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Real Estate Law and Business Copyright © 2017 George Lefcoe Copyright © 2017 George Lefcoe. All rights reserved. Real Estate Law and Business Copyright © 2017 George Lefcoe. All rights reserved. Students’ Guide and Supplement to Real Estate Law and Business (2016) Brokering, Buying, Selling, and Financing Realty George Lefcoe FLORINE AND ERVIN YODER PROFESSOR OF REAL ESTATE LAW UNIVERSITY OF SOUTHERN CALIFORNIA GOULD SCHOOL OF LAW With the Assistance of: Jonathan Acheampong Frimpong USC Gould ’18 Kimberly Miller USC Gould ’17 Maxwell Montgomery USC Gould ’19 & Mimi Sanicola USC Gould ’17 Copyright © 2017 George Lefcoe All Rights Reserved Carolina Academic Press 700 Kent Street Durham, North Carolina 27701 Telephone (919) 489-7486 Fax (919) 493-5668 E-mail: [email protected] www.cap-press.com Copyright © 2017 George Lefcoe. All rights reserved. I dedicate this book to my life partner, Leon Chiu, the light of my life over three decades now Copyright © 2017 George Lefcoe. All rights reserved. Contents Chapter 1 – Buying and Selling Real Estate I. An Overview of the Realty Purchase and Sale Transaction Process 2 II. Purchase and Sale Contracts: Contract Norms and the Statute of Frauds 4 III. Observations about Identification of the Parties to the Purchase and Sale Contract 5 IV. Should House Flippers: (a) Close, Take Title and Sell or (b) Assign their Purchase 10 Contracts? V. For Home Buyers: Why Not Purchase Options Instead of Purchase and Sale 27 Agreements? VI. Rent to Own: Lease Purchase or Lease Option Agreements 31 VII. REVISED QUESTIONS 33 Chapter 2 – Valuing Real Estate I. Three Methods of Appraising Real Estate 1 II. Cash-on-Cash Return 7 III. Internal Rate of Return 11 IV. Illustrations of the Advantages and Disadvantages of Debt 15 V. The Rent or Buy Decision for Individuals and Firms 17 V. REVISED QUESTIONS 27 Chapter 3 – Real Estate Brokers and Listing Agreements I. The Professional Responsibilities of Brokers 1 II. Misrepresentations and Undisclosed Property Defects 3 III. The Importance of the Listing Agreement in Broker Compensation Claims 6 IV. REVISED QUESTIONS 10 Chapter 4 – Entity Selection: Limited Liability, Tax Issues, Operating Agreement Deal Points and Fiduciary Duties I. The Pros and Cons of LLCs 1 II. Tax Factors in Real Estate Investment 8 III. Drafting Real Estate Joint Venture Agreements 12 IV. REVISED QUESTIONS 13 Copyright © 2017 George Lefcoe. All rights reserved. Chapter 5 – The Condition of the Subject Property, Fixtures, and Risk of Loss During the Executory Period I. The Physical Condition of The Subject Property: Seller Disclosures 1 II. Property Inspections and Repairs 3 III. Fixtures 6 IV. REVISED QUESTIONS 12 Chapter 6 – Deeds and the Quality of Title I. An Overview of the Topics Covered in the Chapter 1 II. Deed Formalities and Deed Restrictions 1 III. Types of Deeds: Grant vs Quitclaim Deeds 7 IV. Marketable Title 9 V. REVISED QUESTIONS 10 Chapter 7 – Land Descriptions, Surveys and Boundary Disputes I. Land Descriptions 1 II. Surveys 7 III. Boundary Disputes and Adverse Possession 12 IV. REVISED QUESTIONS 13 Chapter 8 – Recording Laws and Public Land Records I. The Chain of Title, Recording Laws, and Title Insurance 1 II. REVISED QUESTIONS 2 Chapter 9 – Title Insurance I. An Overview 1 II. REVISED QUESTIONS 5 Chapter 10 – Real Estate Escrows and Closings I. Introduction to Escrows 1 II. REVISED QUESTIONS 5 Chapter 11 – Terminating Failed Real Estate Contracts I. When Contracts for the Purchase and Sale of Real Estate Go Sideways 1 II. REVISED QUESTIONS 8 Chapter 12 – An Introduction to Mortgage Lending I. Underwriting Home Mortgage Loans 1 II. Construction Loans 2 III. Financing Land Development 11 Copyright © 2017 George Lefcoe. All rights reserved. IV. Bridge Loans 26 V. Mortgage Loan Commitments 27 VI. REVISED QUESTIONS 33 Chapter 13 – Prepayment of Mortgage Loans I. Why Prepayment Matters to Home Buyers 1 II. Defeasance: Advantages for the Commercial Mortgage Loan Borrower 3 III. REVISED QUESTIONS 7 Chapter 14 – The Mortgage Lender’s Right to Call the Loan Upon Sale of Mortgaged Property: the Due-on-Sale Clause I. Transferring Title to Mortgaged Property 1 II. Transferring Mortgaged Property Title or Personal Mortgages to an LLC 3 III. REVISED QUESTIONS 6 Chapter 15 – Mortgage Foreclosure I. The Capital Stack in Commercial Real Estate, Secured Debt, and Foreclosure 1 II. Foreclosure Experience Described 4 III. Mortgage Servicing Then and Now 7 IV. REVISED QUESTIONS 17 Copyright © 2017 George Lefcoe. All rights reserved. Chapter 1 Introduction This manual offers: (a) summary highlights of each chapter in the textbook; (b) suggested issues for class discussion; (c) supplemental material students might find helpful in addressing those issues; and (d) my revised questions that appear in the text at the end of each of the fifteen chapters. BUYING AND SELLING REALTY: AN OVERVIEW Chapter 1 is an overview of how the typical purchase and sale transaction is phased from