Real Estate Transactions

Question 1

What are fiduciary duties?

Answer 1

1 Duty of loyalty - client interests above own
2 Duty of confidentiality - can’t tell private/sensitive info
3 Duty of disclosure - I must tell my client things they would really want to known
4 Duty of competency

Question 2

Types of brokers & their descriptions

Answer 2

Listing agent = puts house on market/advertises it (duties to seller)
Selling Agent = subagent of the listing agent (& thus agent of seller)
Buyers Agent = agent of buyer, but seller pays agent’s commission normally (buyer liable if
Dual Agency = represents both. Must tell both parties of the dual agency. Cannot disclose confidential info.
Transaction Broker = non-agent. You don’t owe anyone particular fiduciary duties

Question 3

Broker’s duty to disclose

Answer 3

Broker has a duty to disclose to a buyer (1) material, (2) latent defects (3) known to the broker.
(or “should have known” after a “reasonably competent and diligent inspection” Easton v. Strassburger).

Question 4

When is broker commission earned? When is it payable?

Answer 4

Earned Upon finding a “ready, willing and able buyer who is accepted by the seller.”

Payable at Closing

Question 5

Broker Commission: What if there is no closing? Does the broker still get commission?

Answer 5

Traditional rule
- A broker is still 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.
1 STILL has to pay. Seller bears risk of buyer default…

Dobbs Rule (minority)
- Broker NOT entitled to comission, so broker bears risk of buyer default.
1 “Imbues all broker listing agreements with the implied condition that commission is due only if the underlying real estate transaction is consummated.”

Exception to Dobbs Rule
- Breaching seller (or improper/frustrating conduct by seller). Seller still has to pay.

Question 6

Listing agreement types & descriptions

Answer 6

Exclusive Right-to-Sell
- The sale of the property during the contract period, no matter who made the sale, obligates the owner to pay commission to the listing broker (most popular)

Exclusive Agency
- Authorizes only one broker to sell the property but also allows the property owner to sell property themselves without paying commission.

Open
- Property owner agrees to pay listing broker commission if that broker effects the sale of the property, but also retains the right to sell property himself and procure services of other broker in the sale of property.

Question 7

PSA v. Installment Contract

Answer 7

PSA
- Must sign + give “earnest money”
- Earnest money = to show you are sincere about buying (diff than down payment)
- Seller delivers possession AND deed at closing. (executory period short)
- Buyer pays ENTIRE purchase price at closing through down payment + loan proceeds

Installment Contract
- Sign + deposit
- Seller immediately delivers possession.
- Buyer pays purchase price in installments
Deed is delievered only once last payment is made (executory period LONG)

Question 8

A well drafted PSA should

Answer 8

1. Legally obligate the other side to perform
2. Roadmap the deal (set out path for closing)
3. Manage risk (with conditions, disclosures, etc.)

Question 9

PSA Statute of frauds analysis

Answer 9

1. Is the given contract within the statute of frauds? (property interest in land?)
2. (if so,) is there a qualifying writing?
   - Essential terms: Property; Price; Parties
   - Signed (any written identification) by the party it is being enforced against
3. (if no qualifying writing,) does an exception apply?
   (a) Part Performance
   (1) buyer pays part or all of the price, and
   (2) buyer either
   - (a) takes possession, or
   - (b) makes substantial improvements to the land

(b) Estoppel / Reliance
Restatement 129 – may enforce K notwithstanding failure to comply with SOF if in reasonable reliance, the party seeking to enforce has so changed his position that injustice can be avoided only by specific enforcement.

Question 10

PSA conditions v. covenants

Answer 10

Covenants = promises a contract obligates a party to perform or be liable for breach.

Conditions = Statement that a party’s obligation to perform some covenant is dependent upon the happening of a specified event or occurrence.

