Principals of
Real Estate
Lori
Chapman
Virginia Real Estate
• Who must have a license:
Any person who or business entity that
performs or advertises brokerage services
must be licensed by the REB (Real Estate
Board)
• Real Estate Broker &
• Real Estate Salesperson
Virginia Real Estate
• Real Estate Broker- …any
person or business entity, including, but not
limited to, a partnership, association,
corporation, or limited liability corporation,
who for compensation or valuable
consideration(i) sells or offers for sale, buys or
offers to buy, or negotiates the purchase or
sale or exchange of real estate, including
units or interest in condominiums, cooperative
interest… for time shares in a time-share
program…or(ii) who leases or offers for lease,
or rents or offers for rent any real estate or the
improvements thereon for others.
Virginia Real Estate
• Real Estate Salesperson..any person, or business entity of not more
than two persons unless related by blood, or
marriage, who for compensation or valuable
consideration is employed either directly or
indirectly by, or affiliated as an independent
contractor with, a real estate broker, to sell, or
offer for sell, to buy or offer to buy, or to
negotiate the purchase, sale, or exchange of
real estate, or to lease, rent or offer for rent,
any real estate, or to negotiate leases
thereof, or of the improvements thereon.
Virginia Real Estate
•
Firm- sole proprietorship (nonbroker owned) that
is not owned by a principal broker.
•
Principal Broker- individual broker designated to
assure firm compliance & communication with the
Real Estate Board
Supervising Broker- or a managing broker that
supervise the office activities
•
•
Associate Broker- one that practices as a
salesperson but holds a brokers license
•
Sole Proprietor- an individual who owns a real
estate firm, if licensed then acts as principal broker
if not then must designate a licensed broker to be
principal broker.
Licensee- any person…. That holds a license
•
issued by the REB to act a broker or salesperson
•
Standard Agent- a broker or salesperson that acts
or represents a client.
•
Independent Contractor- broker/salesperson that
acts for or represents a client with a written
contract- not to be confused w/tax purposes.
Introduction to
Real Estate
CHAPTER 1
•
•
•
•
Real Estate Specialization
Professional Organizations
Types of Real Estate
The Real Estate Market
Real Estate
Specialization
• Brokerage-bringing people together
• Appraisal- estimating the value of real
property
• Property Management- managing &
protecting an owner’s investment/return
• Financing- arranging/providing funds to
purchaser real property
• Subdivision & Developmentsplitting a larger parcel into smaller pieces &
improving
• Counseling- competent,independent
information & advice
• Education- opportunities to practitioners &
consumers
• Others- practice of law,
corporations,government agencies
Professional
Organizations
• NAR-National Association of REALTORS
• NAREB-National Association of Real
Estate Brokers
• AIREA-American Institute of Real Estate
Appraisers
• ASA-American Society of Appraisers
• NAIFEA-National Association of
Independent Fee Appraisers
• REEA-Real Estate Educators Association
• REBAC-Real Estate Buyer’s Agent
Council
• NAEBA-National Association of Exclusive
Buyer’s Agents
• BOMA-Building Owners & Managers
• IREM-Institute of Real Estate Management
• CIREI-Commercial Investment Real Estate
Institute
• ASREC-American Society of Real Estate
Counselors
Types of Real Estate
• Residential- single family dwellings,
duplexes, triplexes , fourplexes, apartments,
townhouses, condominiums,mobile
homes,…..
• Commercial-office buildings, retail
stores, shopping centers, air parks,
marinas…..
• Industrial-factories, industrial
parks,warehouses, power plants…
• Agriculturalfarms,ranches,orchards,vineyards,feedlots,
hatcheries,timberland..
• Special Purpose- churches,schools,
cemeteries,government owned property
Each type of property can be
separated- Sales market where
ownership is transferred from seller to buyer,
Rental market where rights to occupy & enjoy
for a certain period of time.
The Real Estate Market
•
Market Place-
where goods are bought &
sold
•
Supply & Demand
are economic forces
that set prices
1. Characteristics of real estate effecting
supply & demand:
a. Uniqueness
b. Immobility
c. Effect of natural disasters/changes in
markets
2. Prices drop with increased supply
3. Prices raise with decreased supply
Factors affecting
Supply / Demand
• Supply
1. Labor force
2.Construction cost
3. Government
controls at all
levels
4. Government fiscal
& monetary
policies
• Demand
1. Population
2. Demographics- make
up of population
3. Employment & wageswhere & how money
is spent/ perceived job
security
Real Property Law
CHAPTER 2
• Land- to the earth’s center & upward to infinity
(including trees & water)
• Real Estate-the land & all things
permanently attached by nature & man
(improvements)
• Real Property- the real estate plus interest,
benefits & rights inherent in the ownership of real
estate
• Surface rights- may be sold/ leased to
others
• Subsurface rights- substances in the
ground/may be sold or leased
• Air rights-may be sold or leased. Solar &/or
sunlight have become issues in recent years.
• Personal property- All property that does
not fit the definition real property .
– An item of real property may be changed
to personal property through severance
Ownership of Real
Property/Bundle of legal
rights
• The concept comes from old
English law
• The Bundle of legal rights
include the rights of:
– Possession- the right to occupy
– Control-the right to determine certain
interest for others
– Enjoyment- possession without
harassment
– Exclusion- legally refusing to create
interest for others/keep others from
entering
– Disposition-determining how the property
is disposed of
• Title to real property- right to
ownership
– Deed – the actual paper that
shows ownership- where title is
passed
• Personal Property / Chattels
All property that is not and/or do not fit the
description of real property
Classification of
Fixtures
Fixtures
&
Trade Fixtures
Fixtures
An article that was once personal property
but has been affixed to land or building so
long that the law recognizes it as part of
the real estate
• Legal test:
–
–
–
–
The intention of the annexure
The method of the annexation
The adaptation to real estate
The existence of an agreement
Trade fixture
An article owned by a tenant & attached to rental
space or a building for operating a business
– Tenant’s personal property
– Must remove on or before the last end
of lease
– Not removed becomes the owners real
property
Importance in a real estate
transaction- to avoid confusion items
that are to be included or excluded
should be clarified in the listing
agreement and/or the sales agreement
Characteristics of Real
Estate that affect its
Nature & Use
• Economic characteristics
SIPA
SCARCITY –Land of a particular
quality or location may be limited
IMPROVEMENTS-They can affect
the improved or surrounding parcels
either favorably or unfavorably
PERMANENCE OF
INVESTMENT- improvements are
considered to create fixed
investments
AREA PREFERENCE-or situspeoples choice of area- the most
important economic characteristic
Physical Characteristics
Immobile
Indestructible
Unique
Immobile – the geographic location of
land
Indestructible – land is durable &
indestructible
Unique – nonhomogeneity or
heterogeneity – no two piece of land are
alike
IIU
Laws Affecting
Real Estate
Specific areas of law important to Real Estate
Practitioners
•
•
•
•
•
•
•
•
Law of Contracts
General Property Law
Law of Agency
State Real Estate License Law
Federal Regulations
Zoning & Land Use Laws
Environmental regulations
Federal, state & local tax laws
Real Estate license law
•
•
•
•
•
•
•
To protect the public interest by promoting
confidence
All 50 states, D.C. & Canadian provinces require
licensing
State laws are similar but differ in details
Specific education & personal requirements for
licensure
Exam required
Certain standards of ethical & personal conduct
required
Some state require continuing education for
renewal
Home Ownership
CHAPTER 3
• Reason
– Sign of financial stability
– Investment- appreciation/depreciation: income
tax deduction/exclusion of gain from tax
– Intangible benefits
• Ownership- single, married with children,
“empty nesters”…..
• Types of housing-Single family,
Apartments,
Condominiums,Cooperatives,Planned urban
development (PUD), Converted use, retirement
communities, High rise developments, Mobile
homes, Modular homes, Time-shares
Housing Affordability
• Mortgage terms, including types of loans,
availability, interest rates and monthly
payments
– Ownership expenses: insurance,real estate
taxes, utilities & maintenance
– Ability to meet mortgage payment/ Most
important economic consideration
– PITI/PMI
Qualifying for a loan: 28/36
Gross income $54,000 : 12 =
$4,500
x 28%
$1,260
$1,260 + Total monthly debt $650 =$1,910
needs to be <36%
$4,500 x 36%= $1,620
in this case the persons debt is too high,
needs to be $360 or less
Investment considerations
– Tax benefits: Income deductions, Mortgage
interest, Real estate taxes,certain loan
origination/discount fees, loan prepayment
penalties
– Capital gain: Lifetime exclusion of $250,000/
$500,000 married couples/must have lived there for
2 years, keep good records
– In Practice- Real estate practitioners should tell
their clients to consult a tax professional
Homeowner’s insurance
• Basic policy: fire, lighting, vandalism, theft,
lose…
• Broad-form: falling objects (weight of
ice/snow), collapse, water/steam-plumbing….
• Comprehensive: further available coverage
• Condo/apartment: unit & contents not the
structure
• Most policies have a coinsurance clause
80% of replacement
• Loss settlement of actual cash value
(replacement less depreciation) or prorated
by dividing the % of replacement cost actually
covered by policy
Federal Flood Insurance Program
• Administered by the Emergency Management
Agency (FEMA)
• Program subsidized flood damage insurance
• Required on all properties located in flood
prone areas (flood plains) that have federally
related financing
• Maps of flood probe areas prepared by the
Army Corps of Engineers
Prior to entering into a brokerage relationship the licensee
must advise a person of the following:
-Types of available Brokerage relationships
-Brokers compensation
-Whether the commission will be shared with another
broker
Buyer Broker
Designated Agent
Real Estate agent represents
the interest of the buyer
Real estate agents of the same
company represent the
buyer/seller or tenant/landlord ,
Broker remains Dual agent
Dual Agent
Sub-Agent
Real estate agent represents
the interest of both, buyer/seller
or tenant/landlord
Real Estate agent that is not a
buyer broker or listing agent, is
working with the buyer/tenant
but has no writing agreement
but is an agent of the seller.