start to finish. For readers encountering the real estate sales process for the first time, their eyes may glaze over as they try to imagine what really transpires in each stage of the process. The pivotal document in a typical realty sale is the purchase and sale agreement, whether the property is a modest tract house or a downtown office tower. One difference, though, is that broker-drafted forms are likely to be the document of choice for most houses and rental properties with fewer than 50 units, while attorneys are usually called upon to draft purchase and sale contracts for multi-million dollar commercial properties. At the end of the first chapter, there is a form drafted for use as a purchase and sale contract for commercial real estate. It comes with escrow instructions jointly agreed by seller and buyer. This form is worth reviewing for the many issues it resolves and contemplates, besides the obvious ones of identifying the parties to the transaction, the subject property of the sale, and the purchase price. A far less comprehensive purchase and sale contract would still be enforceable. To be enforceable, an agreement needs to meet certain requisites of contract law. And if the agreement concerns real property, state laws called Statutes of Frauds require that it be in written form. This manual offers a summary of the contract law norms and Statutes of Frauds provisions that figure in determining if a realty purchase and sale agreement is enforceable in court if the buyer or seller decides not to complete the sale. Disregarding these laws, buyers and sellers who have a falling out may discover that their deal is unenforceable. Realty buyers may be drawn to a particular property even though they might not be completely sure that the property is exactly right for them before they have had a chance to check it out. Most potential buyers are reluctant to spend time and money learning about a property until they have obtained a legally enforceable right signed by the seller to purchase it for an agreed price. But sellers are wary of signing binding contracts with potential buyers who are just shopping around before they have learned anything about the buyer’s financial ability and past real estate dealings. They need to agree to a purchase and sale contract that addresses their reciprocal concerns by including exit contingencies, or they can bargain for an option agreement giving the buyer the right but not the obligation to purchase the property. The text describes the subtle differences between a call option and a contingent purchase and sale contract, and why a buyer or seller would prefer one over the other. 1 Copyright © 2017 George Lefcoe. All rights reserved. Chapter 1 The manual for Chapter I is divided into six parts: I. An Overview of the Realty Purchase and Sale Transaction Process II. When Purchase and Sale Contracts Are Enforceable: Norms of Contract Law and the Statute of Frauds III. Observations about Identification of the Parties to the Purchase and Sale Contract IV. Should House Flippers: (a) Close, Take Title and Sell or (b) Assign their Purchase Contracts? V. Why Not Purchase Options Instead of Purchase and Sale Agreements for Home Buyers and House Flippers? VI. Rent to Own: Lease Purchase or Lease Option Agreements VII. REVISED QUESTIONS I. An Overview of the Realty Purchase and Sale Transaction Process. This first chapter identifies eight distinct stages in the realty purchase and sale process. 1 (1) Buyer searches for a property to acquire and seller markets a property for sale. The seller could contract with a real estate broker or make other arrangements for marketing the property. The buyer could contract with a broker or other advisors for assistance in finding and evaluating properties to acquire. (2) Pre-contract period. Buyer and seller or agents representing them come together to negotiate the basic deal terms. Commercial buyers and sellers sometimes sign a letter of intent or term sheet (3) Contract formation and execution. Buyer and seller conclude negotiations and sign a contract containing all material terms of their agreement. (4) Escrow entered. Buyer and seller designate a third party to oversee the fulfillment of the reciprocal promises they made to each other in the purchase and sale contract—the seller to sell and the buyer to buy the subject property. Their designate closing agent could be a title company, escrow firm or an attorney, depending on local custom and practice. Among other administrative functions, this neutral agent usually holds the buyer’s cash and the seller’s deed which the agent may have assisted the seller in executing, arranging for the simultaneous exchange of cash for deed at closing. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 There is nothing sacrosanct about this division into eight. Professor John G. Sprankling in his excellent hornbook, Understanding Property Law (4th ed., 2017) combines the process into four basic stages.
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