendero Tends to be more expensive

y New England = lawyers do title searches; integral part of closing Generally handled by smaller firms

y Transactions are usually too smally volume business

In Chicagoland, most closings involve a lawyer for both buyer and sellery everyseller has a lawyer = Quinlan v.Tyson

o Lawyer required to create the documents Who should control the closing?

y Lawyer?y Broker?y Lender?y During 70s, title company was paying a kickback to whoever placed the

order for title check

Title insurance increases due to outside pressure from secondary market into whichbundled loans were being sold

Buyers need to have a lawyery Easements?


2/22

y Covenants? Liens?y How to take title? Tenancy in common? Joint tenancy?y Although the seller will have a lawyer prepare the deed and check the title,

the seller will have different interests than the buyer

o Commercial

No regional variation in th

e role of lawyers

Lawyers involved in every transactiony Buyer, seller, insurance company

Large firms are involved Can be big business for firms No use of forms

y Lawyers preparing the contracts Less duty on the part ofseller to disclose issues than in residential transaction

y Real Estate brokerso Types of listing

Open listing Exclusive agency

y Typically seen in connection withMLSy Any broker that is a member of the MLS can show the propertyy Commission paid unless owner sells the property themselves

Exclusive right to selly Broker gets paid the commission irrespective of who actually makes the sale

(owner or broker)

y Brokers duty to the cliento Fiduciary dutyo Loyaltyo Confidentialityo What if the broker is representing bothsides of the transaction?

cross-fiduciary duties Broker gets paid 6% for doing nothing because cross-duty prevents from saying

anything to BOTHsides

y IllinoisRule = designated agencyo Broker that lists is the sellers broker listing brokero Other brokers can designate themselves as a buyers broker

Pull themselves out ofsub-agency problemy Eliminates fiduciary duty to the sellery Created by statute

Not exposed for failure to disclose No duty to seller Still get paid by the seller a TRUE buyers broker would work on a fee-basissince fiduciary duty requires

paying the lowest price, however, broker percentage commission is based on having

a higher price

y creates conflicting incentivesy Should brokers act as independent agents?

o Acts as a mediator to bring parties together to sell homeo Independent agent would have none of the traditional duties that create conflicts of interest


3/22

y Technically, a broker isstill entitled to commission even if the sale does not closeo Minority rule is that sale must also close in order to get the commission

Exception is if there is interference from seller, then commission is paidy Lawyer/broker does not have duty to the buyer

o Does have a duty to avoid taking undue advantage of unrepresented partyy U

nau

thorized

practice of lawy Quinlan v. Tyson

o LAWYERS required to prepare documents in ILo Brokers can use standard, pre-made documents

Can only fill in the blanksy In re: Opinion 26y Appendix A (NJ notice required for buyers and sellers) pg. 53y Lets all partiesknow the broker represents only the seller

o Informs partieshow broker is paido Disclaims the ability to give legal advice

y If acting as both lawyer and brokero Lawyers rules require disclosureo Broker rulesPROHIBIT acting as both lawyer and broker

y Problematic to receive commissions if not a licensed brokery FSBOs For Sale By Owner

o Account for 25% of residential saleso Sellershave access to internet siteso Websites dedicated to FSBO sellerso Tend to work well in hot real estate markets

y Chapter 3 Preparing to Contracty Extreme rarity for Letter Of Intent to be considered an enforceable contract

o This is not a contracto Contract will be signed within X days

y Sets out conditions that will eventually become part of the contracty A writing needed under Statute of Frauds in order to create a K

o Property identifiedo Price namedo Parties are named

y Promissory estoppelo No K neededo Must show detrimental reliance

y Four Corners Ruley Parole Evidence Rule

o No oral evidence allowed to change the terms of the contracty In residential context:

o Deed does not transfer ownership of the FFEo Would need a bill ofsale

yy Allocation of Risky Illinois = equitable titlestatey Legal title remains withseller until deed/possession transferred to buyer

o After transfer, risk of loss passes to buyer


4/22

o In residential context, there can be early possession Buyer gets possession before closing Risk of loss passes to buyer in this circumstance Buyer is in better control/aware of risk factors after taking possession

y Equitable title passes to the buyer at the moment of creation of Ky What does the seller want?