Non-Agent
Real Estate agent that
represents neither buyer/seller
or tenant/landlord, but is
facilitator in the real estate
transaction
Virginia Real Estate
CHAPTER 1
VIRGINIA IS A STATUTORY STATE
•
Common Source Information Company- person or
entity that gathers or distributes real estate information,
MLS or REALTOR.com, etc…
•
In Virginia , compensation nor use of an information
center creates a brokerage relationship
Virginia Real Estate
CHAPTER 1
• Agency- any relationship when a real
estate licensee acts for or represents a
person by that person’s express authority
in a real estate transaction.
This can be
changed by entering into a written agreement that
alters the relationship, specifies the duties.
• Brokerage relationship- contractual
relationship between broker and client.
• Client- a person that has entered into a
brokerage agreement.
• Customer- anyone else involved in the
buying/selling/renting/exchanging… of
real estate.
END OF CLASS
See you
Chapter 4 of the yellow book
&
Chapter 1 of the maroon book
Goodnight
Designated
Broker
Agent
Agent
Client
Client
Law of Agency
• Common Law
-Rules of society
• Statutory Law
- Enacted by legislatures &
other governing bodies
Agency
CHAPTER 4
• Agent-the individual who is authorized &
consents to represent the interest of
another, in real estate the firm is the agent
• Subagent-the agent of the agent
• Principal-the individual who hires &
delegates to the agent the responsibility
representing his/her interest
• Agency- the fiduciary relationship
between the principal & the agent
• Fiduciary- the agent is held in a position
of special trust & confidence by the
principal
• Client-the principal
• Customer-the third party, some sort of
service is provided
• Non-agent-facilitator, transaction
broker…..
• Consensual agreement-
Fiduciary duties
COALD
A fiduciary relationship is one of trust
& confidence between employer
(principal) and employee (agent)
Difference between client & customer
• Common law of agency duties:
– Care- by use of skill
– Obedience- obeying the principal’s
instructions
– Accounting- financial (deposits), files
(3yrs), conversion/commingling/illegal
– Loyalty- interest above all/
Confidentiality
– Disclosure- offers,interest of parties,
value, pricing
Creation of Agency
• The principal delegates & the agent
consents to act
• Express agency- Listing Agreement
– The parties state the terms of the
agreement & express their intentions
either orally or in writing
In real estate normally in written rather
than orally: listing agreement or buyeragency
• Implied Agency-Buyer Agency
Agreement
– By actions
– Unintentionally, inadvertently or
accidentally could create an
undisclosed dual agency
• Compensation
– Does not determine agency
– Keep in mind that although a person
pays the compensation to an agent
does not mean that person is the
principal
Termination of
Agency
• Death or incapacity
• Destruction or condemnation of the
property
• Expiration of terms of the agreement
• Mutual agreement
• Breach by either party
• By operation of law- (bankruptcy)
• Completion or fulfillment
• Exception: agency coupled with
interest-the agent has an interest in the
subject of the agency (such as the property
being sold)
– Cannot be revoked by the principal
– Does not automatically terminate at the
principal’s death
Types of Agency
Relationships
Limitations on an Agent’s authority
• Universal agent-no limits on
authority/power of attorney/attorney in fact
• General agent-one that represents the
principal in a range of matters
– Receives power to enter into contracts on behalf of
the principal within the scope of authority(property
manager)
• Special agent-Limited agent-special power
of attorney- one who represents the principal in one
specific transaction under detailed instruction:
Agent cannot bind principal
– Created by the terms of the listing
agreement/buyer-agency
• Designated agent- one who is authorized
by the broker to act as the agent of a specific
principal
– Others in the office free to act for another party
– Broker may be in position of dual agency, disclosure
required
– Varies from state to state
Single agency… continued
• Single agency-the broker represents one
party, either the seller or the buyer, a third
party is a customer
• Seller as principal• The broker becomes the agent of the
seller
• The relationship is established by a
listing agreement
• The buyer is the customer
• The broker may utilize other brokers
who become subagents
• Sub agency- the broker appoints other
cooperating brokers who have fiduciary
responsibilities as the listing broker
• Offered through MLS
• Created by offer of cooperation and/or
compensation
• Other brokers may accept or reject
subagency offer
– Buyer as principal
• The broker becomes the agent of the
seller
• The relationship is established by a
buyer-agency contract
• Broker is responsible to the buyer to
locate real estate
– Owner as principal
• The broker is responsible to the owner
to manage or lease the owner’s real
estate
• The relationship is established by a
property management agreement or
listing contract
Dual Agency
The broker represents two
principals in the same
transaction
• Disclosed dual agency-both principal
must be informed and consent to dual
representation.
• Undisclosed dual agency- the action
of the parties can create an agency
relationship where none was intended
Disclosure of agency
• Mandatory
• Choices for representation
• Who the agent represents
• The advantages and
consequences of
representation
Agency Statue
• Exercise reasonable care & skill in
performing duties
• Obey client’s specific instructions
• Account for all money & property
received
• Disclose material facts
• Perform according to brokerage
agreement terms
• Keep confidential all confidential
information received from client
• Generally comply with terms of
statue
Customer- Level of
Services
•
•
•
•
•
Duties to the customer
– Reasonable care & skill
– Honest & fair
– Disclosure of all facts known to agent that
materially affect the property
Disclosure of environmental hazards
– Lead paint, asbestos, toxic waste, contaminated
soil/water,etc…
Opinion versus fact
– Opinions must be stated as agent’s opinion
– Facts must be accurate
• Fraud- intentional misrepresentation
• Puffing- exaggeration, it’s legal provided the
statement is not considered fraudulent
• Negligent misrepresentation- if the broker is
ignorant of a fact but should have known
Latent defects
– A hidden structural defect that wouldn’t be
found under ordinary inspection
Stigmatized properties
– Virginia prohibits disclosure of HIVpositive, AIDS
Virginia Real Estate
CH 1
Since 1995
VIRGINIA IS A STATUTORY STATE
• Prior to entering into a brokerage relationship
the licensee must advise a person of the
following:
-Types of available Brokerage relationships
-Brokers compensation
-Whether the commission will be shared with
another broker
• Common Source Information Companyperson or entity that gathers or distributes
real estate information, MLS or
REALTOR.com, etc…
• In Virginia , compensation nor use of an
information center creates a brokerage
relationship
Virginia Real Estate
• Agency – any relationship in which an
agent acts or represents a person’s
express authority in a real estate
transaction. The parties can enter into
another type of relationship with a written
agreement (independent contractor)
• Brokerage relationship- contractual
relationship between client and broker
•
•
•
•
Designated agent
Dual agent
Client- contractual agreement
Customer- non contractual agreement
Virginia Real Estate
Duties
• To Client
– Perform to the terms of the contract
– Promote the interest by 1. seeking
sale/lease for the terms of the contract 2.
Present all offers 3. Disclose all material
facts 4. Accountability
– CONFIDENTIALITY- FOREVER
– Ordinary care
– Comply with all laws & regulations
• To Customer
– Must treat honestly
– Can’t knowingly give false information
– Must disclose all material adverse facts of
the property
Virginia Real Estate
• Additional Disclosure:
– Buyer Broker- whether buyer will
occupy the property as main
residence
– Property Management- same as a
client duties other than agent is a
general agent to the owner
Oral agreements are legal in Virginia
but they are not enforceable
Virginia Real Estate
Chapter 1
• Brokerage Relationship
– Establishing:
• Type of brokerage relationship/buyer
broker,dual, -designated, non –agent
• Broker’s compensation
• Whether broker will share commission
with another broker
- Termination:
-
expiration date (90 day default)
mutual agreement to terminate
default by either party
Agents withdrawal when client
refuses to consent to disclose dual
agency
• CONFIDENTIALITY- FOREVER
Virginia Real Estate
Chapter 1
Disclosure requirements
• Agency law requires full disclosure
of any existing brokerage
relationship
• First substantive discussion about
specific property
• Only the person who is not the
client has to sign “The Disclosure
of Brokerage Relationship” form
• Dual Representation must be made
to all parties
• Imputed Knowledge- client nor
broker is liable for
misrepresentations of the other,
provided they didn’t know or
shouldn't have known of the
Monday
March 22, 2004
Chapter #5
Chapter 1,2,3,4
Math THE DRESS
What is the % of profit
$80
Profit
:
:
Cost
% of
25 %
Profit
X
BUY A
DRESS
FOR $80
$80
:
25%
$100
:
X
$100
SELL IT
FOR $100
Math
PART
(Equivalent to Rate)
:
:
RATE
WHOLE
(% of Whole)
(100 %)
X
Math
Commission
Net price
:
.94
(6% comm)
List
Price
$200,000
:
:
.94
X
6% comm.
$212,765
Commission split
$6,400
Total commission
$3,200
$3,200
Broker AAAA
Broker BBBB
Co 45% = $1,440
Agent Matt
Co 45% = $1,440
Agent Lori
55% = $1,760
55 % = $1,760
Math
28/36
GROSS YEARLY INCOME
:
12 = MONTHLY INCOME
MONTHLY INCOME
X 28% = PITI/PMI
MONTHLY DEBT + PITI/PMI < 36%
Real Estate Brokerage
Chapter 5/63
History of Brokerage
1. Formerly, one-office, family –
run operation
2. Common law dictates caveat
emptor was the rule
3. MLS became the widely used
industry service
4. Buyers began to question &
demand representation
Real Estate Brokerage
Chapter 5
License Laws
Purpose:
• Establish basic & continuing
education requirements
• Define actives requiring
licensing
• Describing acceptable
standards of conduct &
practice
• Enforce standards through
disciplinary system……..
Real Estate Brokerage
Chapter 5/64
License Laws
• Each state has a licensing
authority/commission/board
with the power to :
– Issue license
– Make real estate information
available to licensee & public
– Enforce the statutory real estate
law
AND adopt a set of rules &
regulations that have the same
force & effect as any law
Real Estate Brokerage
Chapter 5/65-70
• Brokerage- Bringing people
together in a real estate transaction
– Broker- One who is licensed to sell,
buy, exchange or lease real property
for others & charge a fee for service
• Business form
–
–
–
–
–
Sole proprietorship
Corporation
Partnership
Independent
Franchise………………….