Question 11

Role of PSA conditions

Answer 11

Buyer’s “get out of deal free” card
- Manage informational risks (can walk away or change based on info acquired)
- Manage performance risks (pre-requisities and co-requisites to required contractual performance)
- Manage temporal risks (can walk away if certain things happen)

Question 12

Four questions for drafting Conditions

Answer 12

1. For whose benefit is the condition (who can waive it)?
2. Exactly what satisfies the condition?
3. Who is obligated to do what acts in connection with fulfilling the condition?
4. What happens if condition isn’t fulfilled?
   - End of contract? Refund?
   - Opportunity to cure? By who? More time?
   - Price abatement? How is it calculated?
   - If there are multiple options, who gets to choose?

Question 13

Boyack’s quote for drafting conditions

Answer 13

“A well drafted contract condition will not just anticipate and allocate a risk, it will also address the consequences of that risk occurring”

Question 14

PSA Remedies: Expectation Damages

Answer 14

Lost benefit of the bargain
- If buyer breachers = purchase price - FMV @ breach
- If seller breaches = FMV @ breach - purchase price

+ Other losses caused by breach (IF foreseeable [Hadley v. Baxendale])
- Incidental (costs finding substitute performance)
- Consequential (other loss caused bc of breach i.e. reasonably certain lost profits) (f the costs would have incurred anyway then its not consequential)

Big Challenges calculating expectation damages in RET
- Timing issues (fluctuating real estate market)
- Difficulty calculating FMV in absence of price
- Determining limits of foreseeability in consequential and incidental

Question 15

PSA Remedies: Reliance Damages

Answer 15

Alternative measure of damages

Could include:
- Costs of due diligence
- Costs of preparing for closing
- Broker commissions (maybe)
- Must be reduced by costs avoided (duty to mitigate)

Question 16

PSA Remedies: Liquidated Damages

Answer 16

Only enforceable if:
1. The anticipated damages would be difficult to accurately calculate
2. Stipulated damage amount is reasonable compared to anticipated or actual damages (closer to one the less close it has to be to other)
3. Liquidated damages provision is not intended to be a penalty.

Question 17

PSA Remedies: Specific Performance

Answer 17

Available only if
1. Non breaching party:
(a) Has no adequate remedy at law
Presumption of inadequate remedy at law for buyers of real property (unique. no true substitute.)
Even apartment/condo units are unique (prev owners could have made improvements or what not) - Centex Homes
(b) Has “clean hands”
(c) Remains ready, willing & able to perform

2. AND the relief requested:
   (a) Does no harm to innocent 3rd parties (already sold to 3rd?)
   - If seeking SP, make sure lis pendens & record real prop is directly involved in lawsuit so no one can be innocent 3rd
   (b) Is practicable for the court to oversee
   (c) Is fair & in the interest of justice

Question 18

PSA Remedies: Specific performance for the seller?

Answer 18

A little harder to justify.
Majority view = since its always avialable for buyer it should be always available for the seller. They bargained out of market risks.
Minority (and Boyack) think this is BS. Money is so freaking fungible.

Question 19

PSA Time & Tender Clause

Answer 19

“Time is of the Essence” clause makes not closing on closing date a material breach.
- If no time is of the essence clause = split in jur if not closed on time. Some say its partial breach. Some say no breach at all.

Can unilaterally make time of essence even if K doesn’t mention it as long still as reasonable time out.

Question 20

Seller’s duty to disclose property defects

Answer 20

Common Law (minority)
- Caveat emptor (buyer beware) . . . But seller cannot lie about or hide facts. (misrep and fraud concealment both still claims)

Modern Rule (majority)
- Adds fraudulent omission (passive concealment as a claim)

Question 21

Seller Liability: Misrepresentation / fraud

Answer 21

lying about factual assertions

Question 22

Seller Liability: Fraudulent concealment

Answer 22

Actively hiding the truth (if seller creates a misimpression, seller must clarify it)

Question 23

Seller Liability: Fraudulent Omission (Passive Concealment)

Answer 23

1. Known by seller (actual, but can be circumstantial evidence) (see Jensen v. Bailey (maybe unjust to charge seller with liability on imputed knowledge + alienability))
2. Material (effect the value of the property in a significant way)
3. Latent (unknown/unknowable to buyer)

Question 24

Seller Liability: Duty to disclose offsite/neighborhood impacts?

