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1) Background information on RE transactions:

a) Parties

i) Developers

ii) Realtors (6% commission)

iii) Lenders (charge interest for profits & origination fees)

iv) Attorneys…functions:

1) Assess reliability and completeness of info

2) Structure the transaction to protect client

3) Understand legal rules to protect client’s expectations

4) Complete the transaction

b) Motivation: profit!

i) Balance risk and reward (return)

2) Nine steps in a RE transaction:

a) Search

i) Residential or commercial?

ii) Risk v. profit opportunities (for client)

iii) Is this the property we want?

← Location

← Schools, government services

← Traffic, access to roads

← price

b) Decision & offer (w/ broker’s assistance)

c) Earnest money K

i) Must be in writing b/c SOFs

ii) Drafted by brokers, realtors & attorneys (usually in commercial)

iii) Contingencies to be met before sale goes through:

1) Inspection period

2) Survey

3) Title insurance

4) Disclosure notices

d) Financing

i) Bank or lending institution

1) Help client w/ loan app.

2) Get loan approved

3) Review lender’s terms (to ensure you agreed to them)

ii) Seller financing (vendor’s lien)

iii) Cash

e) Due diligence

i) Buyer & lender inspect property

ii) Title, survey, termites

iii) Environmental assessment

f) Title commitment

i) Def: preview of title ins. policy

ii) Shows restrictive covenants

iii) Easements

iv) Liens, encumbrances

g) Survey

h) Closing

i) Def: in exchange for deed, buyer pays $ to seller

ii) Where: title co. or atty’s offices

i) Post closing

3) The RE Agent

a) Duties owed by RE agent to principal: FIDUCIARIES of their Pr’s

i) Duty of performance

1) Get best price & conditions he can for client

2) Obey instructions of Pr & stay w/in granted authority

ii) Duty of rzbl care

1) Render services in competent manner

2) Of same level as others in his bsns

iii) Duty of loyalty

1) Place Pr’s interest above own interests

2) Do not disclose confidential information

3) Riley: seller’s broker can’t buy property for himself

4) Duty to disclose material info.

Exceptions:

← Broker has no duty to inspect property

← But if you know something, you must disclose it

iv) Duty to account (for money that comes into your hands)

b) Duration of fiduciary relationship: ends when transaction closes (unless broker continues to provide services to Pr)

c) Dual Agency

i) Created when seller and buyer use same broker

ii) If RE agent qualifies as an intermediary (under statute) then statute takes precedence over common law

iii) Intermediaries (created by statute)

1) Qualifications:

a) Before entering into written ag. to represent more than one party, realtor provides TREC disclosure form.

b) Realtor makes written ag with all parties that specifically authorizes transaction. (*make sure buyer makes the ag., too.)

c) Written ag. of compensation arrangement (not on Trec form)

2) If you qualify as intermediary, you do not have to:

a) Disclose to buyer that seller will accept lower prices or that buyer will pay more

b) Disclose any confidential info. or info. he was instructed in writing not to tell (realtor can’t disclose this info.)

3) Duties: Realtor still must treat all parties honestly & impartially (q. of fact for jury)

iv) Common law (dual agency) allowed as long as:

1) Agent gets consent of both parties &

2) A fully advises both parties of all material facts that he knows about

d) Real Estate License Act

i) Unlawful to:

1) Act as or advertise as a RE broker or salesperson w/o license

2) Act as a broker if you’re a salesperson (unless acting for broker; see iii)

ii) RE brokers: any person who, for a fee or other consideration or with the intent of getting compensation from another person, performs one of the following:

1) (Offer to) Sell, purchase, rent RE

2) (Attempt to) Negotiate listing, sale, purchase, rental of RE

3) (Attempt/Offer to) list RE

4) appraise RE

5) auction RE

6) buy/sell RE options

7) aid in locating property for purchase/lease

8) (assist or) procure prospects for sale or lease

iii) RE salesperson: licensed by Trec & associated with a “sponsoring broker”

1) Can’t accept or pay commission from/to anyone other than broker under whom they are licensed

2) Brokers are vicariously liable for acts of their salespersons

iv) Exempted (do not have to be Trec licensed)

1) Attorneys

2) Agents under poa

3) Public officials performing their duties

4) Licensed auctioneers

5) Acting under ct. order

6) Onsite manager of apt. complex

7) Transactions re: mineral leases

8) Owner, owner’s ee’s re: their own property (ex. developers)

9) Cemetery lots

10) renting, leasing, managing hotels

v) requirements for Texas RE license

1) us citizen or legal alien

2) 18 y.o.

3) legal resident of Texas

4) evidence of your:

← honesty

← trustworthiness

← integrity

← competency (based solely on exam)

5) an entity can get a RE license but must designate a Principal broker

vi) Real Estate Recovery Fund (RERF)

1) Fees collected by Trec is put into RERF to pay ppl for actual damages caused by brokers/salespersons in violation of Texas RE license act

2) 2 year SOL (starts when coa accrues)

3) show you have a final jj against broker/salesperson and

4) you have attempted to collect jj by filing writ of execution that was returned nulla bona (no property subj. to execution)

vii) punishment: suspension of license or revocation if you do certain things...

1) guilty, nolo contendre to a felony of which 'fraud' is an essential elements

2) making material misrep, failing to disclose to potential purchaser any latent structural defect or any defect known to the broker/salesperson

3) make a false promise to influence party to enter into a K that you know you cannot keep

4) pursuing a continued & flagrant course of misrep

5) commingling monies

6) paying commission/fee to anyone who is not licensed

7) acting as broker + undisclosed pr. in one transaction (dual capacity)

8) publishing/advertising that is likely to mislead/deceive public

9) except death, hiv

10) TREC must act w/in 4 years

11) usually the private party is also pursuing a private coa

e) § 15c: disclosure

i) a licensee under act who represents a party shall dislose that representation of the party at the time of the licensee's first contact w/ the other party to the transaction

ii) information about brokerage services: consumer signs acknowledgment of receipt of this

1) listing broker is owner's agent (if I come to you and you show me a house you've listed, you're not my agent, but seller's agent)

2) unless you are strictly a buyer's agent, everyone is working for the seller

3) intermediary: (statute to address dual agency prob.)

a) can't give advice

b) can only carry offers back & forth between the parties

iii) when you don't have to give 15c notice

1) lease is for no more than one year and

2) there is no sale being considered

iv) the TRLA says no broker, etc who provides info. about real property sales price or terms of sale to facilitate listing, selling, leasing, financing, appraisal of real property shall be liable to any other person as a result of providing that information to any other person

1) ex. a broker/salesperson can tell bank's loan officer that you bought house for $xx of if you paid cash, etc. This is okay!