Real Estate Brokerage
Chapter 5//65
• Operation
- Management of business
–
–
–
–
Set effective office policies
Maintain space and equipment
Direct staff and sales actives
Mastering the real estate
transaction
Real Estate Assistant/Technology
- An array of responsibilities,
marketing, organizer, facilitator ..
- May or may not be licensed,
reduce abilities if not licensed
Technology
- Computers, digital camera, cell
phone, voice mail, e-mail,
internet, computer programs/
publisher/adobe writer/contact
manager… on & on..
Real Estate Brokerage
Chapter 5/67
• Broker-Salesperson relationship
– The employing Broker is directly
responsible for supervising all
salesperson’s real estate activities
– The salesperson is responsible only to
his/her employing broker. All activities
must be performed in the name of the
employing broker
– Salesperson cannot receive
compensation from anyone other than
own broker
Real Estate Brokerage
Chapter 5/67..
Independent Contractor
vs. Employee
• Broker should have a standardized
employment agreement that defines
nature, obligations & responsibilities
Employee- adhere to office hours, attend
sales meetings, meet certain sales quotes,
etc…
A broker must withhold taxes, social security,
unemployment, etc…
Independent Contractor- The broker may
control what the salesperson does, broker
cannot require/dictate activities, example,
certain hours of work, require attendance to
sales meetings. Salesperson pays their
own tax withholdings.
Real Estate Brokerage
Chapter 5/68
• IRS has 3 requirements to be
an independent contractor
– Must have a real estate license
– A written contract with the
broker that specifies that the
salesperson will not be treated
like an employee for federal
tax purposes
– At least 90 % of income must
come from sales production
NOT on hours worked
Real Estate Brokerage
Chapter 5/68
• Broker’s compensation
– Must be negotiated between the
principal and the broker
– Usually a % of the sales price/rent
or could be a fixed dollar amount
– Broker is entitled to compensation
when:
• The sales contract has been ,
executed(signed) by a ready, able and
willing buyer
• The contract has been accepted and
executed (signed) by the seller
• Copies of the contract are in the hands
of all parties
If the seller defaults the broker is
entitled to a commission
Real Estate Brokerage
Chapter 5/69
• To be entitled to a commission
an individual must be:
– A licensed broker
– Procuring cause of the sale
– Employed by the buyer or seller
under a valid contract
Procuring cause- started an unbroken
chain of events
Ready, Able & Willing Buyer:
To buy on the seller’s terms & ready
to complete the transaction
Real Estate Brokerage
Chapter 5/69-70
• Salesperson’s compensation
– Must be contained in an
agreement between broker &
salesperson
– May be a fixed salary, % of
commission, draw from or
graduated spilt
– 100 % program w/monthly fees
Math examples
Real Estate Brokerage
Chapter 5
• Transactional brokerage: not
an agent to either buyer or
seller
– Referred as Non-Agent,
facilitator, coordinator,or
contract broker
Real Estate Brokerage
Antitrust
Chapter 5/71-73
Brokers/salespeople are
PROHIBLTED to:
•
•
Price fixing- setting prices
Group Boycotting-conspire
against another business or
withhold patronage
•
Allocations of customers-
•
divide the market place
Tie-in agreements – tie first
sale to the purchase of another
Penalties:
-Maximum $100,000 3 years in
prison
-Corporation: Up to $1,000,000
-Civil Suit: Suffered party may
collect triple the actual damages
& attorney fees
Real Estate Brokerage
Chapter 5/73
Fee-for-Service
Various duties, bundle of
services, on stop shopping,
etc…
Math THE DRESS
What is the % of profit
$20
Profit
:
:
Cost
% of
25 %
Profit
X
BUY A
DRESS
FOR $80
$20
:
25%
$80
:
X
$80
SELL IT
FOR $100
PART is a portion of the WHOLE - Your office
space
WHOLE – Building
RATE -- % of your office space to the building
PART
(Equivalent to Rate)
:
:
RATE
WHOLE
(% of Whole)
(100 %)
X
Math
PART
(Equivalent to Rate)
:
:
RATE
WHOLE
(% of Whole)
(100 %)
X
Math
Commission
Net price
:
.94
(6% comm)
List
Price
$200,000
:
:
.94
X
6% comm.
$212,765
Commission split
$6,400
Total commission
$3,200
$3,200
Broker AAAA
Broker BBBB
Co 45% = $1,440
Agent Matt
Co 45% = $1,440
Agent Lori
55% = $1,760
55 % = $1,760
Math
28/36
GROSS YEARLY INCOME
:
12 = MONTHLY INCOME
MONTHLY INCOME
X 28% = PITI/PMI
MONTHLY DEBT + PITI/PMI < 36%
Employment
Contracts
CHAPTER 6
•
Listing
1. Listings are personal
service contracts between
the broker &
seller(principal)
2. Creates an employment
contract
3. Most state require them to
be in writing to be
enforceable in court
Listing
Chapter 6/79
• Exclusive right to sell
– One Broker is appointed as sole agent for
seller & is entitled to compensation
regardless of who procurers the buyer
• Exclusive agency
– One Broker is appointed as sole agent for
seller & is entitled to compensation
regardless of who procurers the buyer,
EXCEPT the seller
• Open
– Non-exclusive, any number of brokers
including the seller can procure the buyer
Special
Provisions/Issues
Chapter 6/80
Listing
MLS- Multiple listing service
Option listing- Broker has right to
purchaser property
Net listing- Broker may claim all
proceeds above the net amount to
seller ( illegal in most state/unethical
in most others , ILLEGAL in VA)
Option Listing- Gives the Broker the
the right to purchase the property
Termination
Chapter 6/81
• Fulfillment of purpose
• Expiration of date stated in
agreement
• Destruction of property
• Change in property use
(zoning/eminent domain)
• Transfer of title by operation law
(bankruptcy)
• Mutual consent
• Death/incapacity of either party
• Breach/cancellation by either party
(party may later be liable for
damages)
• Bold where listing & Buyer are
Expiration
Chapter 6/81
• Must state a definite termination date
• Automatic extension clauses & the
wording of some contracts are
prohibited by licensing authorities in
some jurisdictions
• Some provided broker protection
clauses, for procuring cause
Listing Process
Chapter 6/82-83
• www.realestateiii.com
• www.caarmls.com
Cma- Competitive market analysiscomparison of similar properties,
sold, for sale & that didn’t sell
Net- the amount the seller will receive
at closing
Market Value- what the market will
bear
Math
Commission
Net price
:
.94
(6% comm)
List
Price
$200,000
:
:
.94
X
6% comm.
$212,765
Listing Process
Chapter 6/85-92
Listings
REIII
ZIP FORMS
Buyer
•
Employment
1. Broker-Buyer Agent
2. Principal- Buyer
3. Purpose- to find suitable
property
4. Fiduciary
relationship(Statutory in
Virginia)
Buyer
• Exclusive
– completely exclusive agreement
– Buyer legally bound to compensate
whether property is located or not
• Exclusive agency
– Limits Broker’s right to compensation
– Buyer free to find property
• Open
– Non-exclusive
– Buyer may enter into similar agreement
with other Brokers
Buyer Broker
agreement
Chapter 6/94-96
Special
Provisions/Issues
Buyer
Explain agency agreement
Parties rights & responsibilities
Compensation
Flat fee
Retainer
Source- either party/seller or
buyer
Always negotiable
Buyer financial information
Virginia Specific
Chapter 2/14-17
Net listings are illegal in Virginia
Listing agreements:
• Sellers must receive a copy of
the signed listing agreement &
all blanks need to be filled in
• Must have a termination date
• Must clearly state commission
rate
Virginia Specific
Chapter 2/17/22
• Disclosure/Disclaimer
A seller/landlord of a 1-4 unit property
must supply a purchaser, tenant,…..
With either.
• Purchase/tenant….may terminate the
contract:
– within 3 days of receipt
– within 5 days of postmark
– prior to settlement
– prior to occupancy
– prior mortgage application calls for
Virginia Specific
Chapter 2/22
Disclosure cont…
If purchaser elects to terminate & falls
within the guideline no penalties
will be incurred.
OR
If Purchaser chooses not to void then
remain silent
Loses rights to terminate upon:
- time of loan application with
termination right clause
- settlement/occupancy occurs
Builder does not have to provided
disclosure/disclaimer ONLY
disclose material defects that
violate building code
Virginia Specific
Chapter 2/26
Disclosure/Disclaimer forms must
contain Megan's Law notice
EXEMPTIONS FROM DISCLOSURE:
COURT ODERED TRANSFER
- to settle an estate
- a writ of execution
-foreclosure
-trustee in bankruptcy
-condemnation by way of eminent
domain
-suit of specific performance
Virginia Specific
Chapter 2/26
• EXEMPTIONS FROM DISCLOSURE:
cont….
• Voluntary transfer:
– Between co-owners
– Relatives
– Divorce settlement
– To /from governmental entity,
housing authority/agency
– Sale due to failure to pay,
Fed/State/Lo Taxes
– First sale of a home
Virginia Specific
Chapter 2/26-27
• DISCLOSURE: cont….
Buyers recourse-Any action must
be commenced within 1 year
from date the disclosure was
delivered or if no delivery then
within 1 year of
settlement/occupancy
Owner not liable for reliable 3rd
party information or what the
owner reasonably believed to be
true.
Agents like owner.
Virginia Specific
Chapter 2/27
Stigmatized property
Refers to any property that is made
to be undesirable by an event or
circumstances that has not
actual effects on the physical
property.
VIRGINA prohibits the disclosure
of any discussion of HIV-positive
or AIDS
Interest in Real Estate
CHAPTER 7
• Government Powers
– Government
– Interest
– Encumbrances
– Water
4 Government Powers
PETE
Chapter 7/103-105
Police power- Preserve
order,protect the public health &
safety, and promote the general
welfare of the citizens.