Answer 24

“Must disclose material things in the community but not something that is a transient (temporary) issue” - Strawn v. Canuso

Question 25

Implied Warranty of Quality (of construction)

Answer 25

Implied promise made by the builder/seller of a home that:
- The home was built using good quality materials
- The home was built with good quality methods (good workmanship/construction)
- The home was built in compliance with applicable housing codes

Question 26

Seller Liability: statute of limitations & statute of repose

Answer 26

The action must be brought within the statute of limitation dsf

Question 27

Seller Liability: statute of limitations & statute of repose

Answer 27

The action must be brought within the statute of limitsadf

Question 28

Seller Liability: statute of limitations & statute of repose

Answer 28

The action must be brought within the statute of limitations (usually triggered by “discovery rule”) and any applicable statute of repose (e.g., within 10 years of sale, regardless of discovery)

Question 29

Implied Warranty of Quality & Subsequent Purchasers

Answer 29

Modern majority = extends to subsequent purchasers within a reasonable time (Speight v. Walters)
Traditional = only extends to direct purchaser in privity of contract.

Question 30

Can you disclaim the implied warranty of Quality?

Answer 30

Implied warranty of quality can be disclaimed but disclaimer must be clear and unambiguous (probably expressly mentioning the warranty of quality). Courts will STRICTLY construe against defendant in any ambiguity.

Question 31

What situation would a statute prohibit the filing of a claim for breach of implied warranty of quality?

Answer 31

Notice and repair statute may prohibit filing until notice and some express time to cure

Question 32

If PSA is SILENT as to title condition contingency

Answer 32

Marketable Title
“the kind of title that a well-informed and prudent person with full knowledge of facts and law would be willing to accept”

Generally:
1. Free from liens & other encumbrances (except for known ones expressly waived by Buyer in PSA);
2. No serious (title) defects;
3. No doubtful question of law or fact;
4. No exposure to litigation;
- Easements/covenants generally render title unmarketable because if they are breached there would be immediate threat of litigation
5. No foreseeable problem w/ peaceful enjoyment

Question 33

Express title conditions: Insurable title

Answer 33

Likely a lower standard than marketable.

Just that a title insurance company will insure the title.

Question 34

Express title conditions: record title

Answer 34

If you look at the record, it says you have title (FSA).
- Good… but not sufficient. Records can easily be wrong.

Question 35

Express title conditions: what does “free from” mean?

Answer 35

Covenant promises in the title

Question 36

Express title contingencies: what does “subject to” language mean?

Answer 36

Categorical exceptions to whatever title they are promising!

Make sure to carefully look at what is after “subject to” and see if anything is a problem.
“subject to all matters of the record” is a problem for buyers. Probably wont even see the record until after closing…
As a seller: important to include anything after “subject to” that COULD be an encumbrance so you don’t promise what you can’t deliver.

Question 37

Title Risk Conditions: what should the buyer and seller practically want to include?

Answer 37

Buyers should
1. Provide the ability to check title during the executory period (title search, report)
2. Provide the ability to walk away and get deposit if title is suboptimal.

Sellers should
1. Limit the time for buyers to check title and confirm acceptance of it
2. Opportunity to cure provision?
3. Limit buyer’s ability to walk away (no free option)

Question 38

Doctrine of Merger

Answer 38

At closing, title promises in the purchase contract are considered fulfilled or waived when deed is delivered. (Translation: after closing, there can be no more title claims under PSA)
- This means buyers need to be sure to check the state of the title before closing!! Recorded matters, matters on the ground. . . Duty to inquire.
- Exceptions only if clearly intended to survive.

Can buyer sue grantor on anything then after closing?
- Deed covenants.