o Money!!o No risko No contingencyo No liability extending beyond closing

y What does the buyer want?o Ideal = option

Prevent seller from shopping the property Lock the seller into a firm price and think/inspect Ideal option would include terms to prevent future haggling

o Maximize ways of getting out of the dealo Right of first refusal

Generally does not specify a price Tend to be longer term than options Buyer gets the right to buy at same terms/price/conditions as negotiated by a

different buyer

Ifsale is not consummated, right continues to exist Often times added as a condition on a separate transaction

y Ex. first refusal on vacant lot next to home purchase Not much consideration is needed since the value is fairly low merely agreeing to

buy the property at market price

o Financing contingency (Buyers need) Seller cant deny, or else there wouldnt be any buyers! Buyer should prepare the contingency

y Be VERY preciseo subject to financing lacks precisiono Doesnt matter the amount or the rate

y Buyers ability to obtain loan for X dollars at Y rate for a term of Z years Buyer need only see (1) lender to satisfy the contingency

y Industry criteria are the same for all lenders = set by Fannie Mae/FreddieMac

y There should be no variation in the loan available to any given individual What ifseller finances the transaction? Satisfy the financing contingency?

y No?o In financing contingency, there are related issuessuch as appraisalwhich is incorporated into the financing contingencyo No appraisal when self-financedo No need to accept sellers offer

y Yes?o Some courtssay that seller CAN satisfy the contingency

o Inspection (contingency) Seller must provide a disclosure statement


5/22

y no material deficiencies in the propertyo to best ofsellersknowledge no requirement to inspecto Mostly structural

Provides the buyer second opportunity to renegotiate pricey Can ask for repair creditsy

Screws up th

e closing timeline Always material deficiencies when dealing with residential

o Radon (contingency)o Sale of existing home (contingency)

Closing of new home is contingent on Buyer being able to sell their existing home Sellers use equivalent of right of first refusal

y Keeps the house on the markety Can continue to entertain other offersy Brokers dislike

implied contingency exists b/c wont be able to get financing ifBuyer is carryingtwo homes

o Attorney approval clauses (contingency) K issubject to approval by attorney

y Commercial transactionsy Everyone has a lawyery Seller wants cash

o What can seller do if buyer defaults, POST-contingency period Generally clause allows for all remedies at law and equity

y Ex. Can sue for specific performance or court-awarded damages Liquidated damages clause

y Often limited to money that has already gone hard and represents the fullremedy available

y Creates an optiony In smaller deals, hard money may only be $25K

y Buyers wants to maximize contingencies and make the seller responsible for disclosureso Holdback money

If buying raw land, will hold back part of the purchase price in the event the selleris unable to complete utilities, roads, zoning, etc.

y Zoning, subdivision, plat, licensing Money will be used by buyer to complete ifseller fails RCOA reciprocal construction and operating agreement

y AllowsBuyer to come onto Sellers property to complete the projecty NO affirmative disclosure requirement as in residential sales

o Caveat emptoro Can sell AS IS

Exception for flagrant failure to discloseo Buyer minimizes risk by having K incorporate numerous representations and warranties

Most sellers will represent and warranty for 3-6 months following sale, but nolonger

o Use reps and warranties because there are no statutory protections (ala residential sale)for failure to disclose problems with property

y Surveys?


6/22

o Generally not done for home sale in downstate IL More frequently done if building a fence or similar

o USUALLY done for home sale in Chicagoland Usually not a full-blownsurvey Not always exact

o COMMERCIAL properties DOHAVEsurvey Need to know location ofALL the easements/encroachments

y Accessy Utilitiesy Agreements for maintenance, liability?

o Windshield Survey (residential) Drive past and make sure the four corners of the building are within the property

lines

y Title and Survey are the two biggest problemso Title problems dont often arise until after the survey!

y Disclosuresy Seller must affirm whether they know about the items aor noty Generally structural issues

o Sometimes deal with wells or septic systemsy In IL, cannot sell home as is without disclosing ALL structural defects

o Leaky roof, flooded basement (must diclose if asked directly)o Depends on what isACTUAL knowledge

If the seller does not have actual knowledge (even if there has been no testing) theyare exculpated

y In commercial context, still caveat emptoro Would have to be something VERY egregious to hold seller responsible

Duties ofSeller

o Fraud:o Misrepresentation of a material fact that caused you to buy and damages the buyer

No active misrepresentation required In IL, could have a concealment = fraud

y Must disclose deficiency of which they have actual knowledgey Seller has no duty to crawl around in the basement looking for problems

o Defense: If completely obvious during visual inspection, then no requirement to disclose

y Patent Defects Ex. location in a flood plain is a matter of public record Ex. water mark in the basement indicating leakage

y Constructive noticey Buyer doeshave duty to be informed

No requirement that buyer crawl around in basements or crawl spaces looking forproblems

y Commercial transactiono Presumption of sophisticated buyero Buyer must perform due diligence cannot rely on the seller

Structural Environmental


7/22

o Innocent PurchaserDefense Phase I -Hires firm to study whether there has been factories, gas tanks, etc.