2) why? necessary in the market

v) re brokers/salesperson can prepare K's for sale in Texas

1) general rule: can't practice law w/out license

2) problems arose

3) soln: atty-broker committee that promulgates forms for re Ks that are lawful for brokers/salespeople to use; if brokers use these, then can't get broker in trouble

4) brokers cannot: draw up deed, note, dot, or other instrument to transfer land or advise them about what the law is or the effect of the law re: a conveyance of land

5) unless used special forms

f) listing agreements

i) "listing agent" a broker w/ whom the seller enters into a written K to sell a particular piece of realty

ii) the K is the "listing ag"

1) O agrees to pay commission to listing agent (6%)

2) "selling broker" when an agent shows a listed house, they are the agent of the listing agent (so they don't work for the buyer, either); they are sometimes called co-brokers

iii) legal disclosures (form from Trec)

1) paying fee to broker doesn’t necessarily mean he represents you (get listing ag)

2) homeowner’s association addendum (info. about subdivision)

3) lead based paint & lead based paint hazards disclosure

4) 5.008 disclosure (form seller fills out about property & condition)

← general info. (built in appliances, heating/ac info, etc)

← HOA fees, common areas

← Deaths caused by property

← Conditions on property which materially affect one’s physical health/safety

iv) 3 types of listing ag's

1) exclusive right to sell (most common) (see h/o);

a) if ag unclear, this is default

b) gives commission if RE is sold by anyone during the term of the listing ag., even if owner finds buyer for property

c) if owner takes property off market => breach of listing ag (K) & O is liable for damages (rzbl profit realtor would have received)

2) exclusive agency ag.

a) broker gets commission if RE sold during term of listing ag.

b) unless the owner is the one who found a buyer

c) if O takes property off market =>

i) it is a unilateral option & may be withdrawn

ii) if O w/draws property after the broker has performed under the K, then exclusive agency ag. becomes a bilateral K and the broker can sue for damages

3) open listing ag.

a) non-exclusive ag. where O gives broker commission if he finds a buyer

b) O can w/draw property at any time w/out penalty

v) Commission (6% standard)

1) Earned by:

a) Procuring from buyer valid & enforceable K on terms seller agrees to

b) By producing a buyer who actually buys or

c) By producing a purchaser who is ready, willing & able to buy on terms specified in the listing ag.

2) To sue for loss of commission: broker’s burden to prove elements!

a) Broker had proper license from Trec

i) Must have when services performed

ii) If license renewed day before closing, you weren’t licensed when services performed

b) A writing (list ag.)

i) Promise to pay a definite commission signed by ptbc

ii) Name of broker to whom commission to be paid (if salesman, must still put broker’s name in K, else brokers (& salesman) gets no commission)

iii) Directly or by reference to a writing, ID the property to be sold with a valid legal description (not a street address) see earnest $ K’s section

3) Broker can get a broker’s lien

a) § 62 Property Code

b) can only get broker’s lien on commercial RE!

i) Commercial RE is everything except:

1. 1-4 family residential units

2. unimproved RE zoned residential

c) lifting the lien: owner’s options

i) set up escrow account = lien amt. +15% or

ii) provide bond from an ins. co. payable to broker of lien (times 2)

vi) MLS (Multiple Listing Service)

1) Def: arrangement among brokers to pool listings & share commissions

2) Usually for residential

3) Function: assimilate info. & publish to members

4) Form: includes broker info, seller info, location, size, features, etc.

4) The Role of the Attorney in RE transactions:

a) Advise the client on risk management

i) Examples: title defects, restrict covenants, environmental hazards, zoning…

b) RE atty’s:

i) Specialization exam

1) Worked for 5 years in RE

2) Exam

3) Renew annually

4) Certify that % of practice is in RE

ii) Residential RE attys: lower legal fees; fixed price packages

iii) Commercial RE attys: flexible, hourly legal fees; less form work, more drafting

c) Functions of the Attorney (9)

i) Select realtors (rare)

ii) Negotiate price (rare)

iii) Draft earnest money K

1) The executory K that obligates the seller to sell & buyer to buy

2) Provisions (atty ensures client has provisions he wants & review docs)

a) Title (usually that seller will convey marketable title; buy title ins.)

b) Survey

c) Inspections

d) Contingencies (I won’t buy if I don’t get loan)

e) Default and remedies (what happens if default; what constitutes default)

iv) Review title commitment

1) Get title ins. from abstract/title company (they get from national title ins. co)

2) Commitment is a preview of the policy

v) Curative work (fix defects or rectify title)

vi) Review & explain survey

vii) Draft documents necessary to conclude sale

1) Warranty deed

2) Promissory note

3) Deed of Trust (mortgage)

viii) Review settlement statement (HUD-1)

1) Fill out the Hud-1

2) Review the economics of the transactions; what costs have been/will be pd. by whom

ix) Attend closing (on commercial deals, most often)

5) Purchasing a House (Residential transactions)

a) Pay cash

b) Loan

i) Lenders:

1) Considers risk v. reward

2) Considerations:

a) Willingness to repay the loan

i) Very subjective (not just ability)

ii) Look at cr. report for charge offs & lateness

b) Ability of debtor to repay

i) Assets and liabilities

ii) Credit report tells: current debts, payment history, employment hist.

c) Residential guidelines:

i) Monthly installment (pr & interest) should not be more than 28% of monthly GI

ii) Total debt repayments should not exceed 36% of your monthly GI

ii) 2 types of loans:

1) secured: collateral [allows lender to FC, sell & apply proceeds to debt]

2) unsecured: must sue, get jj & go after non-exempt assets

a) exempt assets:

i) 10 acres of land in Cities

ii) 100 acres in rural (200 if married)

iii) $100k of personal property

iv) insurances policies, annuities

v) retirement plans, IRAs, SEPs

c) Mortgage Markets (where to get a loan)

i) Primary market (residential): get loan from bank

1) Standard form

2) No negotiation

3) Why? b/c sold in secondary market

4) Benefit:

a) Allows quick and non-judicial simple fc’s

b) Favorable to lender

c) Boilerplate terms protect the collateral

ii) Associations buy mortgages from these primary markets:

1) GNMA (Gennie May): purchases subsidized single/multi family mortgages (mostly VA and FHA loans)

2) FNMA (Fannie May): purchases single/multi family FHA, VA loans and conventional mortgages

3) Freddie Mac (now private): purchases conventional mortgages only

iii) Associations sell securities to investors [the ass’n issues mortgage backed securities] (three types…)

1) Pass through: monthly payments go through association to investor; if everyone quits paying, investor out of luck

2) Fully modified pass through: monthly payments to investor is guaranteed by ass’n

3) Partially modified pass through: ass’n guarantees a % of the mortgage payment

d) Loan considerations for the consumer

i) Interest rates (annual)

1) Fixed rate mortgage:

a) 15-30 year term

b) by end of term, principle is pd. down to nothing

2) Adjustable rate mortgage (ARM)

a) Rate fluxes during term of loan

b) Rate (adjusted monthly, quarterly, annually) decided by an index

c) 4 indexes:

i) Weighted Cost of Funds to Lending Institutions as published by the Federal Gov’t; a calculation made by the gov’t based on banks’ savings account interest payments

ii) FHA’s Average National Mortgage Rate

iii) London Interbank Offered Rate (LIBOR)

iv) Prime Rate (can vary by bank, so use “xx bank” or Wall St. Journal)

d) Have ceiling (cap) & floor (sometimes floor)

e) Convertible: at option of borrower, can fix the mortgage rate

ii) Loan to value ratio

1) Banks generally only loan you a % of what your RE is worth

2) 80% standard

3) if you borrow more than 80%, you may have to get PMI

a) PMI = private mortgage insurance

b) Ins. co agrees to pay the bank in event of a loss & borrower default

c) Only have to get on amt. Over 80% (and can quit once principle pd down)

iii) Types of loans

1) Fixed, adjustable

2) Jumbo (over $275k at a higher interest rate)

3) Other special gov’t subsidized loans for losers

iv) Points

1) More points => Lower interest rate

2) Origination fees: ex. 1% to bank to set up loan (pure profit)

3) Includes points & origination fees when deciding if interest rate is usurious

4) Points discount table:

a) Shows real or actual interest rate if you pay pts.

b) Must show borrower table b/c of Truth in Lending Act

v) Balloon mortgages (or bullet mortgages)

1) Fixed, equal monthly payments

2) At end of short term, rest is due!

3) You may have to refinance if you can’t pay it then.

e) Types of Mortgage Transactions:

i) Basic

1) Seller, buyer & bank

2) S gives buyer Warranty Deed & Vendor’s Lien

3) Bank gives S money

4) Buyer gives bank DOT & promissory note

ii) Owner financed

1) Buyer & seller

2) Seller gives buyer WD and Vendor’s Lien

3) B gives seller a DOT

iii) Assumption

1) S gives DOT to bank

2) S gives buyer an ADS (assumption Warranty deed)

3) Buyer gives Seller a DOT to assume

iv) Wrap around: assumption deed that takes subject to prior lien

v) Assumption & Second Lien

vi) K for Deed

vii) Lease Purchase

viii) Refinance

1) Sellers gives buyer WD and VL

2) Buyer gives DOT to lender

3) New lender offers buyer better loan; new lender pays off old lender & gets DOT assigned to him

6) Earnest Money Contracts

a) Pre-K: letter of intent

i) Outlines bsns deal; helps with negotiations

ii) Problems: have to be skimpy to avoid it’s being a K (put in “this is not a binding K”)

b) K signing:

i) Equitable title:

1) Equitable title in buyer

2) Legal title in seller

3) Equitable title gives buyer right to specific performance

ii) SOFs

1) Must be in writing

2) Three elements (per Cohen case)

a) Complete w/in itself in every material detail

b) Signed by ptbc

c) Contains all essential elements of the ag.

d) Does not have to be acknowledged nor recorded

3) Exception: Hooks v. Bridgewater

(if you meet exception, can get specific perf. on oral K)

a) Buyer takes possession of property w/ consent of seller

b) Buyer pays valuable consideration and

c) Buyer erects valuable improvements on the property

iii) Must have valid legal description (not street addy or tax description):

1) Metes and bounds description provided by a surveyor

2) Refer to a recorded plat

3) Refers to previously recorded deed w/ a valid legal descrip.

4) “I hereby convey to buyer all my real property in McLennan County TX” (rare)

iv) 9 elements of an earnest money K:

1) correctly designate the parties

2) address the assignability of the K (if silent, default is assignability)

3) legal description

4) consideration & how it will be paid

5) representations, warranties and contingencies (if can’t get financing, no deal, etc)

6) duties of the parties

7) closing (where when)

8) ad valorem property tax issues (who pays for what part of year)

9) what constitutes default & remedies

a) money damages or

b) specific performance

v) forms

7) The Mortgage

a) Three theories of mortgage:

i) Texas: lien theory—lender just has a lien (equitable right, not equitable title) and the O has possession & legal title

1) In Texas we call them DOTs

2) After a default, fc & sell

ii) Title theory—legal & equitable title vested in lender; debtor has a limited right if they pay the debt to have property conveyed to them

iii) Hybrid method: same as lien theory except lenders gets property if there is a default

b) Lender’s possession of the property:

i) The person in possession is entitled to rents & profits from the property

ii) Texas: until fc (when lender take possession), the lender has no rt. to profits/rents