Question 39

Equitable Conversion: Blackletter Common Law

Answer 39

Once the buyer has the right to specifically enforce a sale contract, then the buyer becomes the EQUITABLE owner of the real property, and the seller retains the LEGAL title holder with the personal contract right to collect the purchase price.
- Buyers interest is converted to real property
- Seller’s interest is converted to personal property only.
— No longer has real property interest

Question 40

When does equitable conversion happen?

Answer 40

Title splits when buyer has right to specifically enforce the contract.
If the seller still has a contingency unfulfilled you have a problem… but if the buyer still has an unfulfilled contingency, no problem bc they can waive it.
Legal and equitable title merge back together at closing.

Question 41

What happens to changes in property value during equitable conversion period?

Answer 41

Traditional (default) rule
- Buyer gets the upside and the downside of market, legal, and discovery-based changes.
- BUT buyer also gets the downside only risks of condemnation & casualty.

Some states have changed the rule to shift the risk of loss to the buyer at different times (date of closing, closing, actual possession)

Uniform Vender & Purchaser Risk Act
- If NEITHER possession nor legal title has been passed:
— If all or a material part of the property is destroyed, then the seller can’t enforce, and purchaser can recover deposit.
- If EITHER possession or legal title has been transferred:
— If all or any part of the property is destroyed, then the purchaser isn’t relieved from a duty to pay the price and cannot recover any deposit.

Question 42

Equitable conversion risk allocation in practice

Answer 42

You can draft around the default rule if you want. If you allocate risk a specific way, the contract controls.

Question 43

Types of warranty deeds

Answer 43

General Warranty Deed = everything in past
Special Warranty Deed = only while owner owned it
Quitclaim Deed = no title promises. You get what I had, whatever that was.

Question 44

Present covenant types

Answer 44

1. Seisin = grantor is in legal possession
2. Right to convey = grantor has legal right to convey
3. Against encumbrances = grantor promises there is no right or interest in a 3rd party that diminishes the value of the title

Question 45

Present covenant breach and recovery

Answer 45

Breach Occurs At closing

Can only sue your IMMEDIATE grantor.

Question 46

Types of future covenants

Answer 46

Quiet Enjoyment = someone with superior title won’t interfere w/ possession. Requires actual/constructive eviction (SOL runs from that time).
Warranty = grantor warrants to defend grantee in future if QW violated
Further Assurances = promise grantor will perform necessary future actions necessary to perfect title

Question 47

Future covenant breach and recovery

Answer 47

Breach Occurs At ouster / eviction
- The mere existence of a superior title does not constitute a breach of a future covenant. (Brown v. Lober)
A party must be prevented or hindered from possession by someone having better right
- Must “feel the pressure” of the superior title.

Who can you sue?
Can sue immediate or REMOTE grantors (covenants run with the land)

Question 48

Recovery under deed covenants — things to remember

Answer 48

1. Deed covenants are personal to the grantor.
2. Damage for loss or dispossession = value of the property (or portion lost) calculated at the time of delivery.
   - Grantee not compensated for losses of value resulting from improvements, applications, market changes, etc.
3. Damage for removable encumbrance = cost actually incurred to remove the encumbrance
4. Know when breach occurs (present v. future). SOL starts from that date.

Question 49

Deed requirements and best practices

Answer 49

Requirements:
1. Identification of Grantor and Grantee (BP: correctly named)
2. Real property is adequately described
3. Signed by grantor & delivery of the deed
4. Deed contains present tense operative words of grant (future language is a contract, not a deed)
- Ex: “I hereby agree to grant” DOES NOT WORK. “I hereby grant” works.
5. Deed contains accurate Habendum clause (states the quality of the estate, especially if it is less than a FSA)
6. Recordation requirements for notice (BP: have grantor’s signature notarized (usually required to be recorded))

Best practices:
In writing

Question 50

When does a deed become operative?

