Class 1: Land Transactions

Question 1

Are there high transactions costs to buying a home?

Answer 1

Yes

Question 2

What does it mean when they say real estate contracts are executory?

Answer 2

It means that title is not give automatically by singing the agreement because both parties must do certain things between the time of the contract and closing. Example: getting inspection, getting mortgage etc.

Question 3

What are some examples of things buyers need to do between the purchase agreement and closing?

Answer 3

Get a title search

Get a mortgage

Get a inspection

Question 4

What is the SOF? What is its purpose?

Who needs to sign the deed? Buyer or seller?

Answer 4

The SOF says no interest in land can be created to transferred except by a written interest signed by the party to be bound.

Purpose is to make people more secure in real estate transactions

Deeds ONLY need to be signed by the seller

Question 5

Do all states have there own SOF?

Answer 5

YES based LARGELY on the original

Question 6

What are the three basic requirements under the SOF? (SAME AS CONTRACT LAW)

Answer 6

A deed/paper with:

1) Signature by the party sought to be bound (The Seller)

2) A property description

3) A price (DOES NOT NEED TO be the actual price)

Question 7

If there is an agreement to sell the house without a price, is it automatically against the SOF?

Answer 7

Usually but some courts may imply an agreement to pay a reasonable price if no price is stated, but this is RARE.

Question 8

What if:

O, owner of Blackacre, executes and delivers a deed for Blackacre to her daughter, A, as a gift.

Subsequently, O tells A that she would like Blackacre back, and A, a dutiful daughter, hands the deed back to O and says, “The land is yours again.” O tears up the deed.

Who owns Blackacre?

Answer 8

A owns Blackacre. Since title passed to A by the deed from O, the Statute of Frauds requires a deed from A to O signed by A to pass title back to O.

Question 9

Stambovsky v Ackley

Facts: There was ghosts not disclosed. It was haunted.

Issue:

What was the ratio about material defects?

Answer 9

Ratio: The seller has a duty to disclose all material defects that they know about, whether they are asked about it or not.

Question 10

What does it mean when they say a state has a disclosure statute? (think material defects)

Answer 10

If they have a disclosure statute, then these statutes require the seller to deliver a written statement disclosing facts about the property.

Question 11

What are the two tests to determine if a defect is material in real estate?

(objective v subjective test)

Answer 11

Two tests to determine if the defect is material:

1) An objective test looking to whether a reasonable person would attach importance to the defect in deciding to buy, OR (the majority view)

2) A subjective test of whether the defect affects the value or desirability of the property to the buyer. (the minority view)

Question 12

What is a stigma statute?

Provide an example

Does Michigan have one?

Answer 12

Some states have enacted statutes that shield sellers for failing to disclose conditions that might “stigmatize” property.

Examples: a murder in the house, that it might be haunted, that someone died of some infectious disease in the house, etc.

Michigan has yet to address the issue in case law or by statute.

Question 13

Explain what the merger doctrine is when it comes to the purchase agreement and the deed?

What is the effect of this? (aka who cares about this doctrine)

Answer 13

The purchase agreement merges into the deed

Merger doctrine: When a buyer accepts a deed, the buyer is deemed to be satisfied that all the contractual obligations in the purchase agreement have been met.

The purchase agreement is said to MERGE with the deed.

Effect: The buyer can no longer sue the seller based on the promises in the purchase agreement. The buyer can only sue based on what’s in the deed.

Question 14

What is the implied warranty of quality for builders and developers?

Is it strict liability?

Answer 14

Majority Rule: As a matter of law, a builder or developer of housing gives an implied warranty of quality or skillful construction in purchase agreements for new builds. Usually only applies to significant defects in construction.

Lawsuits based on this warranty can usually only be had once closing has taken place (because the buyer can sue based on the purchase agreement before closing)

This implied warranty does NOT impose strict liability in most states. That means the builder/developer is liable ONLY if they fail to exercise the standard of skill and care customarily used (a negligence standard).

Question 15

If there is a breach of the purchase agreement, what are 3 remedies the party who is not breaching can go for?

Answer 15

If a purchase agreement is breached, there are three remedies available for the NON-BREACHING PARTY:

1) Damages

2) Retention of the deposit (if buyer breaches) or refunding of the deposit (if seller breaches);

3) Specific Performance

NOTE: Generally, the winner of the lawsuit may elect which remedy he or she prefers. (But specific performance is harder to get for seller’s than for buyers.)

Question 16

What is specific performance?

Is it commonly used for land lawsuits?

Answer 16

It is a judicial order that a breach contract be fulfilled as originally agreed.