y If clean, will satisfy the defense Phase II soil testing Phase III cleanup

y Astigmatized Propertiesy Creates paranoia in the purchaser and makes them unwilling to live there

o No actual/potential harm to the purchasero Unrealistic fears/idiosyncracies

y haunted housesy Location ofheinous acts (Jeffrey Dahmershouse)y Recently, been a way to go back and re-negotiate the price

o Stigma reduces the value, and had the purchaser been aware, the price would have beenlower

o Action for damages effectively a re-negotiation on the priceMISSINGNOTES 3/8/2011

Van Camp v. Bradford

y Was there fraud?o Court doesnt decide simply rules that the case will not be decided on summary judgment

y Probably a fraudulent inducemento Buyer relied on the misrepresentation to her detriment

y In IL today fraudulent concealmento What would happen if buyer didnt ask and seller didnt tell?

y As relates to the property ONLYAPPLIESIFANALYZINGBROKER DUTIESo Part of2005 Licensing Law in ILo Absolvesbrokers of responsibility for not disclosing defects that are NOT related to the

property

Ex. crime/violence in the neighborhood, presence of a flood plain, etc.y Builders Warranty

o Lasts 1 year and coversEVERYTHINGo Any defects must be cured by the builder

y Should sellers be forced to offer warranties on USED homessimilar to Builders Warrantyo Sellers must disclose material defects of which they knowo Home Owner Warranty often offered by brokers to induce sale ofhome

y Disclosures on Commercial propertyo All stateshave a Sophisticated Buyerstandard

Commercial buyers are expected to do extensive due diligenceo Is there a point at whichcaveat emptorno longer applies?

Would have to be particularly egregious Ex. apartment building was represented ashaving white collar tenants but

actually had many Section 8 residents

y Tenant fileshad been purged to hide the true nature of the tenantsy Sellers DO have the right to hype their property


8/22

y Plaintiff-Buyer LOST on fraud claimo Could not prove clear and convincing evidence

Higher than preponderanceo Also need to prove intent to defraud

y Marketable Titley

Wh

o is th

e owner?y Title insurancey Insure against non-marketability of title

o THINK they are getting marketable title that quality of title which makes the property able to be readily re-sold

y Will list all items that affect the propertyo Covenantso Restrictionso Mortgageso Assessmentso Easements

y Insurance = monetary payment for failurey Does not insure FUTURE events; only insuresPAST events

o Thus events after the title insurance given can affect the marketabilityy Some events are NOT in the public record hidden defect

o Fraudo Incompetency

y Most litigation is due to something that the title company missedo They are essentially insuring over their own mistake in examining the title

y Covenants, Easement do NOT make unmarketabley Liens andMortgages = unmarketabley Staleyy Easement normally does not make the title non-marketable

o However, the easement opened the property owner to litigationo NON-MARKETABLE

y Ex. adverse possession makes title non-marketableo Only after the adverse possession has been proved up in court would the property

become marketable

o Similar to the litigation scenario in Staley The unproven adverse possession opens the door to litigation

y Previously, Title insurance company would show every encumbrance, whether they were willing toinsure over or not

o Insured items were affirmatively listedy In smaller residential transactions, Title Insurance companies use binder of coverage and would

NOTshow all encumbranceso Mechanics lien on the house might exist, but if it is insured over, then the binder of

coverage will not list, and the attorneys/buyers will have no knowledge that such a lien

exists

o If lawyer knows about the defect, lawyer SHOULD refuse to take title because insuranceagainst non-marketable title is NOT the same as marketable title

If there is money down to cover the possible damage, then the lawyer might HAVEto accept title as part of duty to buyer


9/22

y Generally, litigation risk destroys marketability (usually)o Marketability will be raised as an issue when buyer wants out of the dealo If buyer wants the house, they will generally work out the issue of encroachment or set-back

violations, etc.

o Most encroachments do not affect the value of the propertyy DeedCovenants of Title

o General Warranty Deed Applicable all the way back to government patent Used for most residential sales No need to recite all the warranties on the deed itself convey and warrant

y By STATUTE, these words indicate:o I own ito I have the right to convey ito There are no liens or encumbrances, other than those statedo I will indemnify for any breach of these warrants

Buyer must be aware of who is giving the warrantyy Is it a shell company that has no assets other than the property being

conveyed?

o Special Warranty Deed Warranties apply only during sellers ownership

o Quitclaim Deed Simply giving up any claim that might exist NOTstating that any interest actually exists Historically used to clear title of adverse possession, encroachment, etc.

y Descriptions of propertyy Original government survey

o Helpful in the Midwest where property is laid out on a grid Township = 36 sections

o Section = 1 square mile Township = 36 sections Section = 1 square mile

o Often times not exacto Avoid saying The NW quadrant of the NW quadrant, about 40 acres simply describe by

quadrant to avoid problems

y Metes and boundso Historically based on geographic markers trees, rivers, rocks, etco Surveyer uses metal pins to measure the distance and angles