(
protection laws, zoning ordinance&
building codes…..)
Eminent domain- the right to
acquire privately owned property
for public use. Condemnation is the
process by which the Gov’t
exercises the right
Taxation- A charge on real estate to
raise funds for public use
Escheat- when the owner dies &
having no heirs or will property
goes to the state, intended to
Estates in Land
Chapter 7/105
defines the degree of quantity,nature &
extent of owner’s interest in real
property
To be an estate in land , an
interest must allow possession
(either now or in the future) &
must be measurable by duration
• Freehold- indeterminable length of
time (lifetime or forever)/ indefeasible
fee
• Leasehold- fixed period of time
• Fee Simple estate- or fee simple
absolute/estate of inheritance/fee
ownership- the HIGHEST interest in
real estate recognized by law- Holder
is entitled to all rights to the property,
only limited by PETE
Contin…
Estates in Land
Chapter 7/106-107
• Fee simple defeasible/ defeasible
fee– condition subsequent new owner
must NOT perform some action or
activity(owner retains right to
reentry), need to go to court
– Special limitation or fee simple
determinable- if violated, reverts
back to former owner no need to
reenter or go to court
Both considered future interest &
can be passed on to heirs
Contin….
Estates in Land
Chapter 7/107-109
• Life Estate- limited in duration to the
life of the owner or some the designated
person(s), that person(s) may sell their
interest in the life estate , it passes to
future owners based on provisions of the
life estate
– Conventional life estate- by deed
during owners life or will upon death,
life tenant has the rights to the
property until their death, then passes
on to another as stipulated in the
owners will or back to owner
– Pur autre vie- similar to a
conventional life estate other than it’s
measured by another life
Estates in Land
Chapter 7/108
Creator of a life estate plans for the
future ownership by naming a:
• Remainder- Remainderman is the
person to whom the property will pass
to when the life estate ends
• Reversion- Reverts back to the
owner of the property when life estate
ends
Estates in Land
Chapter 7/109
• Legal life estate- Dower/CurtseyWife/Husband-Not created voluntarily
by owner, by the state,for the
nonowner spouse after the death of
the owning spouse. Receives 1/3 to ½
interest of the property(doesn’t apply
in community property states).
• Homestead- depending upon the
state, a certain portion of the
home/property is protected from
creditors. Mortgages, real estate taxes
or loans for improvements to the
house.
Encumbrances
•
•
•
•
Liens
Easements
Licenses
Encroachments
Encumbrances
Liens
Chapter 7/110
Encumbrance is a right or interest
in a property by another than
that of the fee owner
• Lien- Monetary, security for a debt or
obligation. If not repaid then property
maybe sold to satisfy the lien.
• Deed Restrictions- covenants,
restrictions & conditions, private
agreements typically made by the
owner of the land. Can effect the use
of the land.
Encumbrances
Easements
Chapter 7/111-113
Easement is the right to use the
land of another for a purpose
• Appurtenant easement- Annexed to the
ownership of one parcel & used for its benefit
on the land of another
--Servient tenement- owns the lands in which
the easement is on
--Dominant tenement- owns the land that
benefits from the easement
• Easement in gross- an individual interest
in or a personal right to use the land of
another
• Party wall easement- used for a wall that
straddles the property lines of adjacent
properties w/different owners
• Easement by necessity- arising because
owners must have e ingress and egress from
their land
Encumbrances
Easements
Chapter 7/113
• Easement by prescriptionarising from continuous,
exclusive use of the property
without the owner’s approval
– Open, notorious, visible
– Tacking
• Easement by
condemnation- acquired for
a public purpose, requires
compensation for loss in
property value
Encumbrances
Easements
Chapter 7/112
• Creating an easement- BY:
– Expressed grant in a deed from the
owner of the property
– Express reservation by the grantor
in a deed of conveyance
– Use
– Implication
Encumbrances
Easements
Chapter 7/113-114
Terminating an easement-BY:
– When the purpose fro which it was
created no longer exists
– The owner of either the dominant or
servient tenement becoming the owner
of both properties(merged)
– Release of the right of easement to the
servient tenement
– Abandonment of the easement
– The nonuse of a prescriptive easement
by it’s owner
– Adverse possession by the owner of
the servient tenemt
– Destruction of the servient
tenement(party wall)
– Court decision of a quiet title action
against someone claiming an easement
– Excessive use (change in property use)
Above isn’t automatic
Chapter 7/114
License- The privilege to use
another’s land for a specific
purpose
Encroachment- anything
extending from one property
across the property line onto
another parcel or beyond legal
building setback lines
Water
Chapter 7/115-116
end of Chapter
• Riparian rights- rights granted to owners
along a non-navigable river or stream
• Littoral rights- rights granted to an owner
along an ocean or large lake
• Accretion- increase in land resulting from
deposit of soil
• Erosion- Loss of soil by gradually wearing
away
• Avulsion- sudden removal of soil due to an act
of nature
• Prior appropriation- the right to use water is
controlled by the state rather than by the
adjacent landowner. A person must show a
beneficial use for the water, such as crop
irrigation, in order to secure water rights
• Doctrine of prior appropriation-the right to
use any water, except for limited domestic use,
is controlled by the state
Virginia Specific
Chapter 3/30-32
• Eminent Domain-also referred to as
“taking”, just compensation must be paid
to the owner, that is considered as fair
market value. Payment of just
compensation is a prerequisite to passing
of the title. A genuine but ineffectual effort
to purchase the property needs to occur
prior to condemnation proceedingsDISCLOSE
• Curtsey/Dower- does not exist in
Virginia- NO WILL descent &
distribution is used, where property
passes to the surviving spouse and
others
• Intestate- If no will is left then the
property goes to the
The spouse receives 1/3 & remainder
is distributed amongst the
decedent’s child or their decedents
Virginia Specific
Chapter 3/33-34
• Augmented Estate- When the
surviving spouse objects to how the
property is left
• Homestead- UNSECURED DEBTS
One can hold real or personal property
exempted from unsecured loans. Total value
not to exceed up to $5,000 plus $500 for each
dependent….. The exemption does not apply
against:
– Claims for purchase price of the
homestead property
– Mechanics liens
– Claims for taxes
Claim must be made by deed in case of real
property & inventory list under oath for
personal property
A few things may be withheld, family bible,
wedding rings, burial plots..
Virginia Specific
Chapter 3/33-34
• Easements• Easement by Prescription20 yrs
– In a court action to establish :
– Adverse, under a claim of
right,exclusive,continuous,
uninterrupted, with knowledge and
acquaintance of owner
Forms of Real Estate
Ownership
CHAPTER 8
• Severalty
• Co-Ownership
• Trust
•
Severalty
– Title is held by one
individual
•
Co-Ownership
–
–
–
–
•
Tenancy in common
Joint Tenancy
Tenancy by the entirety
Community Property
Trust
– Living & Testamentary
– Land Trust
Tenancy In Common
• 2 or more owners
• Undivided fractional interest
• Unity of possession
• Each may encumber or
convey their interest
• Each is inheritable
Joint Tenancy
• Right of survivorship(common
law)
• 4 unities- required to create a
Joint Tenancy
–
–
–
–
Possession
Interest
Time
Title
• To terminated if you can’t agree
then you have to file a court
action to partition the property
Tenancies by entirety
• Only for married couples
• Right of survivorship
• Spouses have equal and
undivided interest (only way
to sell the property is both
people sign the deed)
considered one legal unity
• Termination – J’S Judgment Sale
DAD Divorce, Agreement & Death
Community Property
• Spouses are Equal Partner
• Anything acquired during the
marriage is community propertyBoth Real & Personal Property
• Anything you have before the
marriage or received during the
marriage by gift or inheritance is
separate property
• No right to Survivorship – Death
of 1 spouse leaves ½ to
surviving spouse and other ½
according to will
Trust
Parties to a Trust
• Trustor – creates the Trust
• Trustee – Manages the Trust
• Beneficiary – Receives the
benefits
Living Trust
• Put something into Trust
while your alive
Testamentary Trust
• The will puts the Trust into
effect going upon your death
Land Trust
• Only asset
• Usually the Trustor &
Beneficiary are the same
person
Legal Descriptions
Legal description- used to
identify a property
3 Methods of describing Real
Estate
Metes and Bounds
Rectangular survey
Lot and block
Chapter 9/140
• Mete and Bounds-oldest way
legally describe property.
• POB- point of beginning and
continue to the next boundary.
Use linear measurements,
natural & artificial landmarks (
monuments) and directions
always end back at the POB.
The actual distance between a
monument over rides any
linear measurement
description.