Answer 50

Delivery

Question 51

Deed consideration requirement

Answer 51

The deed is NOT a contract. Consideration is not required (Slaick v. Arnold)

Question 52

How to interpret deed description of real property

Answer 52

Deed description MUST SPEEK FOR ITSELF “deed ipsa loquitor” clear on its FACE
Deeds are like diamonds (last forever) so can’t use testimony to clear up ambiguities.
Courts are more likely to interpret deeds as written (AMOL)

Question 53

Types of deed real property descriptions

Answer 53

1. Metes & Bounds
   - Start at “point of beginning” and “walk the boundary” based on instructions back to POB.
2. US Gov’t Survey
   - Gov mapping – divided US by lines and such.
3. Plat Reference
   - Used locally where land is platted (streets, blocks, lots, etc.). Accuracy depends on reference plat, but this is the easiest sort of description.

Question 54

Your best friends when reviewing bad legal descriptions

Answer 54

1. Surveys
   - Allows you to do a reasonably thorough review of a legal descirption
   - Shows the recorded lines, occupied areas, location of improvements, off-record risks (visible easements, parties in possession, etc.)
2. Adverse possesion
   - Messy historical problems can be wiped away. Start with a clean state.

Question 55

Elements of legal delivery

Answer 55

1. Grantor’s intent to PRESENTLY (immediately) convey
2. Actual physical transfer of control
   - “physical relinquishment of control” (but intent more important see Wiggil v. Cheney).
   - Recording the deed to someone else can be relinquishment
   - Entrusting deed to an agent with right to take it back is not letting go.
3. Acceptance (usually presumed)

Question 56

Does the physical deed matter?

Answer 56

After deliver the physical deed doesn’t matter.

Question 57

Delivery through escrow

Answer 57

A deed can be delivered via TRUE escrow as long as there is no discretion to take back the deed.
If this happens, the date of transfer typically relates back to the delivery to the escrow agent.

Question 58

True Escrow elements

Answer 58

1. Independent third party with instructions to deliver to grantee based on certain conditions PLUS (true elements)
2. Grantor must not reserve any power to recall it, and
3. The parties must have entered into an enforceable contract of sale (unless the transfer is a gift)

Question 59

Escrow agreement practical tips

Answer 59

1. ALWAYS use a written escrow agreement
2. Draft an escrow agreement like a computer program (if x, then y) NO DISCRETION
3. If you’re an escrow agent, unless there’s party agreement or 100% clarity from the agreement: do nothing.

Question 60

Title recording system types

Answer 60

Grantor-Grantee index
- Super cumbersome
- Sorted by names. Have to go to name, see who granted to them, then go to that name, etc.
- THEN once you find original owner, you have to go back the other way to look for adverse interests)

Tract Index
- Sorted by property. Much easier to search (harder to create)

Question 61

Wild Deed

Answer 61

Deed that is not properly connected to the chain of title because a predecessor recorded it wrong.
Courts have uniformly ruled that a “wild deed” does not give constructive notice to subsequent purchasers, even though its technically on the record (it’s not findable)

Question 62

Will perfect searches of the official records reveal all title defects?

Answer 62

No. Careful title search in the recorder’s office will not reveal all significant title defects due to off record claims (need to go broader than actual record: probate, wills, etc.)

Question 63

Mechanic’s Lien & priority

Answer 63

Laborers and suppliers may file claims of lien to recover money owed. They have a certain amount of time to file one after completion of their work, but once they file it, the priority of the lien relates back to the date the work/project started.

Issue because you can have looked at the record and it appeared clean… but then this gets related back.

Question 64

Purchase option v. right of first refusal

Answer 64

Purchase Option = can TRIGGER sale.
Right of First Refusal = cannot trigger sale. Only has to be first offer when owner decides to sell.

Question 65

Recording acts purpose

Answer 65

Determines priority between parties claiming interest in the same property. Applies regardless of the size of title (FSA, mortgage, etc.)