Expressed in angleso A

llows a more accurate description th

an th

e govt descriptiono Creates problems when old govt plat and recent survey doesnt match

What property is actually being conveyed? If paying by the acreage, what is the actual price?

y Subdivisiono If property issold off in pieces (smaller than original survey that conveyed the property to

the seller), then the lot must be subdivided, and sold as Lot 1, Lot 2 etc.

o Generally applies within cities and the immediate surrounding area


10/22

o Subject to sub-division ordinances for both city and countyy GPSDescription

o Not yet a valid substituteo Useful in conservation easements where exact lines are often irregularly shaped and

precision is less important than in a home-building context

y Surveys must show flood plains, endangered species, locations of easements, encroachments,improvements, set-back lines, etc. in addition to the simple description of the property

o SHOULD show location in relation to other propertyo Name of adjacent property owners

Lenders usually requireo If use number of feet to describe the final closing of the property line and the number is

wrong, the deed is invalid and no conveyance has occurred

Simply use to closing to describe the enclosure of the propertyy Today, biggest issue is Fraud against the title company

o Insuring properties that dont exist, or arent owned by the insuredy Public Recordsy Recording statutes only come into play when there is a conflict of title==> fraudulent transfers

o Ex. Person A conveys to bothB and C; who prevails between B & C both can sue Aregardless of outcome.

o Race Statute race to the Courthouse Even if C knows about the transfer to B, (and thus not a BFP) C can get title if C

records before B.

y The public policy is to encourage recording of titleo Race-Notice

In order for C to prevail, must be an innocent purchaser (BFP) AND must recordfirst

o Notice C prevails only ifBhas failed to record IfBhas recorded, then C will not prevail because C had constructive notice IfB closes, waits to record, and C closes after, then C will prevail conveyance occurs when seller delivers the deed to buyer

y Doctrine ofseisiny Constitutes and effects conveyancey In case of conflict, states recognize TWO conveyanceshave occurred, and

the public policy choice is to favor the second purchaser

o Shelter rule - Simmons 3rd parties receive same protection as the party with whom they are dealing

o Solution is to do closing via escrow company Escrow will take the deed, run a title check, and record, thus eliminating theproblem of fraud

y Anything affecting real estate must be a public recordo Generally refers to documents filed in the county recorders office

Deed, mortgage, lien, etc. Flood plains are NOT recorded Judgments are public but filed with Clerk of the Court

y Accompanying lien IS filed in the Recorders Office


11/22

o Would show up in a tracked indexo Would NOTshow in a Grantor/Grantee index

o Serve as basis for commitment and binder from title companyo Puts buyer/owner/seller on constructive noticeo Grantor/grantee indices are the official records

Largely replaced by tract indexesy Listed by property and then shows all related documents

Judgmentsearch is different and located elsewherey IL law is a Notice Statute, but judicial interpretation has created a Race-Notice statey Can obtain gap coverage that covers problems that occur AFTER closing, but BEFORE recordation

o Could have situation in whichTitle Company checks title, but records at the end of the dayas part of a batch

o Ex. in IL, which isRace-Notice, coverage will cover the possibility of Fraud, in whichAconveys to bothB and C

y Options are generally NOT recordedo If Commercial Buyer A comes into town, they do not want to publicize potential locations to

competition/community

o Generally short termo Seller could convey to Buyer B

Buyer A would have a breach of contract for damages (whatever they might be probably minimal)

o Buyer A could NOT demand specific performance ifBuyer B is a BFPy Title Productsy Title insurance

o Doesnt apply to 3rd party claims.Title insurance is only between the title company and theinsured.

y Title company in agency closing is acting as agent for BUYERS LENDERo Title company owes no duty to the buyero Providing an insured closing

Guaranteeing to Lender that Title Company will disperse funds properlyy Buyer is protected only to the extent that their interest is the same as the lendery Problems might come up with last minute easements, restrictions, encroachments, etc.y Improving Title System Chapter 12y How far back need to go in a title search?

o Generally 50-60 yearso IL = no more than 75 years

Liens are only good for 75 years (statute) Reversions are limited to 40 years (statute)

o Most Title Companies rely on previously issued title search/policyy Public registration systems?

o Individualsself-report their property, and receive certificate of ownershipo Government insures that you own your property

No need for title insuranceo Most title companies duplicate the public system in order to keep the database in house

Duplicative, expensive, wasteful?