Rectangular survey
Government Survey
CHAPTER 9
• Principal
meridian lines
– Run North to
South
• Base lines
– Run West to
East
•Both are located in reference to degree
of longitude & latitude
•Each principal meridian is named & is
crossed by its own base line
•The rectangular survey system
affects specific land areas within the
boundaries
Base line
Meridian
line
TOWNSHIP TIERS
• Run East and West ,parallel to
the base line and are 6 miles
apart
• 6 miles wide stripes of
townships that are numbered
North to South of the base line
RANGE
• 6 miles apart and run North &
South parallel to the principal
meridian
• 6 miles wide of townships that
are numbered East & West of the
principal meridian
Township Squares
• The intersection of a township
stripe & a range strip
• 6 miles square & contains 36
square miles
Township Square(s)
6 miles square
Contain
36 square miles
township 6
north , Range
2 east of the
principal
meridian
Section in a Township
6
5
4
3
2
1
7
8
9
10 11 12
18 17 16 15 14 13
19 20 21 22 23 24
30 29 28 27 26 25
31 32 33 34 35 36
SECTIONS
• 36 sections in a township
• Numbered 1 – 36, starting upper right
corner
• Each section is 1 mile square & contain
640 acres
• By law Section 16 is reserved for school
purposes
• Sections are divided by Halves (320) &
Quarters (160)
• Correction lines
•
- are required to overcome the effect of
the earth’s curvature on range lines
•
- every 4th township line is a correction
line
•
- guide meridians run North & South at
24-mile intervals from the principal
meridian
•
- adjustments are made on the North &
West boundaries of a township (sections
1-7,18,19,30)
• Fractional sections & government lots
- Undersized or oversized sections are
classified as Fractional lots
- Areas smaller than full quarter-sections
are designated as Government lots
- They are used to correct survey errors
and physical disparities
•
Reading a government survey legal
description and calculating the size of a
tract of land
- Start at the end of the description and
work backwards to the beginning
- Begin size calculations from the right
hand side with section containing 640
acres, then divide by each fraction
given as you move to the left (the
beginning of description)
•
Metes & Bounds descriptions within the
rectangular survey system
- tracts are too small to be described by
quarter sections
- When tract does not follow the lot or
block lines of recorded subdivision
- When a tract does not follow the section,
quarter-section or fractional section lines
Lot and Block system
recorded plat
• This system uses a recorded
subdivision plat map
• It requires a survey plat by a
licensed surveyor or land engineer
• Identified properties may later be
re-subdivided
• The system is used in all states,
sometimes in conjunction with
other legal descriptions
Preparing a Survey
• Used to locate a given parcel of
land & can also amend a legal
description
– Shows the location & dimensions of
the parcel
– Spot survey includes the location of
buildings on the land
• Requires the use of a licensed
surveyor or land engineer
Measuring Elevations
• Condominium laws require a legal
definition of the horizontal property
rights included with each unit (air
lots), air lots specific boundaries
above land
• Datum – defined as the mean sea level
at New York Harbor, a point, line or
surface from which elevations are
measured
• Benchmark – permanent reference
point throughout the United States,
primarily used for marking datums,
embossed brass markers
Land Units &
Measurements
• Area x Cost per sq. ft. or per
acre
Convert the acreage to square
feet before multiplying
1 acre = 43,560
Insert
examples
Real Estate Taxes &
Other Liens
Chapter 10/158
• Lien- a charge against property that
provides security for a debt of the
property owner
• Encumbrance- any charge or claim
that burdens the title to real property,
lessens its value or impairs its use.
Including liens & claims
Liens may be voluntary or involuntary
Statutory or equitable & general or
specific
Real Estate Taxes &
Other Liens
Chapter 10/158-159
• Voluntary Lien- created
intentionally– mortgage
• Involuntary – Not created by
choice:
– Statutory lien- created by
statue- real estate tax
– Equitable- created by common
law- based on court of fairness
• Vendor lien- belongs to a vendor
for the unpaid balance of a purchase
price for land
Real Estate Taxes &
Other Liens
Chapter 10/159
VISE - 4 ways ways to create a
liens, Voluntary, Involuntary,
Statutory, Equitable
• General lien- Judgments,
inheritance taxes, IRS taxes.. effect all
property, real and personal propertyon real property the lien attaches the
moment it is filed, personal property
attaches once the property is seized.
• Specific liens- secured by specific
property & effects only the specific
property, mortgage, mechanic’s lien….
Real Estate Taxes &
Other Liens
Chapter 10/159-160
Liens run with the PROPERTY not the
person when properly established
• Priority of liens- typically it’s 1st come 1st
served. Real estate tax and special
assessment taxes don’t apply to this rule,
those are paid 1st, then as the time the lien is
recorded in a public place is the order of
placement.
• Subordination agreement- when one lien
hold gives up their place in line (order) of
recording.
General Tax– Ad Valorem Tax
specific, involuntary, statutory liens. Imposed
by:
– States, counties…….
Some state exempt cities, state & federal
governments, hospitals….. senior citizens,
veterans….
Real Estate Tax Liens
Chapter 10/162-163
Assessment-the valuation of the
property’s worth, based on fair market
value
• Equalization-used to achieve
uniformity throughout statewide
tax assessments
• Tax rate- “mill” usually 1/1,000 of
a dollar or $.001, can be mill-per
dollar or in dollars per hundred or
in dollars per thousand
• Tax bill- amount due, calculate the
tax assessment x tax rate
• Enforcement of tax lien- Lien
placed against the property, if not
paid then a tax sale is enforced, the
owner has the EQUITABLE RIGHT
OF REDEMPTION, to pay the taxes
along with additional cost to the
property prior to the sale.
Real Estate Taxes &
Other Liens
Chapter 10/166-167
• Special Assessment- not used much
anymore, however if assessed, the cost of the
improvement is divided amongst those that
benefit
• Mortgage liens-or in some states called a
Deed of Trust –involuntary, used to secure the
purchase of a property. Lenders usually
require a preferred lien, 1st mortgage lien, all
others would be junior liens.
• Mechanic's lien- when improvements have
been made to the property and the person that
performed the work wasn’t paid. Varies from
state to state.
• Judgments- a decree issued by a court.
Normally used to satisfy a debt that is
delinquent. Creditor obtains a writ of
execution, where then a sheriff is allowed to
enter the property and seize property, real or
personal.
Real Estate Taxes &
Other Liens
Chapter 10/167
• Lis pendens – puts people on notice
that litigation is pending and could
effect the title of property.
• Attachment- prevents a debtor from
selling the property until a suit is
settled, the creditor must post a bond
if creditor doesn’t win the debtor
received the bond
• Estate and Inheritance tax- are
general, involuntary & statutory
• Municipal Utilities- imposes a
specific, equitable involuntary lien on
the property
Real Estate Taxes &
Other Liens
Chapter 10/167-168
• Bail Bond Lien- specific,statutory,
voluntary lien against property, no
show in court, property is sold.
• Corporation Franchise Liengeneral,statutory, involuntary lien
against property owned by the
corporation
• IRS tax lien- general,statutory,
involuntary lien against real and
personal property. Does not
supercede other liens.
Virginia Real Estate
Chapter 4/37-38
Co-Ownership
• Tenancy in Common- can be
created as follows:
– Express limitation- 2 or more
people
– Grant- interest
– Devise/grant- equal shares
– Breakup- in joint tenants
– Dissolving- of tenancy by the
entirety- divorce or mutual
agreement
Virginia Real Estate
Chapter 4/37-38
Joint tenancy
-similar to other states, everyone has to share
the same interest
- Virginia has abolished automatic right to
survivorship, unless THE DEED expressly
creates the right to survivorship
Tenancy in PartnershipSubject to partnership agreement
Partner’s rights are not individually assignable
Partners rights are not subject to creditors
On the death of a partner his share
passes to the other Partners
Partner can transfer property behave of
the Partnership
Virginia Real Estate
Chapter 5/54-55
An incorrect description of a property
does not invalidate the deed IF after
enough information is available it the
property can be identified
4 types of surveys
1) Subdivision plat
2) Boundary survey
3) House location
4) Physical or as – built
Virginia Real Estate
Chapter 6/58
TAX LIENS
Uniform taxation- Tax rate and mode of
assessing be same for like properties
Exemptions:
Burial grounds & cemetery lots owned by a
company &/or individual
Religious groups
Public libraries & non profit educational
institutes………….
Assessment- Taxes run with the land.
Responsible from the date of purchase to
the end of the year, at closing taxes are
prorated.
Virginia Real Estate
Chapter 6/59
Past-due
Taxes currently due & payable
At closing the above 2 will be collected
from the seller and paid.
Taxes not yet due- The seller will be
charged the prorated amount and
the buyer will be credited the
amount
Prepaid – The seller will receive a credit
for the amount not used and the
buyer will be charged that amount
Virginia Real Estate
Chapter 6/59-61
New construction- Taxes are based on the
time a certificate of occupancy is issued,
then prorated
Leases- a perpetual leaseholder/owner pays
the taxes & normally in a net lease the
tenant pays the taxes
Tax lien- Over rides ALL liens. Virginia allows any
unpaid US tax take priority to other liens.
On 3rd anniversary of non payment property may
be sold
30 days before action is taken, a notice is mailed
to last known address, notice of the sale
must be placed in newspaper for 30 to 60
days prior to sale.
Property owner may pay the taxes plus……..
Prior to the sale DATE
Special Assessment…. Notice must be sent
to adjacent property owners
Real Estate Contract
Chapter 11/173
STATUTE OF FRAUDS- MUST BE IN WRITING TO
BE ENFORCEABLE
• Contract- a voluntary
agreement,a promise between
competent parties, supported by
legal compensation, to perform or
reframe some legal act.