Question 66

Title contests & recording acts foundational rule

Answer 66

Foundational Rule = First in time, first in right, unless subsequent taker can demonstrate the applicable recording act grants them title free and clear of the prior interest

Question 67

Title contests and recording acts: first two steps

Answer 67

1. First in time first in right for all first-in-time transferees who IMMEDIATELY RECORD.
   - If this happens ^^ don’t ever need to look at recording act. A always wins.
2. Recording Acts only protect PURCHASERS (not donees)
   - Purchaser = acquired interest in exchange for value
   - Prior purchaser can be donee – only care about the subsequent one.

If you have no immediate recordation AND a subsequent purchaser, you have to determine the scope of the applicable recording act

Question 68

Recording Acts: When does a subsequent purchaser have superior title free and clear (rather than subject to) the unrecorded interest?

Answer 68

1. Notice = if subsequent purchaser is a BFP
2. Race = if subsequent purchaser records first
3. Race-notice = if subsequent purchaser is a BFP AND records first. (if they do this, subsequent purchaser takes free and clear regardless of recording act).

Question 69

Recording Acts: When does a subsequent purchaser have superior title free and clear (rather than subject to) the unrecorded interest?

Answer 69

1. Notice = if subsequent purchaser is a BFP
2. Race = if subsequent purchaser records first
3. Race-notice = if subsequent purchaser is a BFP AND records first. (if they do this, subsequent purchaser takes free and clear regardless of recording act)

Question 70

What constitutes notice for the notice/race-notice recording acts?

Answer 70

1. Actual notice (subjective knowledge)
2. Record notice
   - constructive notice from any title inconsistencies a complete search of the record would disclose
3. Inquiry Notice
   - If upon inspection of the property, you would have been alerted to evidence that title was not as shown on the record, you have a duty to make an inquiry to find out more.
   - If you don’t make such an inquiry, you are deemed to know what the inquiry would have disclosed.
   (we presume anyone acquiring interest in real prop will examine the ground and examine the record and inquiry anything that doesn’t add up!)

WILD DEED = COURTS SAY NO NOTICE

Question 71

Shelter rule

Answer 71

Once title has come into the hands of a BFP who is protected by the recording acts, the BFP can pass that protection on to subsequent grantees, even if those subsequent grantees have notice of the prior adverse conveyance (*transferees take the priority of their transferor);

This means when A & B continue conveyance ONLY LOOK TO the conveyances to A and B. Transferees take the priority of their transferor)).
Only exception: if the subsequent grantee was O. (can’t straw man it clean)

Question 72

What does title insurance do?

Answer 72

Where recording acts notice protect only if you didn’t have actual, inquiry, or record notice (no one would have known) title insurance protects if you didn’t have actual notice.
Want it to protect yourself from off record risks.

Question 73

What does title insurance do?

Answer 73

Where recording acts notice protect only if you didn’t have actual, inquiry, or record notice (no one would have known) title insurance protects if you didn’t have actual notice.
Want it to protect yourself from off record risks.

Question 74

Note v. Mortgage

Answer 74

Note = instrument evidencing the obligation to repay the loan.
Mortgage = instrument granting a security interest in real property (security for debt)
Deed of Trust = basically same as mortgage except the secuity interest is given to a trustee (instead of lender) who is holding it for the benefit of the lender.

Question 75

Title v. Lien theory

Answer 75

Lien theory = In some states mortgage is a lien only. Lender-ish rights, not ownership rights.
Title theory = lender or trustee holds legal right to property that has been discharged with the payment
Intermediate theory = these states say it’s a lien until default at which point it becomes a transfer of title/ownership.

Question 76

Mortgage underwriter concerns

Answer 76

Quality of the debtor (willingness/ability to pay)
Quality of the collateral (LVR)
- Lenders prefer LOW loan to value ratios

Question 77

Mortgage financing considerations

Answer 77

amount, interest and time period

Question 78

Mortgage Rights of Redemption

Answer 78

Legal Right of Redemption (common law)
- If for any reason the payment was not made on law day (payment day), mortgagor forfeited all interest in the premises.