12/22

y Closings Chapter 6-7y Deliveryy Problem 6A placing a deed in the safe is NOT deliveryy Placing deed in escrow = DELIVERY

o Ifseller has other conditions which allow recission of deed, NO deliveryy

Contract merges into th

e deed at closingo If there are post-closing obligations ofseller, buyer must have it recorded on the deed or get

a separate recordable instrument

o Failure to do so will eliminate those obligations under Doctrine ofMerger Exceptions:

y Fraudy Mistake

y Closing = END OF THE DEALo All loose ends must be tied up

y SEE SETTLEMENT SHEETy Repair Credit can sometimes create problems at closing and hold up the transaction

o Generally in $2500 rangeo Make sure that it is noted on the deedo Lenders were disallowing

Was deceptively used to allow a higher LTV Sellers would raise the price, allowing a borrower to get more cash, and then give an

equal Repair Credit on the Settlement Sheet

Agents responded by charging all ofBuyers closing costs to Sellersy Caused many problems

y Holdbackso Money held by escrow to ensure that final, unfinished work is completed

y Closingo Only requires delivery of the DEEDo Does not require delivery of possession

Possession USUALLY occurssimultaneously with closingy Usually relates to new construction

o Late Possession Seller is building new home, and selling old home to Buyer However, Buyer wants to close in order to lock in an advantageous interest rate Buyer closes, takes DEED, Seller allowed to continue living in house

y Seller would be responsible for rent to buyer = amount of mortgage ofBuyer

y Inspection/warranty will generally be extended to coincide with date ofpossession

o Early Possession Buyer wants to move into empty house before the loan is ready Buyer pays Sellers carrying cost until Buyer is ready is to close

y Buyer can sample the house before buyingy Sees the house warts and ally Chance that the Buyer will simply walk away from the deal

o Seller must sue to force Buyer to go thru the dealo What ifBuyer wants to store items in the garage a couple weeks before closing?


13/22

May constitute taking possession May trigger Risk of Loss; other contractual items

y Remediesy Seller is entitled to keep down paymenty In most instances, contracts prevail and buyer loses earnest money

ounfairne

ssth

eories

usually do not

h

old water in th

e face of a contract (unless

th

e contractis unfair fraud, wrongdoing, etc.)

y Ex. Buyer refuses to close; what are Sellers remedies?o Damages

Cannot be ascertained until future saley Difference in price ultimately receivedy Additional carrying costsy Real estate taxy Insurance

Typically buyers do not have the money to pay damages thus not worthwhile forseller to sue

o Liquidated damages Pre-determined amount the parties agree will be the damagessuffered in event of

breach

Functions as an optiono Rescission

Courts will rescind the contract and put the parties back to their pre-K posture Often used when no meeting of the minds

o Specific performance Due to unique nature of real estate, monetary damages may be inadequate to

compensate BUYER for loss

In some places, SELLERS have the right ofspecific performancey Somewhat illogical since there is no real reason to force the buyer to buyy Damages can fill the gap (if any) between sale price and old pricey Judges find reasons to deny the remedy to SELLERS

o Still unwilling to prohibit the remedy If buyer is seeking this remedy, must remember to file a lis pendens to avoid a sale

of the property during the litigation

y MormanDoctrine [435 Ne.2d 443(1982)] negligence is not a valid basis for a breach of K. cannotrecover damages in tort (punitives; other additional damages beyond those suffered as a result of

the breach)

o Either the party breached or did not,y Insureddoes not have cause of action against insurance company for negligencey TYPES OFHOUSING PRODUCTSy Common Interest Communities andCovenantsy Subdivisionsy Often have man-made lakes (storm water detention pond) as the common element

o Sometimes, lot lines run all the way to the center of the lake Creates problems if there is an accident

y Whos portion of the lake did the accident occur in?o More frequently, HOA exists to own the common elements


14/22

Relieves individual owners of liability in the event of accident Useful for controlling the look of the neighborhood/building

y Will often have approval powers for new construction/renovationy Can restrict size, type, look, landscaping ofhouses

o Maintain visual corridory Z

itoy Can modify existing covenantsy CAN add new convenantsy Lakelandy HOA CANNOT add new covenants, but modify existing onesy In reality:

o LANGUAGE OFCOVENANTSSHOULDADDRESS WHAT/HOW TOMODIFY In close cases, follow the Lakeland approach

o Discriminatory covenantshave no legal effect Economic discrimination still exists/enforceable

y Does not openly discriminate based on the owners incomey Require a certain size ofhousey Require certain square footage for a homey Occasionally required expensive exterior elements (wood, brick, stone)

y Developers must balance controlling the look of the neighborhood with the need to sell lotso Sometimes developers will relax covenantso Creates problems with pre-existing owners that built according to old covenants

y Covenants typically good for 25 yearso HOA must then renew

y If covenants are changed, prior residents would have a good argument that they should be exemptfrom the new covenant

y Ultimately, crazy covenants will limit marketabilityy Remedies for broken covenants?