VOLUNTARY- Can not be forced
AGREEMENT/PROMISE- legally
enforceable
LEGALLY COMPETENT PARTIESconsidered legally capable
LEGAL CONSIDERATIONsomething of value & legal
LEGAL ACT- can’t be illegal
Real Estate Contract
Chapter 11/173-174
Contract – Depending upon how it’s
created:
EXPRESSED- parties state the
terms and show there intentions in
WORDS. Maybe oral or written
IMPLIED- the agreement between
parties by acts or conduct
BILATERAL- Both parties agree to
do something
listing/sales
UNILATERAL- One side agrees to
do something
Option
EXECUTED- When all parties have
completely performed all
requirements
Property has closed
EXECUTORY- Property has not
closed, an act still to performcontingency
Real Estate Contract
Chapter 11/174-176
VAILD CONTRACT- elements
OFFER & ACCEPTANCE- An offer has to be made
by one party (offeror) & accepted by the other
party (offeree) Mutual assent/meeting of the
minds
- A counteroffer voids the 1st offer
- An offer maybe revoked at anytime prior to
receiving the acceptance
- Both parties must be notified of the
acceptance in order for their to be a contract
CONSIDERATION- something of value (money)
LEGALLY COMPETANCT PARTIES- mentally
competent & over the age of 18
CONSENT- No undue duress, fraud…
LEGAL PURPOSE- Can’t be for illegal purposes
Real Estate Contract
Chapter 11/176-177
VALID- it becomes enforceable- meet all legal
elements
VOID- lacks legal elements/ not enforceable/
no meetings of the minds
VOIDABLE- A contract that appears to be
valid but where one party may void based on
sometime period of a condition or the contract
lacks a legal principle (minor, mentally ill,
drunk)
UNENFORCEABLE – seems valid but is
unenforceable, typically an oral contract
Real Estate Contract
Chapter 11/177-178
Discharged of Contracts
TERMINATED
Performance “time is of the
essence” MUST close within that
time frame. Otherwise should have
a time frame if not then “act”
should be performed in a
reasonable time frame
Assignment- pass your
rights/obligations (delegated) onto
another 3rd party (assignee) , you
may still be reasonable for the
terms of the contract unless
specified
Novation – replacing the original
contract with another contract,
could be same parties or a new
party, must have both parties
Discharged of Contracts
TERMINATED
Chapter 11/178-179
Breach- one party doesn’t perform to
the contract, non- defaulting party may
sue the defaulting party
Buyer may sue the seller- Suit for
specific performance- to convey the
property OR Damages- for cost &
hardship
Seller may sue the buyer- for damages or
the purchase price, where the seller
tenders the deed
Statute of limitations – time
limitation to bring suit against a party
Real Estate Contract
Chapter 11/178-179
OTHER REASONS:
Partial performance
Substantial performance
Impossibility of performance- an act
cannot be legally performed
Mutual agreement- Both agree
Operation of law- altered, minor, fraud
Rescission- on party may terminate and all
monies (deposit) returned
Real Estate Contract
Chapter 11/179
The Sales Contract
The ESSENTAIL ELEMENTS
Offer &
acceptance, Consideration, Legally competent
parties, Consent, Legal purpose
Sales Price
Legal description
Statement of type of title/deed
(general,special)
Kind of title evidence
Terms & Conditions
(title search)
Real Estate Contract
Chapter 11/180-182
Offer
Counteroffer
Acceptance
Binder
Earnest Money deposits &(accounts)
Equitable title
Quickclaim deed
Destruction of premises
Liquidated damages
Real Estate Contract
Chapter 11/183
….Parts of a contract…
Purchaser’s name
Description-Address & Legal
descript.
Seller’s name
Purchase price, financing
Amount of deposit & down payment
Closing date
Evidence of title policy (search)
Condition (damaged/destroyed)
Default (liquidated/specific)
Contingencies
Signatures & dates of signatures
Disclosure of agency……………
Real Estate Contract
Chapter 11/184
….Parts of a contract…
Personal property & real property
Warranties on systems & personal prop.
Identifying any leased equipment
Who & where closing will take place
Distribution of escrow funds
Payment of any outstanding debts
Walk Thru/ final inspection
Agreement of documents and delivery of
Real Estate Contract
Chapter 11/184
Contingencies- Additional conditions in
a contract. Mortgage, inspections,
property sale, etc..
Action Time frame Who’s responsible
Escape clause or Kick out clauseSeller retains right to continue to market
property, purchaser may have right to
satisfy contingency
Amendments & AddendumsAmendments- agreed upon changes
after the contract is ratified
Addendums- agreed upon additions
during negotiating a contract
Disclosures- Agency of relationship
& property Disclaimer/Disclosure
Real Estate Contract
Chapter 11/185-186
OPTION- Where owner (optionor) gives
the purchasers/lessee(optionee) the
right to buy/lease at a certain price for
a certain time
LAND CONTRACT- very similar to
owner financing BUT, Seller retains
title and buyer take possession and
gets equitable title to the property
LEASE-Between tenant/landlord or
lessor/lessee- exclusive possession of
land/property for a specified time and
cost
ESCROW AGREEMENT- an
agreement between buyer/seller &
escrow holder- a contract with a
deposit/escrow
Virginia Real Estate
Chapter 7/67/78
Statue of Frauds- Must be in writing to be
enforceable, transferable.
Can be oral, statue doesn’t invalidate an oral
contract. Unenforceable after a year.
Power of attorney –Must be specify the
transaction and parties, must be notarized &
recorded with the deed
Title- A buyer should expect marketable title to
the property
Equitable title- gives the buyer an insurable
interest- VA places the risk of loss on the
buyer.
Warranties- VA caveat emptor buyer
beware
Existing:
New Construction:
Transfer of Title
Chapter 12/192
Title – the rights to or ownership of
land/ evidence of ownership
Voluntary alienation- sale, gift or will
DEED is the document that is recorded
that transfer ownership
The OWNER/GRANTOR signs the deed &
the GRANTEE acquires title
Transfer of Title
Chapter 12/192-194
Requirements for a valid Deed
Grantor- Of age(18), sound mind,
correct spelling of name(s)
Grantee- Must state a full name
Consideration- some type of $ or gift
Granting clause- for how long, life…
this is when the type of interest is
stated, joint tenancy, tenants in
common…
Habendum clause- used to clarify
what type of ownership is being
conveyed
Transfer of Title
Chapter 12/194-195
Legal consideration-accurate legal
description
Exceptions& reservations- must
be recorded with deed, covenants,
easements, special conditions…..
Signature- all grantors must sign/ power
of attorney is possible
Acknowledgement- stating that the
grantor voluntarily signs and is normally
done so in front of a notary .
Delivery & acceptance- Title hasn’t
transferred until the deed is delivered from
the Grantor to have been accepted by the
Grantee
Execution of Corp. deedConveyed only by authority of
bylaws &/or BOD, if all or large
portion is being transferred, may
need to have shareholders
approval & ONLY authorized officer
DEEDS
Chapter 12/196
GENERAL WARRANTY- THE GREATEST
protection to the buyer. The warranties
include: Grantor has…..
- Covenant of seisin: the rights to
convey title- Buyer can recover full
purchase price if broken.
-Covenant against encumbrances: that
the property is free from liens,
encumbrances, other than normal
&/or what’s recorded. Purchaser
may sue to recover cost to remedy.
- Covenant of quiet enjoyment: free
from 3rd party interest, if title is
inferior then grantor could be held
liable for damages
- Covenant of further assuranceprovide to buyer necessary
documents to provide good title
-Covenant of warranty forever- to
compensate grantee forever the loss
sustained
Transfer of Title
Chapter 12/197-198
SPECIAL WARRANTY- Grantor received
title & not encumbered while they held title
BARGIN & SALE- Grantee has little
recourse to recover damages, grantor is
release their rights…. Bankruptcy sale
QUITCLAIM- Grantor receives the very
least protection from the Grantor, to clear
a title quickly
DEED IN TRUST- Deed from Trustor to
Trustee for the beneficiary
RECONEYANCE- when the trustee
transfer the title back to the Trustor
TRUSTEE’S- the trustee conveys real
estate held in the trust to anyone other
than the Trustor
DEED EXECUTED PURSUANT TO A
COURT ORDER- court ordered or will
full consideration vs. &10 & other….
Transfer of Title
Chapter 12/199
Grantors tax- a tax charged to
record the deed into public records,
there are some exemptions, gifts,
government bodies,charitable
organizations…
In this case the rate is .50 per
$500 of value
Value ($324,000)
: Unit($500)
X Rate per Unit (.50 cents)
648 x .50= $324
Transfer of Title
Chapter 12/200
Involuntary alienation- property transfer
against owners consent- condemnation,
delinquent taxes, dies intestate w/no
heirs….
Transfer by adverse Possession
Another form of involuntary transfer, a person
makes claim,takes possession and makes
claim of the title. Usually ALL of the
following must happen:
1.
Open- obvious to everyone
2.
Notorious-known by others
3.
Continuous & uninterrupted
4.
Hostile- w/o true owner’s consent
5.
Adverse to the true owner’s possession
Statutory time frame can be from 5-30 years, from
state to state
Transfer of Title
Chapter 12/201-203
By Will – An instrument used upon ones
death to convey real & personal property.
The testator( person who makes the will)
leaves the “gift” of real property by will is
the(devise) and the person who receives it
is the devisee.
For title to pass to the devisee, upon the
death of the testator the will must be filed
in court and probated.
Probate- legal procedure to verify the validity
of the will and accounting of assets.
A will cannot supercede dower/curtsey rights
Legal requirements of a will-Only a
valid and probated will can transfer title of
property. Testator must be of legal age and
sound mind
Probate proceedings- Person who possess the will is the
executor
- To see that all assets are distributed
correctly
- Debts are paid
- Distributes property to heirs
Virginia Real Estate
Chapter 8/80
Requirements for a valid deed
Grantor w/legal capacity
Grantee
Consideration
Granting clause
Accurate legal description of property
Any relevant exceptions or reservations
Signature of Grantor
Delivery & acceptance
Grantor can sometimes be a grantee as well
Grantee- Legally competent, full name & can be
to a nonexistent person
Virginia Real Estate
Chapter 8/80-81
Competence – A
minor may convey
property BUT may be repudiated
after he/she attains majority.
Habendum Clause- rarely used
Power of Attorney- Acceptable
BUT affidavits & sworn statements
cannot be signed by POA, lender
may not allow POA because of truth
in lending requirements
MUST BE RECORDED if not it’s as if the
deed wasn’t signed
Virginia Real Estate
Chapter 8/81-82
Transfer taxes & feesRecordation fee- Deed
State fee
is $.15/$100 &
county/city is
1/3 of that $.05/$100
Grantor Tax- $.50/$500
Tax on deed of trust- calculated the same
way as recording fee, use applicable
rate for area.
Transfer & clerk fees- a fee for
miscellaneous papers to be
recorded.
Rule of thumbBuyer pays for “new” items & seller
pays for “old” items
* Recording fees are based on Purchaser
price or value of grantor’s equity
Virginia Real Estate
Chapter 8/82-83
Adverse Possession- Necessary
to show actual, hostile,
exclusive, visible and
continuous possession for 15
years
Must be hostile and without true
owner’s permission
Transfer of deceased’s property
No will is valid unless it is in writing.
Must be signed by the testator or
by someone under the direction
of the testator & state clearly that
it is to be in his/her name.
Can be in the testator’s handwriting
(holographic will) if witnessed in
the presence of at least 2
witness, they must sign it as well.