This is a very common remedy for sales of land – but not common in the sale of goods (because goods are fungible)

The theory is that each piece of land is unique, so if the party wants specific performance, they should be able to get it.

An aggrieved buyer or seller is broadly entitled to elect the specific performance remedy.

Question 17

If the buyer breaches the purchase agreement, what happens to their deposit?

What is the majority typically?

What is the limit of this as a %?

Answer 17

General Rule (Majority): when a buyer breaches a purchase agreement, the seller may elect to retain the deposit because of the difficulty of estimating actual damages. (aka if I lost money because you breached I keep your deposit for my damages)

Retention of up 10% down is considered a reasonable amount in the absence of a liquidated damages provision.

Question 18

What are the three types of deeds? Explain all three

Answer 18

General Warranty Deed: warrants title against all defects in title, whether they arose before or after the grantor took title. [Property sold with this deed sells for more than the others.]

Special Warranty Deed: warrants title against the grantor’s own acts (but not of acts of others who came before the grantor). [Sells at a 19% discount to general warranty deed property]

Quitclaim Deed: contains no warrants of any kind. It merely conveys whatever title the grantor had – no matter how bad or good it is. [Sells at a 50% discount compared to General Warranty Deed property]

Question 19

In the deed, does price need to be explicitly stated?

Does price need to be actually in it?

Answer 19

General practice: It is customary to state in the deed that some consideration was paid for by the grantee, which raises the presumption that this buyer was a bona fide purchaser for value.

Doesn’t need exact price.

Question 20

If a deed is signed by the seller, given to the buyer but it is not notarized. Is it valid?

Is it recorded without if it wasn’t notarized?

Answer 20

YES. General rule: In most states, a deed signed by the grantor (seller) and delivered to the buyer is VALID without acknowledgement by a notary public.

BUT to be recorded, the deed needs to be acknowledged by a notary public. Recording gives the world notice of the buyer’s interest.

Question 21

What happens if there is a forged deed? Whats the general rule?

Who wins if there is forgery?

Answer 21

Rule: A forged deed is a void deed.

Who prevails when there is a forgery?

The grantor whose signature was forged prevails over all other people, including subsequent bona fide purchasers for value.

Question 22

What if there is fraud regarding the deed?

Answer 22

Most courts hold that a deed procured by FRAUD is voidable against the grantee.

But the grantor bears the loss against a bona fide purchaser for value who in good faith buys from the fraudulent grantee.

Question 23

What are the six covenants in a general warranty deed?

Explain each one

1. Covenant of Sesin
2. Covenant of Right to Convey
3. Covenant against encumbrances
4. Covenant of general warranty
5. Covenant of quiet enjoyment
6. Covenant of Further Assurances

Answer 23

(1) A covenant of seisin – The grantors warrant that they own the estate they are trying to convey.

(2) A covenant of right to convey – the grantor warrants that he or she has the right to convey the property.

(3) A covenant against encumbrances – the grantor warrants that there are no encumbrances on the property that are not disclosed. These typically include mortgages, liens, easements, and covenants.

(4) A covenant of general warranty – the grantor warrants that he or she will defend against lawful claims and will compensate the grantee for any loss that the grantee may have because of someone else’s superior title.

(5) A covenant of quiet enjoyment – the grantor warrants that no one with superior title will disturb the grantee’s possession and enjoyment of the property.

(6) A covenant of further assurances – The grantor promises to execute any other documents required to perfect the title conveyed.

Question 24

Of the six covenants, what are the present convents?

What are the future covenants?

What do either mean?

Answer 24

The first three covenants are called “present covenants.”

A present covenant is broken, if ever, at the time the deed is delivered.

The statute of limitations begins to run on a present covenant when the deed is delivered.

Question 25

Brown v Lober

Facts: Brown bought property from someone else that had a coal mine. In the future (24 years later) they tried to sell the right to mine coal on their land to a company. Figured out during a title search, they don’t own the mineral rights as it was already sold. They sue the previous owners as they were never informed. They cannot sue on the present covenants because the SOL ran on them.

Issue: Can they sue on future covenants?

Answer 25

No. You cannot sue on a future covenant because you were not evicted. With mineral rights, you cannot be evicted and thus cannot sue on the future covenant. Once you get passed the SOL you need to wait for someone to oust you/assert their rights before you can sue under the warranty.

To sue on a future covenant, you need to be evicted.

Question 26

Does a deed need to be delivered?

Answer 26

Rule: To be effective, a deed must be delivered with the intent that it be presently operative.

Note: Delivery is rarely an issue in commercial transactions. They occur more in donation/gift transactions.