1) Exceptions:

a) Lender can go to court and ask for receiver or TRO (& get rents/profits before fc)

b) Mortgagee in possession: lender who takes physical control of the debtor’s property prior to fc

c) Usually DOTs in Texas have assignment of rents: two ways to assign…

i) absolute assignment: (not favored by law)bank holds rents absolutely subject to a license by the O of the property as long as he is not in default

ii) collateral assignment: (preferred by Tex SCt) ??assignment if default

c) Ways to Foreclose!

i) Judicial fc (expensive and time consuming)

1) Lender proves he owns note

2) Proves balance of note

3) Who signed

4) That it is in default

5) That there is an alien on the property

6) Sheriff’s sale: avoid this b/c expensive and takes time

ii) Non judicial fc: DOT mortgage system allows us to get around judicial fc

1) Owner owns property but grants mortgage (DOT) to trustee

2) Trustee gets equitable right (not title) to fc if default via non judicial fc

a) Notices

b) Trustee conducts non judicial fc sale on courthouse steps of that county

c) Bid process

iii) Trustee: usually appt’d by lender, but he has duty to conduct fair sale

8) Warranty Deeds

a) Special warranty deed

i) Special warranty deeds say there is no claim “by through or under Grantor” but not otherwise

b) General warranty deed (two warranties)

i) Grantor has not conveyed the property or any interest in the property to anyone else

ii) At time of deed execution, the estate is free from encumbrances

1) Means: there is no other person/entity who has any type of ownership interest in the property

2) Ex. licenses, easements, mineral rights, royalty interests, dot’s

3) There are no encumbrances back to sovereign (there probably are, but the defects are erased b/c SOLs run and fsa vests in the seller)

iii) Elements of GWDeed

1) Grantor, grantee

2) Date

3) Consideration

4) Legal description

5) Reservations, exceptions (encumbrances)

6) Grant clause “grant or convey”

7) Warranty clause “warrant and forever defend”

8) Signed by G’or and G’ee

c) Three requirements of a deed:

← Words of grant (grant or convey)

← Present intent to convey

← Adequate legal description

d) Warranty deed w/ vendor’s lien:

i) Consideration: this is what creates a vendor’s lien

1) For cash: “$10 and other good and valuable consideration”

2) Loan: “$10 and other good and valuable consideration including the execution of a promissory note to xxx bank dated xxx for the amt. of xxx”

ii) Vendor’s lien

1) Can encumber HS for: purchase money, improvements or taxes

2) It’s a PM lien (but special b/c works for homestead!)

iii) Assignment: “this vendor’s lien is assigned to xxx bank (the lendor)”

e) Deed:

i) Grantor signs deed

ii) Should be recorded to put ppl on notice (and must be notarized to be recorded)

iii) Must be delivered (valid if signed and delivered)

iv) Deed may contain disclaimer of warranty language; then G’ee should sign so G’or is safe that G’ee bought property “as is”

f) Promissory Note

i) Interest rate & rate on matured unpaid amounts (18% or max. allowed by law)

ii) Term of payment (e.g. monthly); should match consideration clause in deed

iii) If note is silent, you can’t prepay

g) Deed of Trust

i) A DOT is the primary mortgage used in Texas

ii) Def: a mortgage coupled with a right to sell

iii) Elements ?

1) Parties (gor, gee, trustee)

2) Legal description

3) Id loan

4) Prior liens and exceptions

iv) Lender’s rights:

1) Lender appoints trustee

2) Subrogation clause: move up into shoes of first lien

3) If borrower doesn’t pay insurance, lender can buy ins. and add amt. to note

v) Default: after fc, borrower agrees to vacate (if he doesn’t, file fed)

9) Mechanic’s Liens

a) Don’t do it if you don’t know about it; changes often, so check property code.

b) When to use:

← Must have for residential construction or improvements to HS

← But it doesn’t hurt to do it at other times, just in case

← Can only get mechanic’s lien for private work (not gov’t work).

c) Voluntary Liens

i) O voluntarily gives a lien to someone who is going to work on his property to secure payment for work to be done.

ii) Procedure:

1) O and contractor make K for repairs;

2) O gives lien to contractor (and K does repairs);

3) Contractor assigns lien to bank & bank pays contractor;

4) O must now pay bank.

iii) Requirements for getting a mechanic’s lien: statutory disclosures and

1) Repairs:

a) Written K for work and materials

b) Signed by both spouses

c) K for repair can’t be executed before 12th day after owner makes application for credit (unless necessary for health/safety)

d) K must have clause giving homeowner 3 day right of rescission for any/no rzn

e) K must be executed at the office of a 3P lender or atty’s office or title co’s office

2) New home construction: don’t need those elements above per Spradlin case

d) Involuntary Liens

i) Def: Contractor or sub works on property, doesn’t get paid, files lien on property.

ii) General Contractor is in direct privity with the O and can get a Constitutional Lien:

1) C’al liens are automatic (don’t have to be perfected or recorded)

2) Unless purchase has actual or constructive notice, a C’al lien doesn’t pass with the property.

3) If GC files lien affidavit, 3P’s get notice and lien will pass with property.

a) NOTE: to get a statutory lien, GC must (1) give notice and (2) file affidavit.

iii) Subs get assignments from the GC, are not in direct privity, so can only get Statutory Liens: (Tex. Prop. Code ch. 52)

← By 15th day of 3rd month after work done or materials supplied, give CG and O written notice of claim for non-payment

← By 15th day of 4th month after last work done, give notice to GC and O of non-payment and file affidavit and lien

← If you miss deadline, you can still sue on boK for money jj, but no lien

iv) Sub-Sub contractor (3rd tier): By 15th day of 2nd month, give GC notice; file and give notice of lien affidavit; file suit and get lien

v) Notice must be certified mail & lienholder has burdens to prove everything

e) Bonds (O requires GC to be bonded, often)

i) Performance bond: insures GC completes project

ii) Payment bond: insures GC pays his bills

10) Closing

a) Executory period ends at closing b/c it becomes executed K

b) Basics:

← Where: at title co (also at bank, atty office, realtor’s office)

← When: per dates in earnest money K or as otherwise agreed by parties

← What: documents are exchanged & $ changes hands; title is transferred

← Who: buyer, seller, realtor present; larger deals: rep. of lender, attys

c) Transactions that take place at closing:

i) Purchase price from buyer to seller

ii) Loan between buyer and lender

iii) Note: if one of the K’s falls through (breach), that doesn’t excuse performance on other

d) Role of the Attorney:

i) Make sure buyer gets what he pays for & seller gives no more than he is pd. for

ii) Attorney for seller: know method of payment of consideration for deed

1) Don’t’ take checks

2) Take “cleared funds” (a cashier’s check or wire transfer to bank acct)

3) Texas: title co. only allowed to accept $1500 worth of uncleared funds

e) Merger

i) Doctrine of merger: everything that has occurred, been contracted for prior to closing merges into closing documents

ii) Effect: everything merges into deed executed at closing and earnest $ K has no effect

iii) Attorney’s role: review executed K and ensures everything was contracted for and you got everything you contracted for

iv) Exceptions to merger!

1) Fraud

2) Mutual mistake

3) Collateral rights: court-created exception; if the right do not affect the title to the property, but are collateral, the parties can enforce the original K

4) You can contractually agree there will be no merging (after each specific provision in the K say “this provision survives closing”)

f) Escrow

i) Three types of escrow (you may use them all; they have different functions)

1) Loan escrow: a procedure by which the lender collect taxes and ins. premiums re: the property that is his collateral (almost always used in residential transactions)

2) Escrow closing: parties have appointed an escrow agent to conduct the closing (in Texas, almost always the title co.); conduct the closing strictly adhering to K and instructions from the parties

3) Contingency escrow: close the transaction, but you still have to fix minor problems

a) Seller leaves money with the title co. and if the minor matter isn’t fixed, buyer gets the money

b) Seven elements to include in writing an escrow contingency K:

i) Describe the item to be fixed

ii) Seller sets cost or max he will pay to fix

iii) Give time period for correction

iv) Provide standard for proof of performance or completion

v) Buyer gets right to inspect

vi) Agreement should contain clear & express statement of when, how & to whom escrow funds will be given (ex. once seller gives notice it’s fixed & buyer doesn’t object)

vii) Agreement should clearly define obligations & duties of the escrow agent (agent doesn’t want to judge what’s good enough); if there is a dispute, agent can give money to court or until both parties agree.

g) Hud-1 settlement statement

11) Post Closing:

a) Recording: title co. records documents

b) But attorney has to make sure title company does it

c) And check order of recording: if DOT signed to bank is recorded before the deed is recorded, you gave a DOT mortgage in property you don’t own.

12) Environmental: know that you should ensure you protect your clients from liability

a) TNRCC

b) Environmental Site Assessments: ensure “due diligence” on property so not exposed to liability

i) Preliminary site assessment (phase I ESA)

ii) Limited site assessment (phase II)

iii) Corrective action plan (phase III) (abatement)

c) O&M plan: operation and management plan

d) Stormwater prevention plan: EPA and TRNCC require you to test runoff from your plant to ensure it doesn’t contaminate surrounding groundwater

e) Handout: ??did I get enough??

i) Superfund laws: anyone associate with hazardous waste is PRP (potentially responsible party) and is J&S liable

13) Alternative Financing: (not bank as lender)

a) K for Deed

i) Seller gives Buyer a K for deed

ii) Used in residential almost exclusively: vacation homes & for the non-credit worthy

iii) 4 elements

1) terms are variable

2) xxx period of years

3) buyer has possession

4) no instrument to record b/c legal title stays with seller!

iv) Problems with K’s for deed:

1) Seller has legal title, buyer has possession; if seller doesn’t pay his note for something & used house as collateral, creditor gets jj, it puts a lien on the property and buyer may end up getting a clouded title

2) Underlying debt: if seller still owes on the property but doesn’t pay his DOT, buyer can get clouded title

3) Pre-existing encumbrances on the property

4) Taxes and insurance: seller doesn’t want to pay for this anymore & usually the K for deed doesn’t have an escrow provision

5) Seller dies before property paid off => buyer may have problems getting deed

v) To protect the buyer & seller:

1) Record the K for deed contract

2) Put the closing documents in escrow (helps with (5))

3) Go to court for breach

vi) Notices: Tex. Prop. 5.061 to prevent abuse (by seller),

1) the longer a note has been paid on, the more notice the seller is required to give before taking back possession

a) paid less than 10 percent purchase price 15 days after notice

b) less than 20 percent 30 days after notice

c) 20 percent or more 60 days after notice

2) statutory notice statement to buyer

a) id remedy seller intends to enforce

b) specify: delinquent amount (pr & interest), late fees, period to which that amt. relates

c) any provision

3) right to cure (during specified period of time) by fulfilling K’s obligations

b) Lease with Purchase Option

i) 3 characteristics:

1) terms will vary greatly

2) lease (usually residential) w/ option for tenant to buy by certain date

3) define these terms with specificity:

a) duration of lease & option

b) purchase price

c) how rent payments are applied (as cr. for purchase price or not)

d) options must be supported by consideration (is this a credit or lost)

e) define terms of sale (stuff you’d find in an earnest money K)

ii) always remember to say the option is valid “if the lease is not in default” b/c you don’t want them to run out on lease & come back to exercise option

14) Title Insurance

a) Parties:

i) Title insurance company : [TIC] these are the national underwriters like Stuart Title

ii) Title insurance agency: (Tia) they get the clients & examine the titles

1) if there is a question, they ask the title ins. co. if the title is insurable

2) two functions of title insurance agencies

a) issue title insurance

b) handle escrow closings

b) about title insurance:

i) title insurance does not guarantee good title (just as health ins. doesn’t guarantee health), but it is an indemnity agreement to pay for defects in title

ii) Texas Title Insurance Act

1) Ch 9 of insurance code

2) Regulates all players in title ins. system

3) Set insurance rates (TDI, Tex. Dept. of Ins.)