Testamentary intent must be on
the face of the paper itself.
Virginia Real Estate
Chapter 8/84
Va is silent on an oral or deathbed will
All heirs and spouses must sign as
grantors
SELLER’S NET
AMOUNT SELL WANTS TO NET
$300,000
.94 (94%)
$319,148.93 Equals the amount the
property needs to be listed for
Round up to $319,150
Original Cost
SALES PRICE : % OF PROFIT =
ORIGINAL COST
$125,000 : 1.3% =
$96,153 IS ORIGIANL COST
To double check yourself:
$96,153 X 1.3% =$124,998.90
ROUND UP
Mortgage Qualifying Ratios
28/36
PITI/PMI- Principal, interest, taxes, insurance
& private mortgage insurance
PITI/PMI no more than 28% of total gross
monthly income
Total housing allowance (28%) plus
monthly debts cannot exceed 36% of
monthly gross income
$60,000 yearly income
: 12 months =
$5,000 monthly income
X 28% maximum monthly housing allow.
$1,400 PITI/PMI
+ $400 monthly debt
$1,800 : 36% = $5,000 OKAY
Real Estate Commission split with
agent & company on a 55agent /45
company split
Sales price
$364,000
Commission rate
x
Commission
$25,480
Commission
$25,480
Agent share
x 55%
7%
$14,014
Company share
$25,480
x
45%
$11,466
Important #’s to remember
1 acre = 43,560 square feet
1 mile = 5,280 feet
1 mile = 320 rods
1 square yards = 9 square feet
1 square mile= 1 section= 640
acres
1 cubic yard = 27 cubic feet
Title Records
Chapter 13/209
Recording – Any written document that
affects any estate , right, title, or interest in
land MUST BE recorded in the county
where the land is located to serve public
notice. To be eligible for recording a
document must be drawn & executed
according to the recording acts of the
state
Notice – Giving notice
3 types
CONSTRUCTIVE – diligent inquiry –
Properly recorded documents serves as
notice to the world
ACTUAL- direct knowledge someone that
has searched the public records &
inspected the property/ they can’t use lack
of constructive notice to justify a claim
INQUIRY- law assumes a reasonable
person would inquiry more into the
property
Priority – Order of rights in time who
Title Records
Chapter 13/211
Unrecorded - ????? Example ???????
Chain of title – the order in which tile is
recorded (passed) Trace ownership
through the years, if there is an unbroken
chain then (gap) then there’s a cloud on
the title that needs to be resolved, court
action, a suit to quiet title, each claimant is
allowed to present evidence then the
judge rules.
Title search & Abstract of Title –
Title search- examination of all public
records to determine if there are any
defects in the chain of title. Starts with
present owner & goes back 40-60 years.
Some states have adopted the Marketable
Title Act this extinguishes certain interest
& cures certain defects, goes back to
Title Records
Chapter 13/212
Marketable Title – Disclose no serious
defects & does not depend upon doubtful
questions of law or fact to prove its valid
-Doesn’t expose purchaser to hazards of
litigation or threaten the quiet enjoyment of
the property
-Convinces a reasonably well-informed &
prudent person that he/she could, in turn,sell
or mortgage the property
-Unmarketable title can still be transferred but
its defects may limit or restrict its ownership
-Typical sales contract requires the seller to
deliver marketable title to the buyer
-Customary for a preliminary title search be
conducted after sales contract is signed to
give the buyer opportunity to review & seller
time to cure defects before settlement
It’s important to sure any defects/restriction
before closing, a buyer cannot be forced to
accept what they didn’t bargain for in the
contract.
Title Records
Chapter 13/212
Proof of Ownership- evidence of
title: deed by itself not sufficient
Certificate of Title- Statement of
opinion of the title’s status as of
the date of the certificate
-Based on a title search
-Prepared by a title company,
licensed abstractor or attorney
-Imperfect because unrecorded
liens, rights of parties in
possession & hidden defects such
as forged deeds, marital interest or
fraud cannot be detected.
Abstract & attorney’s opinion- May be
used in some areas as sufficient
evidence
-An opinion issued on basis of
abstract
-Imperfect because of the same
Title Records
Chapter 13/213-214
Title Insurance- Insures the policyholder against
loss due to defects in the title other than those
exceptions identified in the policy (unlike
other insurance policies, title insurance insure
against past occurrences)
- Based on the title search
-Preliminary report of title(commitment to
issue policy) issued describing policy to be
issued & includes: Name of party
Legal description of property
Estate or interest covered
Condition & stipulations
Schedule of exemptions
-Premium paid (one time @ closing)
-Insurer’s liability cannot exceed face amount of
policy unless there is an inflation rider
-When the title company makes a payment it
generally acquires the rights to any remedy or
damages available to insurer- SUBROGATION
SEE PAGE 214 TABLE
Title Records
Chapter 13/214
COVERAGEStandard coverage- Normally insures the title
as it is known from public record & hidden
defects as forged documents, conveyance
by incompetent grantors, incorrect marital
statements & improperly delivered deeds
Extended coverage- As provided by the
American land Title Association policy,
includes standard items & protects the
homeowner against defects that maybe
discovered upon inspection of the
property, rights of parties in possession,
examination of survey & certain
unrecorded liens
Exclusions- not everything is covered,
zoning, water rights, easements, taxes…
TYPES OF POLICIES-Owner’s- Owners, heirs equity
Lender’s- Mortgage amount, reduces as
principal amount is paid down
-Leaseholder’s- the tenant
Certificate of sale- property purchased in a
court sale
Title Records
Chapter 13/214-215
Torrens System- A legal registration
system used to verify ownership &
encumbrances . Provides evidence of title
verses searching the public records. Owner
submits an application, it is submitted to
the courts clerk, if applicant proves they
are the owner then a certificate of title is
issued.
UNIFORM COMMERCIAL CODEDOES NOT APPLY TO REAL PROPERTY UCC ,
Governs the documents when personal
property is used as collateral. A lender
requires that a security agreement be
signed & a financial statement be given, it
identifies any real property that may be
involved.
Real Estate Financing
Chapter 14/221-222
Mortgage- is a voluntary liens on the real
estate, the Mortgagor (borrower) pledges the
property as collateral to the Mortgagee
(lender)
(for money)
Title theory- Mortgagor gives title to the
Mortgagee and he/she keeps equitable title
Lien theory-Mortgagor keeps the legal and
equitable title to the property, Mortgagee has a
lien on the property, if Mortgagor defaults then
Mortgagee must foreclose, offer property for
sale. Some states allow the Mortgagor (owner)
the right to redeem the property for a certain
amount of time after the sale.
Intermediate theory-Similar to title theory
but Mortgagor must foreclose to obtain legal
title
Real Estate Financing
Chapter 14/222-223
One cannot convey anymore than what one
owns. Interest/ fee simple, condo & the same
goes for a mortgage…..
The are TWO parts to a mortgage
Mortgage loan instruments:
Promissory note- otherwise known as the note
or financing instrument, The Mortgagor
executes(signs) the note as a promise to pay
back.
Mortgage- or otherwise known as deed of trust,
security instrument , creates the lien on the
property.
Hypothecation- the pledging of property, must
have a debt to secure in order to have an
effective deed of trust
Deed of trust- Title without the right to
possession, the deed is given as security for a
loan to a third party called a trustee. Trustee
holds title on behalf of the lender beneficiary,
the holder of the note. The conveyance
establishes the actions that will be taken if the
Trustor, borrower defaults.
Real Estate Financing
Chapter 14/224
Provisions of the note- promissory note
executed by the borrower/maker/payor is a
contract in itself. Normally it states the debt,
time & method of payment and interest rate.
If it’s not tied to a mortgage or deed of trust then
it’s called an unsecured note, normally a
short term loan.
A REAL ESTATE LOAN is a SECURED loan &
ALWAYS includes security… a mortgage or
deed of trust.
A note is a negotiable instrument the bank or
whomever holds the note is the payee, it may
be transferred to a third party, 1. Assigning or
2. Delivery
DATES SHOULD BE CLEARLY STATED
Real Estate Financing
Chapter 14/224-225
Interest- The charge for using money.
Arrears-due at the end of the month
Advance- due at the beginning of the month
Usury- To protect consumers from
unscrupulous lenders. Usury- when a
lender charges interest in excess of the
maximum rate .
Loan origination fee- Processing a loan is
called loan origination, the fee is used to
cover the expenses involved for
processing. 1 point = 1% of the loan
amount.
Discount points – A fee charged the
borrower to make up the difference
between the interest rate charged for the
loan & the yield (true rate of return)an
investor demands.
The number of points charged depends on 2
factors
- Difference between interest rate & required
yield
- How long lender expects the borrower will
Real Estate Financing
Chapter 14/225
Prepayment penalty-
a charge for paying
off a loan early- not all mortgages have this
LENDERS MAY NOT CHARGE A PREPAYMENT
FEE ON FEDERAL GOVERNMENT LOANS OR
THOSE SOLD TO FANNIE MAE/FREDDIE MAC.
Freddie Mac
Fannie Mae
Real Estate Financing
Chapter 14/225
Provisions of a Mortgage
The property is the security for the debt
Identifies the lender & borrower
Accurate legal description
Both mortgage document & deed of trust
Incorporate the terms of the note and should be
signed by all parties that have an interest in
the real estate .
Borrower’s duties:
Payment in accordance to the terms
Payment of real estate taxes
Insurance/ Homeowners
Keep in good repair
Failure to comply can result in default causing
the mortgage company to foreclose, normally
there is a 30 day grace period.
Real Estate Financing
Chapter 14/226-27
Acceleration clause- allows the lender to
foreclose (call the loan earlier than stated
time) should borrower default.
Assignment of Mortgage- The lender may sign
over the note over to a 3rd party.
