Real Estate Transactions and
Finance (Prof. Freyermuth)
• Please don’t sit in 2 back rows
• E-mail: freyermuthr@missouri.edu
• Web: www.law.missouri.edu\freyermuth\
retf\fall2015\index.html
• Exam and permitted materials
• Cancellations and make-ups
Course Coverage
• First 5-6 weeks: Land Transfer
– Contracting for the Transfer of Land
– Closing and Escrow
– Deeds and Delivery; Deed Warranties
– Title Search and Title Insurance
• Last 8-9 weeks: Real Estate Finance
(The Law of Mortgages/Deeds of Trust)
Brokerage Arrangments
Real Estate Broker Functions
• Listing function: placing
the land on listing service
(e.g., MLS), advertising
• Selling function:
displaying land to wouldbe buyers, facilitating
negotiation of purchase
and sale contract
• Open listing: owner can sell land herself, or
use any broker (listing broker earns
commission only if he/she facilitates sale)
• Exclusive listing: owner can sell herself, but if
owner uses another broker, owner also has to
pay a commission to the listing broker
• Exclusive right to sell: listing broker earns
commission on any sale during listing period,
even if listing broker didn’t procure the sale!
• Nearly all modern brokerage agreements are
exclusive right to sell agreements. Why?
1
Exclusive Right to Sell
• Exclusive right to sell
agreement protects
Broker’s investment in
listing/marketing the
owner’s property
– Else, broker would have to
prove broker was procuring
cause of a sale (difficult)
Form Listing Agreement (p. 3)
• ¶ 8: “Possession of the Property shall be
delivered to Buyer on _________.”
• ¶ 4: “The Offering Price for the Property shall
be $_______ on the following terms.”
• Why are these provisions in the listing
agreement (given that Broker won’t have yet
started marketing the land, and won’t have
yet found any potential buyers)?
Broker Functions
• “Listing” and “selling” functions can be
served by the same broker
• More frequently, they are served by
different brokers, who split the commission
– “Selling” function may be provided by
• (1) broker representing the seller (sub-agent),
• (2) broker representing the buyer (buyer’s broker)
• (3) Both (1) and (2)
• Broker uses listing agreement to constrain
Owner’s discretion in “rejecting” buyers
– E.g., Broker doesn’t want to locate a Buyer
that agrees to pay Owner’s $400,000
asking price, only to have Owner reject the
Buyer b/c Owner now wants to charge a
higher sale price
– Owner can still reject the Buyer (if Owner
and Buyer don’t have binding contract), but
Owner would incur liability to Broker for
commission on rejected sale!
2
• Bailey hires Barbara to sell
his home, listing agreement
(p. 3) provides for 6%
commission rate
• Jerry signs K with Bailey to
buy home for $400K, but
sale doesn’t “close” b/c
Jerry gets job transfer
• Does Bailey owe Barbara a
$24K commission?
Problem 2:
Commissions
Minority Rule: Dobbs
• Unless listing K provides otherwise, broker
only earns commission when sale actually
closes and buyer performs (when buyer
pays K price) (adopted in Drake v. Hosley)
– Real test of whether buyer is “ready, willing,
and able” is whetherbuyer actually closes
– Rationale: more consistent w/ expectations
of typical seller (who may need the closing
proceeds to pay the commission)
Traditional Commission Rule
• “Ready, willing, and able” standard
– Unless listing agreement says otherwise,
Seller accepts Buyer as “ready, willing, and
able” when Seller and Buyer sign K on
which Buyer is unconditionally bound
– In this situation, Broker earns 6%
commission ($24,000), even though Jerry
breached K and didn’t actually perform!
• Problem 2(b): Jerry
signs K to buy Bailey’s
home for $400K, but
does not “close” b/c
Jerry couldn’t get
approved by Bank for a
mortgage loan
• Does Bailey owe
Barbara a $24K
commission?
Commissions
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• Question: Was the contract of sale
subject to a financing contingency?
– If so, Jerry was not unconditionally bound
until contingency was satisfied or waived
• If so, then Jerry was not a “ready, willing and
able” buyer until he qualified for financing ⇒
Barbara has not earned commission
– If not, Jerry was unconditionally bound to
perform regardless of whether he got
financing; thus, he was “ready, willing and
able” ⇒ Barbara earned commission
• Now suppose that Jerry
refuses to close b/c
Bailey’s title was subject
to “no chain link fence”
covenant
• Barbara claims that
Bailey owes her a
$24,000 commission
• Is she correct?