4) Licenses: title insurance agencies can only sell title insurance

iii) 9.02 the Function of Title Insurance

1) insures, guarantees, or indemnifies owners of real property against loss or damages suffered by reason of liens, encumbrances upon or defects in the title to the property and the invalidity of liens thereon

2) very broad definition

3) rule: the only companies that can issue title ins. are title insurance companies

iv) 9.03 rebates & discounts

⇨ no commission, rebate, discount, portion of any title insurance premium, or other thing of value

⇨ shall be directly or indirectly paid or received by any person

⇨ for doing the bsns of title ins. or soliciting or referring title ins. bsns

exceptions:

1) a title ins. underwriter (TIC) can split a commission w/ a title agency (total can’t exceed total premium)

2) division of premium between title co. and a subsidiary (e.g. if TIC owns title agency)

3) a title ins. agency can compensate bona fide employees for examining titles

4) can by attorneys for services actually performed in connection with title examination or closing a transaction; payment may not exceed a rzbl charge for such services [title agency hires atty & pays them % or wage for examining titles]

5) a promotional & educational activities not conditioned on the referral of bsns.

v) 9.48 Texas Title Insurance Guaranty Act: a fund for consumers to compensate for losses in case title ins. co. fails (goes bust)

c) limitations on recovery:

i) usually ltd. to amt. of purchase price b/c it is insurance (not a guarantee of good title)

ii) extra-contractual liability: P’s lawyers would add DTPA claim => mixed results

d) types of policies:

i) owner’s policies: insure the owners/buyers

ii) mortgagee’s policies: insure the bank or whomever’s collateral; insure the validity & priority of the mortgage

e) claims

i) present the claim to agency & underwriter w/in xx periods of time

ii) if title co. was wrong, they have remedies for consumer

1) institute all necessary legal proceedings to clear title to the property (file dec. jj action to uncloud title)

2) remedies for consumer (title co. should take care of this) [do one or more…]

a) institute all necessary legal proceedings to clear title (file dec. jj to uncloud)

b) indemnify the insured per terms of the policy (policies capped at amt. pd. for property)

c) reinsure at current value the title to the property w/o making exception to the defect

d) secure a release of the encumbrance discovered

f) remember, title commitment is not title policy; you must get both

15) Surveys

a) 3 organizations govern surveys:

i) American Land Title Ass’n ALTA, a trade group for title ins. companies

ii) American Congress of Survey & Mapping ACSM, a trade group of licensed surveyors

iii) National Society of Professional Surveys NSPS, a trade group of licensed surveyors

b) These organizations write criteria for different types of surveys; that’s why you should order the specific type of survey you need

i) Topological survey shows elevations

ii) Gradient boundaries survey is what you use along riverbeds

iii) ALTA gets together with other trade groups to decide what the standards are for types of surveys

c) Survey checklist: make sure it’s the types of survey you asked for in earnest money K

i) Recent date

ii) Certificate: signed & sealed

iii) Compass & scale

iv) Beginning point & system of reference (“point of commencement, point of beginning”)

v) Compare survey to legal description

vi) Locate the easements recorded on the title commitment (and note those not on title commitment!)

vii) Locate improvements to see if they protrude & see if anyone encroaches on you

viii) Notations on survey

ix) Access to public roads

x) Utilities

xi) Flood plains

d) Encroachments & protrusions:

i) Try to get limitations title by adposs

ii) Make offer & boundary ag. with neighbor

iii) Replat land & resurvey (and pay neighbor)

16) Foreclosures

a) Judicial: ordered & supervised by the court

i) Plead, prove default & lien

ii) Get sherrif’s sale order & sheriff will give you the money

iii) If you file for judicial fc, you must name all persons w/ a property interest in the re (O, lender, lienholders)

iv) Deeds in Lieu of FC

1) O would offer bank a “deed in lieu of bank having to fc” on the property; bank would accept it, not knowing about jr. liens. Then bank loses priority & takes subj. to jr. liens. (fixed by ( )

2) § 51.006 Prop Code “anti-merger” statute: if you take deed in lieu of fc, you may file suit to avoid deed and get fc instead

a) debtor (O) fails to disclose a lien or other encumbrance before deed goes to lien holder and

b) holder of debt has no personal knowledge of the undisclosed debt/lien

v) § 51.007 Wrongful FC

1) sue bank and trustee for wrongful fc

2) statute protects T if T can file verified pleading that he was acting in a ministerial capacity [if P objects, P must file denial and prove T was acting on own]

3) this creates safe harbor for T’s that act in GF reliance on information provided by lender or lender’s agents

vi) SOL: non-judicial FC SOL is 4 year from date note matures [if you default and accelerate note, then bank allows O to repay at lower payments, you will lose SOL! soln: reinstate note!]

vii) Property in the hand of a receiver/guardian/bankruptcy trustee can’t be FC’s upon b/c in a court’s hands.

b) Non Judicial:

i) Can use when you have “power of sale” per DOT (or other K like a mechanic’s lien K)

ii) Benefits: quicker & cheaper

iii) Overview -- Nine steps of non-judicial FC

1) NOITA letter (notice of intent to accelerate); 20 days notice of default, rt. to cure for residential (in commercial, the notice if usually waived by K)

2) Check for tax liens (federal)

3) 25 day notice to IRS if tax lien

4) file notice of T’s sale with county clerk where property located

5) post notice of T’s sale at courthouse

6) send 21 day notice of trustee’s sale to O (cert/rrr)

7) consult with client (bank) re: bid instructions, amount, T’s fee, etc.

