Selling Real Property- Part I (Ch. 8) Flashcards
Step 1 of a typical real estate sale
Purchase contract- The parties negotiate and sign a written contract, and prepare to consummate the transaction.
Step 2 of a typical real estate sale
The Closing- The contract is fully performed; the buyer pays the purchase price, the lender advances loan funds, and the seller transfers title.
Step 3 of a typical real estate sale
Title Protection- The buyer protects her title through covenants, a title opinion based on a search of public land records, and/or a title insurance policy.
Four most common issues during the purchase contract stage
Statute of Frauds, unmarketable title, equitable conversion, and the seller’s duty to disclose.
General rule for oral agreements to buy real estate
These agreements are not enforceable.
Basic Statute of Frauds requires that a contract have these three elements:
Essential terms (identity of parties, price, and property description), a writing, and a signature (signed by the party to be charged).
Why is an oral contract unenforceable?
To prevent fraud and discourage perjury, based on the original Statute of Frauds.
Hickey v. Green (1982)
P and D made an oral agreement for purchase of a house, but D revoked when she received a better offer. The court held that the agreement was binding because P relied on it in agreeing to sell his own house to someone else. Rule is that an oral contract can be enforced on the basis of reliance and when injustice can only be avoided by enforcement.
Three most common types of property descriptions
Government survey (divides country into 36 sq. mi. blocks called townships, consisting of 36 sections), metes and bounds (describes parcel using distance and direction), and subdivision map (showing location of each lot).
2 major exceptions to the Statute of Frauds
partial performance and equitable estoppel
partial performance exception to the SoF:
buyer must (1) take possession, (2) pay at least part of the purchase price, and (3) make improvements to the property. Reason for this exception is that buyers would only perform these actions if a contract existed. Some jurisdictions requires only 2 of the 3 elements.
equitable estoppel exception to the SoF:
oral contract may be enforced if (1) one party acts to his detriment in reasonable reliance on another’s oral promise, and (2) serious injury would result if enforcement were refused.
marketable title- general rule
Title is unmarketable if (1) the seller’s property interest is less than the one she purports to sell, (2) the seller’s title is subject to an encumbrance, or (3) there is reasonable doubt about either (1) or (2).
Seller is generally required to convey marketable title at which stage of the transaction?
At the closing (seller can use time before the closing to cure any defects, but buyer can rescind when it becomes clear seller will not be able to convey marketable title at the closing).
Lohmeyer v. Bower (1951)
P agreed to purchase a house from D, but ( before closing) he discovered the house violated local ordinances by being too close to lot border lines and it was only one story tall. The court allowed rescission b/c there were encumbrances that would subject buyer to potential litigation, and the seller was not transfering the title she purported to be selling when the agreement was made.
Existence of statutes doesn’t make title unmarketable, but…
violation of those statutes makes title unmarketable.
equitable conversion- general rule
during the period between the contract signing and the closing (executory period), if the property is damaged or destroyed the buyer will bear that risk ( doesn’t apply if the contract explicitly state who will bear the risk).
Brush Grocery Kart v. Sure Fine Market (2002)
During a dispute over purchase price for a grocery store which was currently being leased, the property was damaged in a hail storm. Court held that the owner, not the lessor bore the risk of the damage because the lessor did not yet have right to possession, as there was no formal agreement to purchase.
The Massachusetts Rule
Minority approach in which the seller bears the risk of damage to the property all the way up until title is actually transferred.
duty to disclose- general rule
Seller of residential real property is obligated to disclose defects he knows about that (1) materially affect the value of the property, and (2) are not known to or readily discoverable by the buyer.
caveat emptor
“buyer beware”- common law doctrine which said seller had no duty to disclose defects to the buyer.
Under caveat emptor, seller would only be liable if…
He actively misrepresented conditions on the property, actively concealed the defects, or owed a fiduciary duty to the buyer.
Stambovsky v. Ackley (1991)
P discovered that the house he had agreed to purchase from D was purportedly haunted by ghosts. The court allowed buyer to rescind because the seller created the condition, the condition materially affected the value of the property, and it was not readily discoverable.
Do buyers have a duty to disclose facts they might know about property they are attempting to buy (such as a lucrative oil field underneath seller’s land)?
No, buyers have no duty to disclose these facts.
Implied warranty of quality
An exception to caveat emptor, which says that developers of new residential property impliedly warrant that the property is fit for its intended use.
Strawn v. Canuso (1995)
NJ Supreme Ct. extended the duty to disclose to offsite conditions that materially affect the value of the property (presence of a toxic waste dump in this case), but limited it’s holding to professional sellers of new, residential housing, because they are in a superior bargaining position. Doesn’t apply to re-sale of homes or sale of commercial property.
Closing is usually supervised by…
A third-party escrow agent
Delivery of a deed is effective when…
the grantor manifests an intention to immediately transfer title to the grantee.
Rosengrant v. Rosengrant (1981)
Court held that when a grantor delivers a deed and reserves a right of retrieval and attaches to the deed the condition that it is only to become operative upon the death of the grantor, and further continues to use the property as if no transfer has occurred, the deed is not effective.
Key concept in delivery is…
INTENTION
In most states there is a presumption of delivery if…
The deed has been manually transferred or has been recorded.
Acceptance
Required for a deed to be effective, but is usually assumed. However, there can be cases where the grantor doesn’t want the property (ex. doesn’t want to pay the property taxes).
Promissory note
a contract by which the borrower promises to repay the loan on certain terms and conditions
Common law theory of mortgages (a.k.a. title theory)
It was a transfer of title from the borrower to the lender under the loan was re-paid.
Lien theory of mortgages
mortgage conveys only a security interest, which only gives the mortgagee the right to foreclose on the property–it’s not a transfer of title.
installment land contract
an alternative to a mortgage in which the buyer promises to pay the purchase price in installments over a period of time. Seller retains title until all payments are made (usually used when there is no down payment).
at common law, specific performance would be granted only if…
monetary damages were inadequate. (This was usually the case in land contracts because land is considered unique).
Giannini v. First Nat’l Bank of Des Plaines (1985)
P agreed to purchase a condo from D, but the building in which his unit was located was never formally declared a condo building, so the agreement was not followed through on by D. The court granted P specific performance, saying that even condos are unique enough for specific performance instead of monetary damages.
fraud in the inception
When a deed is induced to be signed over through fraud, the deed in not valid.
equity of redemption
how much value has been put into the property
foreclosure
the ability for the motgagee to sell the property to pay off the defaulted loan.
reinstatement
when a mortgagor avoids foreclosure by paying off missed back-payments.
deficiency judgment
an action that can be brought by a mortgagee if a foreclosure brings less than the amount owed on the house ( some states have antideficiency statutes to limit this right).
deed of trust
a 3-party relationship in which borrower gives a deed of trust to a third-party for the benefit of the lender.
On what theory can a mortgagor challenge the validity of a foreclosure sale?
Under the “shock the conscience” test, which says if teh price brought on the sale is so low that it “shocks the conscience,” the sale can be set aside.
Is a seller entitled to specific performace if a buyer breaches an agreement to purchase real estate?
Most courts say yes (which seems illogical b/c monetary damages seem like they would be sufficient).