.

Question 27

What are the two types of collateral for mortgages?

(aka what are the two residential types)

Answer 27

Types of Collateral:
Residential
1 to 4 family homes (up to 4 units)

Commercial
Larger apartments & non-residential

Question 28

What is the difference between a permanent loan or a construction loan for houses?

Answer 28

Perm on completed existing buildings

Construction loans finance development projects

Question 29

Tell me about government insured mortages.

What about conventional mortgages?

Answer 29

Government-Insured (FHA, VA)

Include “mortgage insurance,” allows higher L/V ratio
More “red tape,” longer approval process
No “due-on-sale” clause

Conventional
Normally max L/V=80%, unless private mortgage insurance (PMI)
Majority of all loans before & after “Mortgage Crisis”

Question 30

What two documents do mortgages need?

Answer 30

Mortgages have two parts (documents):
(1) Promissory Note (Contract) establishing debt.

(2) Mortgage Deed: Secures debt with real property collateral (potentially conveys title if certain conditions are met).

Question 31

What are the two legal bases of mortgages?

(Lien Theory and Title Theory, what are they)?

Answer 31

“Lien Theory” (most states): borrower holds title, lender gets lien.

“Title Theory” (a few states): Lender holds title.

Question 32

What are the two rights of redemption?

EXPLAIN

(WILL BE ON EXAM)

Judicial and Statutory

Answer 32

Judicial Right of Redemption: This is the right that courts (using their equitable powers) give to borrowers. It allows buyers a reasonable time to pay back any past payments BEFORE the court will order a foreclosure.

Borrowers have a right to redeem up until the court issues a foreclosure. (That’s what foreclosure means. The foreclosure of the borrower’s right to redeem.)

Statutory Right of Redemption: This is a time period AFTER foreclosure that the borrower has to recover the property.

The borrower must pay all back payments, interest, foreclosure fees, etc.

Question 33

Talk about redemption in Michigan

Answer 33

6 months for most situations when the borrower owes more than 2/3 left on the mortgage

1 year if the borrower owes less than 2/3

Up to 12 months for farming property

Question 34

x

Answer 34

x

Question 35

What is the difference between title assurance v title insurance?

Answer 35

Title Assurance is a broad term including surveys, maps, title opinions, anything having to do with title to property

Title Insurance is a specific contractual obligation

Question 36

What is at the heart of the title assurance system?

Answer 36

The Public Records System – that is, the place where documents impacting land are recorded (deeds, mortgages, leins, etc).

This is where title searches happen.

Why title insurance if we do a title search? Because public records are not always perfect, so title insurance serves as back-up to the recording system.

Question 37

What title system does CND use?

How does it work

Answer 37

A Torrens Title System

How does Torrens work?

Owners are issued a Torrens Certificate (also referred to as a certificate of title). This Certificate assigns unassailable ownership of real property to the registered titleholder.

The certificate acts as the ultimate authority on the title to a property, and its legal supremacy makes recording deeds unnecessary.

Some US states follow this approach: NY, North Carolina, Colorado, etc.

Question 38

How does the US recording system work?

Answer 38

Began in the 1640s: Public recording of deeds, mortgages, leases, and other instruments impacting title began being publicly recorded in the US (in Plymouth and Mass Bay colonies).

Note: This was not an English custom.

Every state has a Recording Act mandating what records need to be kept regarding the land in that state.

Note: Recording does not impact the validity of the deed

Question 39

What three functions does recording serve?

Answer 39

(1) It creates a public database that anyone curious can search to find who owns a certain piece of property.

Wills, Trusts, affidavits of inheritance are all capable of being recorded by most recording statutes.

(2) The recording system preserves important documents in a secure place (so they can’t be easily lost or misplaced).
This helps in judicial proceedings because the original doesn’t need to be accounted for.
A notice of lis pendens (a pending judicial action) can be recorded too, which gives notice to the world that some claims have been (or are being) litigated.

(3) Recording protects purchasers for value and lien creditors against prior unrecorded interests.

Question 40

What if:

O mortgages Blackacre to A, but does not record the interest. O then later conveys Blackacre to B, who does not know of the mortgage.

What happens at common law?

Under most recording acts?

Answer 40

At common law, B takes the land subject to A’s mortgage because title was determined (at common law) by the timing of the conveyance, and A got a mortgage on Blackacre first.

Under most recording acts, a subsequent bona fide purchaser is protected against prior unrecorded interests. So B would be protected.

Important: The common-law rule of “first-in time, first-in right” continues to control UNLESS the person can qualify under the state’s recording act (which most people can).