Commissions
Drake v. Hosley
Minority (Dobbs) Rule
• Dobbs does not protect Seller from liability for
a commission if it is the Seller’s fault that the
sale did not close
• E.g., If sale doesn’t close b/c Bailey’s title was
defective, Bailey breached his duty to provide
marketable title
– This would allow Jerry, the buyer, to rescind
the contract, but
– Barbara did her job (locating a capable buyer)
and earned her commission
• 3/5: Drake lists home for sale with broker Hosley
– 10% commission if Hosley finds buyer “ready, willing,
and able” to buy on Drake’s terms
• 3/23: K signed w/Buyers; closing to occur “w/in 10
days of [Drake proving] clear title”
• 4/3: Drake delivers clear title report
• 4/5: Drake demands to close April 11, Buyers refuse
• 4/11: When Drake demands to close, Hosley tells
Drake Buyers can’t close until May 1
• 4/12: Drake sells land to other buyers
• 4/12: Buyers tender price, Drake refuses it
• Hosley sues Drake to collect 10% commission
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Questions about Drake v. Hosley
• Ordinarily, Seller must wait until closing
date and tender performance before
Seller can declare Buyer in breach
• But, not necessary if Buyer commits
“anticipatory repudiation”
• Q: Is Buyers’ statement “We won’t have
the money to close until May 1” an
anticipatory repudiation of the K?
• Suppose Buyers had
directly told Drake (the
Seller), on April 5: “We
can’t close until May 1”
• Would this have
changed the analysis
of this dispute? How?
• Buyers allegedly told
Hosley they wouldn’t have
$$ to close until May 1
• Court: not a repudiation
– Hosley was the seller’s
agent, not buyer’s agent
(didn’t have authority to
bind buyers)
• Does it make sense to treat
statement as a repudiation
if Buyer made it directly to
Seller, but not they made it
to Seller’s agent?
Drake v. Hosley
Drake
• Drake is technically correct as a matter of
agency law; but it is unrealistic
– Typically, a selling agent often works closely
with the buyer (even if the selling agent is
actually an agent or sub-agent of the seller)
– Buyers often “talk” to the seller using the
selling broker as an intermediary
– Seller is likely to “take the broker’s word,”
rather than confirm facts with buyer directly
• What if buyers in Drake actually (wrongly)
believed that Hosley was their agent?
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Drake v. Hosley
• FTC investigation (1983)
– When “listing” and “selling” agents were
different, 72% of buyers believed the “selling”
agent represented them; only 8% believed
“selling” agent represented Seller!
• Similar misconceptions (and resulting
disputes) have resulted in development of
new disclosure obligations for brokers
• Having a buyer’s agent is useful for Buyer
where Buyer is unsophisticated or unfamiliar
w/characteristics of local real estate market
– E.g., Seller’s agent can’t advise Buyer re:
formulating an offer price or a counteroffer price
(doing so would breach duty that the broker owes
to the Seller) [note 4, page 19]
• Extra cost is a “red herring,” not a concern—
in listing agreement, Seller’s agent typically
agrees to divide commission w/ Buyer’s
broker, according to customs within local
community of brokers [Listing K, ¶ 12, p. 6]
• Sometimes, selling function is
provided, in whole or in part,
by a broker who represents
only the Buyer (who has a
separate “Buyer’s Broker”
agreement with the Buyer)
• What’s the benefit to the
Buyer of using a Buyer’s
broker?
• Is the transaction more
expensive as a result?
Buyer’s
Brokers
For Sale by Owner
(FSBO)
• Primary attraction: no broker commission means
reduced transaction costs, “more equity in seller’s
pocket”
• Primary problem: marketing is difficult
– Local MLS will not accept FSBO listings (must be
broker/member of MLS to gain access)
– More feasible in high-traffic or high-demand areas
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“Discount” Brokerage
• In some places, firms now provide “limited”
brokerage services at lower costs
– E.g., “My Dog Tess” lists property on MLS for
$500 flat fee (Seller negotiates w/ Buyers
directly, e.g., broker provides listing only)
– Others provide “fee for service” (e.g.,
SelectAFee.com) (broker provides listing only,
limited service, or full service at fixed price)
“Minimum Service” Statutes
• RSMo § 339.780(7): a broker w/ exclusive right
to sell (residential listings) must provide “full
service” (all selling functions) [p. 11]
– Must accept/present all offers/counteroffers
– Must assist client in developing, communicating, and
presenting offers/counteroffers
– Must answer client’s questions re: offers,
counteroffers, notices, and contingencies
Brokerage Services
• Traditional “Realtor” argument: primary benefit of
full-service brokerage is that client receives
assistance with sale contracting, which produces
better informed deals for seller
– Seller gets to use broker-approved form contract
(which reflects benefit of collected historical
experience)
– Broker likely to be aware of, and form is likely to
address, potential “pitfalls” to which Seller might
otherwise fall victim
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