Equitable Right of Redemption
- After default, mortgagor is able to get the property back by paying the amount due within a reasonable time after law day.
- Cannot contract around the equitable ROR
- Foreclosure cuts off equitable ROR

Statutory Right of Redemption
- Only in some states. Becomes available only after equity of redemption has been extinguished by a valid foreclosure. Most statutes permit mortgagor (and sometimes junior lienors or subordinate interest holders) to redeem the land from the mortgage and reacquire clear title for some fixed period of time after the sale.

Question 79

Mortgagor v. Mortgagee terms

Answer 79

Mortgagor = barrower

Mortgagee = lender

Question 80

Transferring Mortgage Property

“Subject to” v. “assuming” a mortgage

Answer 80

“Subject to” v. “assuming” mortgage

Subject to
- New owner isn’t personally liable for the repayment, but the old mortgage lien runs with the transfer so the land is still collateral security (so probably will want to pay/ensure payment even though not obligated).

Assuming mortgage
- New owner steps in the shoes of the borrower for the promissory note.
- - Maybe would want to assume a low interest rate.
- Original barrower has surety (secondary) obligation.

Question 81

Transferring Mortgage Property

Due on Sale Clause

Answer 81

Sale of property gives the lender the right to declare the loan immediately due

Question 82

Mortgage Foreclosure Types

Answer 82

1. Strict Foreclosure
   - Title to land is forfeited to the lender (mortgagee) no matter what the value of the land is in relation to the original mortgage debt.
   - No public sale of the property
2. Judicial Foreclosure
   - Public sale after a fully-litigated judicial proceeding in which all interested persons are named parties in the litigation.
   - Statutory ROR more common than in non-judicial
3. Non-judicial Foreclosure
   - After proper notice is given to the parties and general public, property is sold at a public auction.
   Only available if:
   - State law permits
   - Mortgage (or deed of trust) explicitly reserves a “power of sale.”
   - Federal HUD mortgage can always use though

Big differences from judicial
- Defenses may not be resolved until after sale.
- Ability to sue for deficiency limited
- Less secure title.
- Much quicker and much less expensive

Question 83

How does foreclosure impact interests/leins in the land?

Answer 83

Interests in land are hierarchical based (primary) on time of perfection/vesting
**Foreclosure puts the sale purchaser in the shoes of the mortgagor as of the time of execution of the mortgage being foreclosed. Therefore, the foreclosure sale purchaser takes title FREE AND CLEAR OF SUBORDINATE/JUNIOR liens.
- BUT “subject to” senior interests

Question 84

Mortgage foreclosure:

Surplus waterfall

Answer 84

A surplus resulting from a foreclosure sale is applied to junior liens/other interests that are terminated by the foreclosure in order of their priority. Any remaining balance is borrower’s equity.

What if the surplus doesn’t pay off a lien?
- Can sue the borrower personally on promissory note (but unlikely to collect)
- But 14 states have anti-deficiency statutes for residential loans.

Question 85

Mortgage Foreclosure:

Hierarchy of interests

Answer 85

Baseline = first in time, first in right
- Publication & perfection (see recording act)
- Possession (inquiry notice)

Purchase Money Mortgage = almost always first
- Purchase money mortgage = mortgage that allows the mortgagor to acquire ownership of the mortgaged real estate.
- Statutory super-priorities & relation back
Subordination agreements

Question 86

How much should a purchaser of a second mortgage foreclose bid?

Answer 86

Subtract the market value of the property by the amount outstanding on first mortgage.
- Although the sale purchaser will not be personally liable on the first mortgage, there is always a risk the first mortgage will be foreclosed and the purchaser will lose title.

Foreclosing lender must join necessary parties (those with a lower priority interest than the foreclosing lender) in the foreclosing process. Upstream interest holders don’t need to be joined.

Question 87

Mortgage foreclosure:

How much should a junior (2nd) interest holder bid?

Answer 87

Assuming the mortgage is worth LESS than the property:
1st lender will probably credit bid the amount of the mortgage.
Junior lender should bid their outstanding mortgage amount on top of this first amount ^. If it sold only for the first lenders mortgage amount, junior lender would get NOTHING.