8) sale at courthouse (read notice, agenda, auction)

9) file T’s deed and affidavit

iv) Trustee named in DOT

1) Fiduciary duties:

a) Conduct FC sale in fair manner & in strict accordance w/ DOT or applicable law

b) To get as good a price as possible (don’t “chill the bidding”)

2) DOT will say how to replace trustee, too

v) Effect of a FC

1) Makes first lender the owner of the property &

2) all liens later in time are extinguished

3) but later liens are still valid for boK; just collateral is gone

4) if we FC 2d DOT, property is still subj. to the first DOT

c) Ch 51. Property Code on foreclosures

i) Auction

1) Conducted at public sale (auction) to highest bidder

2) 10a – 4p of first Tues of month

3) County courthouse where property located (on steps or where designated)

ii) Notice

1) Must say earliest time when sale will start

2) Given at least 21 days prior to sale

iii) Notify owner

1) Notice in writing & posted on courthouse door (or BB)

2) File w/ county clerk

3) Mail to debtor, cert/rrr

4) *don’t have to notify other lien-holders

iv) notice req’d per common law: must fairly appraise potential bidders of info.

1) date, time, place

2) describe lien and debt

3) describe property

4) statement of default

5) request property party (T) to fc

d) the auction

i) requirements

1) must start w/in 3 hours of time state in notice

2) if HS, give 20 days notice of the default and rt to cure

3) notice effective when mailed

4) announcement: debtor’s record is safe harbor?????

5) Winning bidder gets rzbl opp. to get cash (1 hour)

6) If homeowner remedies before sale, don’t show up to conduct sale.

ii) Who bids:

1) Mortgage holder (bank)

2) 3P’s (real estate investors)

3) owner (must bid cash)

4) trustee can bid for a disinterested 3P

iii) bid price (usually set by DOT) consists of:

1) principle

2) interest owing

3) late fees

4) trustees fees

5) attorneys fees

←

e) Post Sale Matters

i) T signs trustee’s deed, which conveys the property under the DOT to the buyer

ii) T distributes the proceeds as directed under the DOT

iii) Mortgagee’s title policy automatically converts to an O’s policy after fc.

iv) General rule: FC of first lien kills jr. liens.

1) Exception: IRS tax liens; if non-judicial foreclosure of real property, the foreclosing party must notify IRS in writing of sale (cert/rrr) 25 days before sale

2) Always conduct a lien search for tax liens before a fc sale

3) Failure to give notice: sale still good; but subject to IRS lien

4) Limited rt of redemption (Texas doesn’t have this); (rare) IRS has limited rt of redemption for 4 moths, they can buy the collateral by paying

a) Purchase price

b) Interest and

c) Negative cash flow

f) Deficiencies & debtor’s rights:

i) if not sold for note amt. => debtor owes lender overage & lender can sue to get deficiency jj (must be brought w/in 2 years by lender [6 yrs for FDIC])

ii) borrower can sue to have ct. determine fmv of property

1) debt – fmv = deficiency

2) fmv determined by “competent evidence of value”

a) expert opinion testimony

b) comparable sales

c) anticipated marketing time and holding costs

d) cost of sale

e) discount for “fire sale”

iii)

17) Choice of Ownership

a) Residential: put in buyer’s name

b) Commercial: should an entity buy this? what type of entity? [Bus. Org. stuff]

i) 8 factors to consider in selecting entity type:

1) *liability*

2) *taxes*

3) methods for getting money out: how to you pay yourself and how it’s taxed

4) formation and maintenance req’s

5) management and control

6) transferability of interest

7) legal flexibility

8) continuity of existence

ii) types of entities:

1) Sole Proprietorship

a) Own something yourself

b) If you do bsns in a name other than own, file dba cert. w/ SOS

c) Taxes: all on individual’s tax return (schedule C)

d) Liability: unlimited personal liability

e) ex. this would be a good idea if all one’s property is exempt (HS, IRAs)

2) Partnership: two+ ppl in jt. bsns. for profit

a) General Partnership (unusual now)

i) No filing needed

ii) All P’s are J&S liability for Pship activities

iii) Use only to make a GP between corp’s.

b) RLLP: Registered Limited Liability Partnership

i) Requirements:

1. file with SOS & pay fees

2. maintain $100k ins. policy

ii) Limits liability to:

1. a P’s own torts/liabilities

2. liability created by e’ee under your supervision

c) LP: Limited Partnership

i) One GP and one LP (GP can be a corp.)

1. GP liable for all Pship debts (all GP’s are J&S liable)

2. LP immune unless:

a. LP’s are controlling the bsns (acting as GP’s)

b. But LP’s can reserve veto power in Art. of Org. for some things

ii) ex. make developer GP and cash-guys the LP’s

3) Corporation: S or C

a) C corp: pay corporate tax & SH’s pay personal taxes on dividends

b) S corp: taxed as Pship (flowthrough)

4) LLC: Limited Liability Company

a) Hybrid between corp & pship

i) Tax & management purposes: treated like Pship

ii) Libility: treated like corp.

b) Members not liable for LLC’s debts

c) Organization:

i) File articles of organization & use regulations (not bylaws)

ii) Have members & managers

c) In Texas, use LP with a corporate/LLC General Partner

i) No franchise taxes

ii) Pass through federal taxes

iii) Limits liability to corp or LLC

18) Commercial Financing

a) General info:

i) 80% small bsns fail in first 5 years

ii) a good bank only loses ½ of one percent in a year

iii) why? b/c a bank’s total assets:

1) 6% bank’s own money & equity

2) rest is depositor’s money (a liability)

b) 5 things loan officers consider in a small bsns’s management:

i) strategic planning

ii) finance and accounting

iii) sales and marketing

iv) personnel

v) administration and operations

← if bad, hire internal or external people!

c) Business Plan

i) Industry overview

1) Outlook of industry: mature, growth, declining

2) Barriers to entry: technology, innovation, cost (actually prefer high to grant loan)

ii) Competition: is there a strategy to beat it? a niche?

iii) Operations: JIT inventory, etc.

iv) Financials: cash flow, cash flow, cash flow! What goes in & what will come out.

d) 5 C’s of Credit:

i) character (most imp.)

ii) capacity (can you pay)

iii) capital (how much of your money is invested)

iv) conditions

v) collateral

19) Representations & Warranties

a) Representations made:

i) Earnest Money K

1) Residential includes disclosure form, which are representations

2) Commercial: most representations, if any, in K; best to get inspection for buyer & go w/ caveat emptor theory

ii) Deed

1) General Warranty:

a) I haven’t conveyed the property to anyone else.

b) Title is good and vested in me.