o Get injunctive relief from court to prevent constructiono Injunctive reliefshould be requested before the building is up and enclosed

Only equitable remedy is damages HOA can prevent ALL future changes/alterations to the structure

o Covenants can include penalties/remedial powers of the HOA Why should property ownershave to pay legal fees in order to prevent someone

from wrongfully breaking the covenants

HOA can assess penaltiesy Per diem penalties

If penalties are unpaid, HOA can file a lien on propertyy No need to go to courty Can then foreclose to pay off the penaltiesy Or,HOA can wait until owner sells their lot and then have the lien paid

before title is clear

o Covenant can state that unpaid lien will collect interesto Broken covenant can serve as precedent for future construction to also break the covenanto Covenants can also be enforced by lot owners

Can take a picture of the infraction and the HOA will impose a penaltyy What are the limits to the covenants that a developer can impose?


15/22

o Restrictions on interior ofhouse? Restrictions on interior colors? Restrictions on artwork? Restrictions on the blinds?

o Restrictions on the type of clothes that residents can wear?o Restriction on vehicle type are found to be OK (No Trucks)

y Zero-Lot Line andDuplexesy Most communitieshave setback requirements that prevent buildings from being too closey Sometimes buildings need to be closer together

o Zero lot line Duplex no space between houses Stand Alone - sometimeshouses abut the lot line

y There will be an easement for maintenancey Useful for small lots

o If the building is centered, then walkways on either side of thebuilding would be so narrow as to be useless

Each person owns their own loty Condominiumsy Statutory creationy Condo unit = air rights

o Own the space in between the walls, floor, and ceiling of your unito Have title to the unito Can be mortgaged/borrowed against

y Limited common elements = balconyo Common ownership but exclusive use by the unit owner

y Common elements = pool, physical plant, roof, lobbies, etc.o Own an undivided share in the common elements

y Cannot create a Home OwnersAssociation to act as a shield for accident liabilityo Only protection is to have a Condo Association with plenty of insuranceo Statute allowing condos would probably not permito Traditional structure is that condo = air rights + undivided share of common elements

y In todays market, Condo Association fees can exceed the mortgageo Occupancy isso low and remaining members must make up the difference to pay for

operating expenses of the building

y CANNOT determine the type of property simply by looking at ity Could build zero-lot linehomes with a Condominium organization

o City might approve a condo project based on certain pre-conceptions about whatcondos look like

A condo is an ownership structure A condo can be any type of building (high rise, low rise, single family)

o Cant describe the condo until its built (b/c condo = air rights within built walls)o Cant sell the land b/c the Condo Association will own it

y In NY and IL, ground leases do not qualify for building condosy Cooperativey Corporation formed to own the entire building (and perhaps land)

o Individuals then purchase shares in the corporationy Particular shares are allocated to particular units


16/22

o Larger unitshave more shares (and thushigher price)y Units themselves are not for saley Possessory interest = Proprietary leasey How do you finance a purchase ofstock for a place to live?

o Cant get a stand-alone mortgageo H

igh

er interest rate

s;sh

orter terms

One solution was the Corporation would get financing and then re-loan topurchasers

y Smells like real estate, looks like real estate, must be real estateo Rules on home mortgages eventually carried over to Co-ops

y How much control does the Board of the Co-op have on the owners?o Has a fiduciary duty to the CORPORATIONo Have little obligation to disclose why a person disqualified from being admitted

Can be voted out for nearly any discriminatory reason NOT allowed to discriminate on race, ethnicity, etc.

y However, can easily set up a facade of why applicant is rejectedy Time Sharesy fee ownershipsystemy Ownership in real property

o Get a deed No specific right to a particular room Only hold a property right to the amount of time

y Still, must generally reserve a year in advanceo Hold as tenants in common with other co-tenants

y Newer method = pointssystemo Not an interest in real estate (personal property)o More points = nicer unito Points can be traded among owners

y Not recommended for investment purposeso Most likely to lose money

Time use of money + yearly assessmentsy FINANCINGy Residential mortgages = income based loans

o Analysis of the individualo Property generates no rental income akin to commercial propertyo Is the property adequate collateral to support the loan in event of default

y Commercial financing = cash flow generated through rentalo Analysis of propertyo What rents will the property generate with which to repay the loano Lenders DO NOT want the property in foreclosure

y Residential housing crisisy High prepayment penalties

o Keep you in the loany Little/no oversighty No appraisal neededy No income needed


