IX. Real Estate Transactions

IX. Real Estate Transactions

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  Rising market prices – case for decades until late 2000s
  
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  Falling market prices – case post-subprime mortgage crisis
  

1. 
   Exclusive right to sell: gives broker right to collect commission if property is sold to anyone during contract, even if sale is to buyer found without broker’s help
   
2. 
   Exclusive agency: entitles broker to commission, or share, if property sold through their efforts or any other broker, but not if property is sold by owner
   
3. 
   Open (nonexclusive): entitles broker to commission only if they are first person to procure buyer ready, willing, and able to buy
   

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  Broker to buyer: fiduciary obligations that may permit claim of fraud if broker fails to reveal relevant information
  
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  Buyer to broker: some courts hold that when prospective buyer solicits broker and broker finds satisfactory property which owner agrees to sell at price offered, and buyer knows broker will earn commission for sale, law implies a promise on part of buyer to complete transaction with buyer
  

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  Some obligations survive deed although not explicitly mentioned
  

1. 
   Note: borrower’s promise to repay principal with interest (creating personal liability to repay money)
   
2. 
   Mortgage: series of promises to maintain insurance on property, pay property taxes, maintain property so that it does not become dilapidated and lose market value (pledge of property as collateral to secure payment of note)
   

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  Mortgagee: lender
  
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  Mortgagor: buyer-homeowner
  

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  Practice of most states is to order foreclosure sales where mortgagee either manages private sale or brings suit to foreclose on property; if sale does not bring in enough to pay off debt, lender may bring an action in some states for deficiency judgment against mortgagor for difference
  
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  Statutory right of redemption allows mortgagor to buy back property for price bid at foreclosure sale within designated period after foreclosure and generally allows mortgagor to remain in possession of property in interim
  

“First in time, first in right”: when property owners take out multiple mortgages, first mortgage has priority over later mortgages if recorded and second mortgagee was aware of it

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  In foreclosure process, proceeds paid to first mortgagee, with remaining assets going to second mortgagee, and so on (Countrywide)
  

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  Restatement (Third) adopts this position
  

Central Financial Services, Inc. v. Spears, Miss. (1983)

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  Facts: Man takes out loan and gives his son half, expecting the son to contribute to repayment. Loan is secured with real property as collateral and falls into delinquency. In foreclosure sale there are no competitive bids and bank bids amount due plus costs of foreclosure. Bank then sells property for substantially more (2x plus original indebtedness) and buyer then sells for even more (3x original indebtedness).
  
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  Rule: Mere inadequacy of price is not sufficient to set aside a foreclosure sale unless the price is so inadequate as to shock the conscience of the court
  
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  Holding: Sale of property within 12 days at a price 2 ½ times bid in foreclosure sale is inequitable; difference between amount bid and the price received by the bank in the resale are to be used in computing amount due to man
  

1. 
   Instead of going to banks, prospective buyers seek assistance from mortgage brokers with incentives to obtain higher cost loans
   
2. 
   Deregulation starting in 1980
   
3. 
   With usury deregulation, lending institutions realized they could induce people to buy homes with adjustable rate mortgages (ARMs)
   
4. 
   Securitization of loans
   
5. 
   Risk posed by subprime mortgages compounded by leverage
   
6. 
   Banks bought and sold credit default swaps as insurance
   

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  Facts: Plaintiff alleges “reverse redlining” due to 30-year mortgage for property in minority neighborhood with an interest rate of 9 ½%
  
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  Rule: mortgage granted to minority buyer for property purchase in minority area carrying interest rate exceeding 9% creates rebuttable presumption of discriminatory practice
  
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  Rule: Lender accused of reverse redlining bears burden of proof to show mortgage was not product of unlawful discrimination
  
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  Holding: plaintiff is victim of reverse redlining
  

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  Normally allows seller to regain possession of the property on default
  
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  Some states implicitly or explicitly prohibit by making protections of mortgage foreclosure statute non-disclaimable
  
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  Ordinarily allows seller to keep payments already made by buyer as liquidated damages (subject to “penalty” interpretation)
  

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  Facts: Parties enter into installment land contract for house and land. Contract provides for liquidated damages in event of default equivalent to amount paid at time of abandonment. Purchasers abandon due to inability to pay for necessary repairs and monthly payments.
  
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  Rule: When determining whether amount forfeited by purchaser through liquidated damages under installment land contract is so grossly disproportional to constitute penalty or forfeiture, courts take into account (1) loss of fair rental value, (2) costs of sale, (3) depreciation, (4) attorney fees, and (5) other directly related expenses
  
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  Holding: Retention by sellers was not excessive
  

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  Facts: Forfeiture clause in contract to buy house and lot provided for termination of contract and retaining all previous rent payments as liquidated damages. 7 installment payments were missed, but purchase ultimately paid an amount equivalent to 40% applied to principal.
  
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  Rule: Where purchaser of property has given a mortgage and subsequently defaults on payments, his entire interest in the property is not forfeited
  
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  Holding: Rule treating seller’s interest as lien will best protect interests of both buyer and seller, fulfilling expectations of seller and protecting buyer’s equity
  

1. 
   Forfeiture: does seller have right to regain possession and retain payments made by buyer?
   
2. 
   Right of redemption: does buyer have a right to continue in possession after default by paying off some or rest of purchase price?
   

E. EQUITABLE MORTGAGES

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  Factors to determine whether equitable mortgage exists: (1) existence of debt, (2) relationship of parties, (3) availability of legal assistance, (4) sophistication and circumstances of each party, (5) adequacy of consideration, and (6) who retains possession (Flack)
  

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  Facts: Plaintiff owns home subject to three mortgages. Real estate taxes were delinquent and foreclosure proceedings had been initiated under one of the mortgages. Defendant represented that he could service the mortgages and pay the taxes for a 10% fee. Plaintiff signed an agreement outlining terms, a warranty deed conveying property to defendant, and a lease agreement allowing plaintiff to remain in premises with an option to repurchase from defendants. Defendant prepared all documents and plaintiff had no legal counsel. When plaintiff missed a monthly payment she was evicted.
  
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  Rule: Controlling factor in determining whether deed should be deemed a mortgage is the intention of the parties
  
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  Rule: Adverse financial condition of grantor coupled with inadequacy of the purchase price for the property
  
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  Holding: Transaction constituted a mortgage to secure a loan