2) Special Warranty: I haven’t conveyed the property to anyone else.

iii) 1968 Interstate Land Sales Act:

1) applies to unimproved lots in subdivisions of at least 25 lots

2) requirements: owner/developer must file a “Statement of Record” to disclose certain things/condition/size

3) know act is complicated & purchase has 2 years to rescind for violation

b) Warranties:

i) Def: a warranty is a positive affirmation/representation with respect to the subject of the sale which operates as an inducement to the purchaser (does not include puffing)

ii) Express warranties:

1) created by the K (boK = 4 year SOL)

2) warrantor warrants something & if it breaks, wararntor will fix for xx period of time

3) you can limit the damages in express warranties by drafting the K (like liquidated damages) [you can’t warrant away Humber]

4) if you represent builder/developer, use express W’s to lt. consumer’s remedies

iii) Implied Warranties know case names

1) New homes

a) Humber v. Morton: implied W of habitability in new home residential sales

i) The home has been constructed in a GWL Manner [constructed in a manner generally considered proficient by those capable of judging such work]

ii) The house is habitable for human habitation [promise the house will be safe, sanitary & otherwise fit for humans to inhabit]

2) Used homes: there is no warranty

a) Exception: Gupta v. Ritter Homes

b) A later buyer can still sue the builder/vendor (not seller) for latent defects caused by the builder/vender

3) RCLA Residential Construction Liability Act governs the sale of new homes

a) Notice before you instigate litigation, you must:

i) Give 60 day notice (written complaint in detail)

ii) Give opportunity to repair

If you don’t, D can file plea in abatement until notice & 60 days pass.

b) Settlement builder can make settlement offer to P; if verdict is less than offer, P doesn’t get atty’s fees or costs.

c) Defenses Rcla allows the jury to consider

i) Negligence of another party (e.g. architect);

ii) P’s failure to mitigate damages.

iii) Eliminates liability due to “normal shrinkage” caused by soil settling.

4) Leases

a) Residential

i) Kamarath v. Bennett implied warranty in residential leases that premises are habitable and fit for living

ii) Codified in Landlord/Tenant Act: implied W of habitability

iii) W is dependent upon payment of rent (duty to pay rent depends on its being habitable).

b) Commercial:

i) Davidow v. Inwood implied W of suitability

1. there are no latent defects that are vital to the use of premises for their intended purposes & they will remain in a suitable condition

2. if there is a defect that causes non-suitability, ti has to be one the leased premises (parking lot not enough)

ii) W of suitability can be contracted around; LL can require T to make all repairs.

5) Home Owners Warranties (HOW): agree to get residential builders to come back to fix; they are lame.

20) Legal Malpractice!

a) Malpractice claims:

i) Tx: you must be in privity to sue

1) Only those in atty-client relationship are in privity

2) Atty-client relationship can be implied!

3) Fees: paying fee doesn’t mean you are atty-client, but not paying fee doesn’t mean you’re not, either

ii) Malpractice claims are not assignable

1) ex. atty drafts bad will; beneficiaries can’t sue b/c they are not in privity

2) exceptions:

a) fraud

b) dtpa

c) **when a non-client party sues an atty for negligently failing to inform him he should get his own attorney (soln: write representation letter “I am not your atty”)

b) SOLs

i) The SOL:

1) Generally, malpractice is negligence = 2 year tort SOL

2) Fraud = 4 years (K)

ii) Starts to run when legal injury accrues (when negligence results in actual damage)

iii) Tolling:

1) Continuous representation rule: if the negligent atty continues to represent the client in the matter in which the negligence occurred, SOL doesn’t start to run until representation is concluded

2) Discovery rule: SOL doesn’t start to run until P actually discovers or rzbly should have discovered the negligence

3) Exhaustion of appeals rule: SOL doesn’t start to run until all appeals are exhausted in the action in which malpractice occurred

c) Malpractice coa’s:

i) Negligence (elements)

1) Duty owed

2) Duty breached

3) Proximate cuase

4) Damages

ii) Breach of fiduciary duty: atty’s are fiduciaries; this duty easily breached in conflict of interest cases (soln: get waiver which will help)

iii) Fraud

1) Representation

2) Material

3) Justifiably relied upon

4) Detrimentally (caused damage)

5) Actual damages

iv) Dtpa claims

v) Securities laws: can happen if you deal with a LP and GP sells interests to raise money

d) 8 ways to safeguard against malpractice:

i) assess/maintain/improve your ability to do the job

1) keep up with the law, go to seminars

2) only handle things you are competent to handle (in your field)

3) don't take cases you don't have time to handle

ii) identify who your client is

1) get a written engagement letter

a) that defines (limits) the scope of the engagement

b) set forth your fee arrangement

iii) identify disclose and prevent conflicts

1) who are the other parties to the transaction

2) who are/not represented by legal counsel

3) if conflict, immediately disclose to your client; if client consents to go forward, get a written waiver from your client

4) maintain some type of conflicts check at your office!

iv) communicate! honestly, fully, openly with the client

1) remember, your job is to lay out the options for your client; they make the decisions

2) ensure client understands there are no guarantees in law

3) if necessary for you to quit b/c conflict => tell client immediately & ensure it doesn't prejudice your client's case

v) calendar everything!

vi) document everything: document oral conversations, too

vii) train and supervise support staff

viii) disclose & deal with problems early

e) cases about not telling people you are not their atty & they should get their own!

i) Carnahan case: client’s wife was held not to be a client, but atty liable for M anyway b/c he didn’t advise her to get her own atty

ii) McCamish case: non-client, adverse parties demanded “representation or opinion” from atty; atty gave it and was wrong; held he was liable b/c he supplied false professional info to a 3P who justifiably relied on it (even though no privity)

1) Solution: if you have to write rep/opinion:

a) Limit who may rely on the writing.

b) Put in all disclaimers and assumptions you can.

21) Income Tax Consequences of Owning/Selling Residential RE:

a) Dasf

b) asdf

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Use when buyer can’t get loan

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