17/22

y No cash down neededy Brokers were making money by passing the loan and making a 1% broker feey 1960-70s

o Home loan = 70-80% ofhome value Normal rate = 8%

CD rate = 4-5%o Primary lender = Savings and Loan

Banksstructured for other types of loans Mostly 20- year FR loan Lenderskept loans in-house

y No secondary market in which to sell the loan Ifhome-owner wanted to sell the house, the loan wasassignable/assumable

o Often no pre-payment penaltiesy 1970s

o Inflation hitshard (10-12%)o Rates go from 8% up to 20%

CD rates go up to 10-12%o S&Ls were stuck with a mound of fixed 8% home loans

Had to pay 10% on CDs No way to make up the gap

o Contract sale Seller holds the deed Buyer makes payments to seller Contract sales got stacked on top of each other

o Savings and Loan crisiso Lenders added Due on Sale clause

If the home getssold, the loan needed to be paid off Allowed lenders to get their money back and re-lend at the new, higher rate

y Lenders not getting locked in to older, lower rateso Lenders, Congress realized the need to create a secondary market for home loans

FreddieMac, Fannie Mae = government created entityy Allowed lenders to unload long term, fixed rate loans

o Gave more flexibility to the lending industryo No longer stuck with older loans

y Lenders generally dont provide fixed-rate products longer than 5 years Lenders = brokers

y No longer holding the notes in-housey Notes most likely sold into secondary market before the Note wassigned

Private lenders get into the secondary market when they realize they can smooththeir returns by having an enormously large pool of loans

o Beginnning of securitization of real estate loans Real estate loans turned into standardized securities that could be traded/sold in

the secondary market

o Pre-securitization, lenders (note-holder) would make evaluations of the individual borrowero Post-securitization, note-holder is NOT evaluating actual borrower

Batches (portfolios) of good loans = more expensive Batches (portfolios) of bad loans = less expensive


18/22

y Person carrying the risk no longer able to evaluate the strength of the loano Wall Street brokerssaw they could make money moving loans from local lenders to large

institutional investors

Want more loans from local lenders Congress is encouraging wider home ownership

o Investment banks not allowed to provide insurance on the loans to large institutionalinvestors

Instead give contractual guarantee on performance of the loans = creditderivatives

y No requirement to keep cash on hand to back the guaranteey Investment bank could then SELL the derivative itself

o Insuranceholder has NO IDEA of the nature of the item for whichthey hold insurance

y Effective mortgage rate is different from actual rate as a result ofTILA requirements andprepayment of first months interest

y 20% down should NOT be borrowed from somewhere elsey Higher LTV require mortgage insurnancey Residential loans almost always are amortized

o Could have a 30-year FR, amortizing loan that comes due in 5 years Creates a balloon payment Need a replacement loan

y Adjustable RateMortgage (ARM)y Today, most ARMs are 1-year

o Amortizes over 30 years, however, rate adjusts over the life of the loano 3 and 1 locked for 3 years and adjusts every year

Could have 5 and 1; 5 and 5; etc.y Adjustments are tagged to LIBOR

o Lender then adds on a point spready Typically include caps 2 and 6

o Rate cannot change by more than 2%, up or down, in a given yearo Rate cannot change by more than 6%, up or down, over the life of the loan

y Assume rates are going up:o Better to have a fixed rate loan

y Assume rates are going down:o Better to have adjustable rate product

y If borrower knows they will DEFINITELY move in 5 years:o Even if rates going up, ARM might be a good option

5-1ARM might give a cheaper rate than a 30-year fixedy Convertible loans

o Allows an ARM to be changed into a Fixed at the prevailing ratey Prepayment

o Residential:o Historically, residential loanshad pre-payment privileges

Allowed to pre-pay all/part of the loan without penalties or interesto Predatory lenders added pre-payment penalties in order to make the mortgage marketable

as part of a security for purchase by institutional lenders


19/22

Generally an exception rather than ruleo Commercial:o Can get a 30-year fixed from FannieMae

Commercial clients dont like themy Too many administrative requirements

o Can slow/prevent a saley Loans dont go away

o Cannot be pre-paid without penalty Often equivalent to the amount lender WOULD HAVEMADE

o New conditions can be imposedy Do not permit 2nd mortgagesy If property appreciates in value, there is a higher LTV ratio??

o What constitutes a pre-payment? What if lender defaults and the lender forecloses?

y Is this a pre-paymenty Often times will trigger the pre-payment penalty

o De-incentivize people to go into foreclosure in order to get out ofthe mortgage

Condmenationy Probably does not trigger pre-payment

Catastophic lossy Probably no pre-payment penalty

y Foreclosureo Strict foreclosure state (Titlestate)

At loan initiation, the title immediately passes to the lender Lender actually holds the title to the property

y Expedites the foreclosure processo Lien States (IL, most others)

Mortgage issimply a lien on the property Title remains with the borrower/home owner during life of the loan/foreclosure Giving of an actual deed in order to get a loan does not constitute a conveyance of

deed

y Instead is just a lieno Hybrid

Title passes upon defaulty Short Saley Home issold for a price less than what is owed on the loan

o Borrower either unable to pay or no longer wants to payy Lender options:

o Deal with foreclosure If there is a foreclosure, borrower might still be on the hook for the amount

remaining on the loan

o Short Sale Lender must agree to take the lower price How will it affect the borrowers credit?

y Will it be treated as a default


20/22

Does not necessarily relieve the borrower of responsibility for the remainingamount

y Lender can sue borrower and get a judgment for the deficiencyy Can contract a release for the borrower on the deficiency

y if enough foreclosures occur in a particular neighborhood, the foreclosure priceBECOMES themar

ket price

o particularly problematic for good borrowers in the areay Many borrowershave a job, but they owe more than what the property is worth

o Even good borrowers are choosing to stop paying/walk away from the propertyy Deed in Lieu

o Borrower simply hands the deed to the Lendero Lender takes title subject to all existing liens

Can take through foreclosure process in order to eliminate the liens Foreclosure is the process by which loans are repaid and title is cleared of

existing liens (including mortgage, mechanics liens, etc.)

y NEGOTIATINGA RESIDENTIAL REAL ESTATE TRANSACTIONy Earnest money generally held in escrow by real estate agenty Mortgage contingency

o Buyers responsibility Must make a good faith effort

o Generally have to alert the seller if they fail to secure a loano Loan review = 30-60 days

y Possession should be tied to closingo Seller should not allow early possession

y Sellers disclosures:o Failure to disclose probably would NOT void the contracto Would most likely lead to damages for Buyero Does allow Buyers to back out of the transaction

If fraud, would have cause of action, but cannot undo the saley Taxes paid in arrears

o Taxes paid on PREVIOUS yearo At time ofsale, the Seller will likely be responsible for some part of the taxes for the

previous year when they were living in the house

y Attorney approval ruleo Lawyer can make alterations to the signed K.

Can disapprove the K on any term EXCEPT purchase price Can propose modifications

y Deedo Specificed in K how the title is conveyedo Transferred by warranty deed

y Titleo SELLER pays for title insurance to protect the BUYER

y Plat ofsurveyo In Chicago, Sellers must pay

Important due to encroachments/other overbuildingo Downstate IL, survey generally not done


21/22

survey less important since there is more spacey Short sale (pg. 149)

o Getting lender to agree to release the mortgage for lower amount than the mortgage debt Release mortgage lien and allow transfer of the property to 3rd party Lenders can avoid foreclosure problems

o Negotiated matter between owner and lender Usually take at least 6 months Not an easy solution MUST negotiate whether debt will be released/surrendered

y Owners presume, and sometimes not in writingo Local court rule in Cook that deficiency in foreclosure is NOTPERMITTED to be collected

Not differentiating between good faith (cant pay) and bad faith (walk away)default

y Closingy Seller drives the process

o Prepares the deedo Arranges for attorneyo Prepares a bill ofsale for personal propertyo Chicago Zoning and Water certificates requiredo Written Mortgage pay-off amount from mortgage lender

will release the mortgage upon payment of X dollarso Condo board must waive right of first refusalo Condo assessments

y Buyerso Money

More than $50K must be via wire transfer GoodFunds Ruleo IL Certificate that loan the buyer taking out is not from a Predatory Lender

Mortgage must be registered with the state for good-nesso TILAstatemento HUD statement GFE Sheet

Discloses the exact terms of the loan to the buyery Charges in connection with the loany What is the true cost of the loan

good faith estimate must match what happens at closingy If provisions of loan at closing are different than GFE,

o Buyer can choose not to close; ORo lender eats the difference

y TITLE INSURANCEy Commitment for Title Insurance

o ALTA promulgates title insurance policyo Commitment by title company that if certain payments made, then title insurance policy will

be issued

Title insurance policy protects the insured from problems with titleo Low risk

Title searches/examination Mitigation of problems

o Intended as an insurance product


22/22

SC hassaid that it is NOT an information producty NOTsubject toMormanDoctrine (liability for negligence)y No liability outside the four corners of the insurance

o Title commitment is conclusive evidence of marketable titleo Buyer could be contractually bound to accept insurable defects

Marketable title different from insurable titleo Seller pays for title insurance for Buyero Buyer pays:

Mortgage policyy Insurance for the lender (covers the same things as title insurance)

Closing costs on the loany Standard Exceptionsy Items that effect title but not shown by the record

o Adverse possessiono Encroachmentso Easementso Mechanics liens

y Special Exceptionsy Marked up commitment exceptions are waived by Title Company

RE Transactions Notes

Documents

Transcript of RE Transactions Notes