Defeasance clause- requires the lender to
execute a Satisfaction/release/discharge, this
document returns all of the rights the
borrower had signed over to the lender for the
mortgage
Release deed- once the loan has been completely
repaid the beneficiary makes a written request
to the trustee to release the deed/deed of
reconveyance to the trustor, giving back all
the rights
Escrow account/impound/trust- Reserve for
taxes, insurance…. At closing normally 1 –2
monthly cost is collected and then collected
monthly with you house payment
Real Estate Financing
Chapter 14/228-229
Flood Insurance- Requires that if a
property is in a flood plan then the
borrower must have flood insurance, as of
October 1996 if the lender has knowledge
that a property is now in a flood plan area
then the borrower has 45 days to insure
the property if not then the lender will and
charge the cost back to the borrower
Assignment of rents- If the secured property
involves rental property, a borrower may
assign the rent to the lend in case of
default. Title theory states it’s automatic
Subject to & Assuming- Subject to is when
the property being purchased has a
mortgage and the purchaser buys the
property and continues to make the
payments, if Purchaser defaults the
property is foreclose d upon, any
outstanding amount may/could be the
original borrower’s responsibility
Assuming- Purchaser assumes the
responsibility of payments/terms if he/she
defaults then & not enough money comes
from the sale then a deficiency judgment
is filed against the assumer and could be
Real Estate Financing
Chapter 14/229
Alienation clause- Due on sale/resale
clause/call clause- allows the lender to call the
loan & used to prevent a mortgage from being
assumed if the lender wants to raise the
interest rate
Recording the Mortgage or Deed of
Trust- In the recorder’s office of the county in
which the property is located, gives public
notice of borrower’s obligations. If the Torrens
system is used then must be entered on the
original Torrens certificate
Priority- In order of which they are recorded. A
first deed of trust or mortgage is 1st in lien, a
2nd mortgage is next & so on… Unless one
agrees to subordination which then steps
back to the other loans.
Real Estate Financing
Chapter 14/229-231
Land Contract- Installment contract /contract
on deed. Vendee is the buyer & vendor is the
seller. Monthly payments are made to the seller
who retains title to the property until the loan
has been fulfilled. If Purchaser defaults the
seller keeps all monies paid to he/she.
Foreclosure: the legal procedure when the
borrower defaults on the loan
Three types of foreclosure proceedings: All
require that the borrower be given prior notice
before the sale:
Judicial- Property sold by court order. The lender
accelerates the loan, the lender’s attorney files
a suit to foreclose, after court procedures the
property is ordered sold. Public notice then
sold to the highest bidder.
Nonjudicial- - when there is a power-of-sale
clause . The trustee records public notice,
advertises the sale and amount due, after
selling the property a notice of sale/affidavit is
recorded.
Strict foreclosure-No sale takes place, the lender
records the proper papers if the borrower
doesn’t pay by the time set then the courts
award full legal title to the lender.
Real Estate Financing
Chapter 14/231
Deed in lieu of Foreclosure- A friendly
way for the lender to take back the property,
but has it’s down falls, if there are junior liens
they pass onto the lender as well. This is still a
adverse element on the borrower’s credit.
Redemption- Gives defaulting borrower the
equitable right of redemption, prior to the
foreclosure sale to pay the amount due plus any
expenses involved.
Some states allow the defaulting borrower the
right to redeem the property AFTER the sale.
Normally a year, the borrower has statutory
right of redemption . Borrower may raise the
money needed and pays the court. Courts may
appoint a receiver to take charge of the
property, collect rents…. During the
redemption period.
Real Estate Financing
Chapter 14/231-232
Deed to Purchaser – If redemption is not
made then the successful bidder( new owner )
gets whatever type of title the previous owner
had, the deed contains no warranties.
Deficiency Judgment- When the amount of
money from a foreclosure sale doesn’t cover then
total cost a deficiency judgment is issued against
the borrower &/or anyone else that endorsed or
grantors of the note, anyone that was involved
with the written agreement.
BUT if there is any more left over from the sale
then the borrower receives those funds.
Real Estate Financing
Practices
Chapter 15/236
There are 3 basic components to
the real estate financing market
1. Government influences
2. The primary mortgage market
3. The secondary mortgage market
Real Estate Financing
Practices
Chapter 15/236
Federal Reserve System- (Fed)
The role is to create sound credit
conditions, help counteract
inflationary & deflationary trends and
create a favorable economic climate.
There are 12 federal reserve districts in
the country, each served by a federal
reserve bank .
All nationally chartered banks must join
the Fed & purchase stocks in their
districts reserve bank
Real Estate Financing
Practices
Chapter 15/237
Federal Reserve SystemRESERVE requirements - regulates the
flow or money & interest rates in the
market place by controlling the
members reserve requirements &
discount rate, regulate the money
supply through the Federal Open
Market Committee, which buys and
sells securities on the open market.
-The Fed requires the members to keep a
certain amount of assets as reserves.
By increasing it’s reserve requirements it
limits the amount of money available
for loans which increase interest rates
which can slow down a market.
Real Estate Financing
Practices
Chapter 15/237
Fed- Discount rates- Fed members
can borrow money from the district
banks. The discount rate is the rate
that the Feds charge to its member
banks. The Federal Funds rate is the
rate the Feds recommend its members
to charge each other on short term
loans. This is the basis on which the
bank will charge loan customers.
The Prime rate is strongly influenced by
the Feds discount rate, the interest
rates charged for mortgages are
slightly higher than the prime
Real Estate Financing
Practices
Chapter 15/237-238
Primary Mortgage Market- The
1.
2.
lenders that make mortgage loans,
they view a mortgage/loan as an
investment, a way to make money.
Income is realized from these 2
sources:
Finance charges, collected at
closing, discount points & loan
origination points.
Recurring income, the interest
collected during the term of a loan
Real Estate Financing
Practices
Chapter 15/238
A few of the major primary lenders
Thrifts- Savings associations & commercial
banks Fiduciary lenders
-Subjects to regulations set by government
agencies such as:
Federal Deposit Insurance Corporation
(FDIC)
Financial Institute Reform, Recovery &
Enforcement Act of 1989 (FIRRES) created
Office of Thrift Supervision (OTS)
Insurance companies –
-Invest much of their premium income in
profitable enterprises, such as long-term
real estate loans
- Prefer income-producing commercial &
industrial properties
- Invest in residential loans by purchasing
large blocks of government backed loans
from the Federal National Mortgage
Association (FNMA)and other mortgage
warehouse agencies
Real Estate Financing
Practices
Chapter 15/238-239
Credit unions – Cooperative
organizations that require membership to
borrow & recently have began making
long term 1st & 2nd loans
Pension funds- Funds channeled
through mortgage bankers and mortgage
brokers
Endowment funds – Source for
financing low risk commercial & industrial
property, commercial banks & mortgage
bankers handle
Investment group financing – Very
popular for large real estate projects,
funds come from such sources as
Real Estate Financing
Practices
Chapter 15/239
Mortgage banking companies – are
not mortgage brokers, Originate real estate
loans using funds borrowed from others as
well as their own funds, often serve as
intermediaries between investors & borrower
for a service fee, usually organized as stock
corporations, subject to fewer restrictions
than others
Mortgage brokers- Are not lenders, Act as
intermediaries between borrows & lenders,
locate borrowers, process their loan
applications & submit to lenders, do not
service the loan once it has been made.
Real Estate Financing
Practices
Chapter 15/239-240
The Secondary Mortgage Market
Where loans are bought and sold after
they have been funded
Routinely lenders sell the loans to the
secondary market to avoid interest
rate risks & to realize a profit, it also
helps to continue funding the lenders
(replenish their funds). Lenders will
continue to collect the payments from
the borrower then passes it on to the
investor, lenders collect a fee for this
service.
Real Estate Financing
Practices
Chapter 15/240-241
Warehousing agencies
Fannie Mae- deals in conventional , FHA and
VA loans, it is organized as a privately owned
corporation that issues its own stock&
provides a secondary market for loans. Buys
large pools/blocks of mortgage from lenders
in exchange for mortgage backed securities
Ginnie Mae- Entirely a governmental agency, a
division of HUD, Department of Housing
Development, corporation without capital
stock, administers special assistance
programs
In tight markets/high interest rates Ginnie mae &
Fannie Mae can join forces (tandem plan) ,
allowing Fannie Mae to buy high-risk/low-yield
loans & Ginnie Mae guaranteeing them
Freddie Mac- Provides a secondary market for
primarily conventional loans, has the authority
to pool loans& sell bonds in the open market
with the mortgage as the security.
Real Estate Financing
Practices
Chapter 15/241-242
Financing Techniques
Straight loans- Term loans/non- amortized
loans, periodic payments of interest only with
the entire principal balance due at the end of
the loan term, generally used for home
improvements/ 2nd mortgages, simple interest
Balloon payment loans- periodic payments
are not sufficient to fully repay the principal
amount, it’s practical amortized but has
principal owed at the end of the loan
Amortized loans- direct reduction loans, each
payment is the same amount, amount applied
to interest decrease with each payment, the
amount applied to the principal increases with
each payment ,15,20 & 30 amortization, most
are paid in monthly installments, some
quarterly/semi annually.
Real Estate Financing
Practices
Chapter 15/242-245
Adjustable rate mortgages- ARM Interest
fluctuates, therefore the repayment loan
amount changes as well. Typically the interest
rate is based on the index rate plus a margin
(1 to 2 %) over there Treasury bill rate.
-The rate cap is the amount the interest rate can
change each time.
-Typical ARMs are either a periodic or life-of-theloan(aggregate) periodic, may change any
one time or aggregate rate cap stays the same
for the life of the loan.
-To prohibit unaffordable payments, there’s a
payment cap ,that’s the maximum the rate can
exceed, which could result in a negative
amortization (higher loan balance).
-The adjustment period sets how often the rate
may change.
-Conversion option is offered by the lender to the
borrower to convert the ARM to a fixed rate.
Real Estate Financing
Practices
Chapter 15/245-24524
Growing equity mortgage-GEM rapid
loan payoff , Increase in payments during the
term of the loan reduces the principal,
Borrower’s equity grows faster. Normally used
when borrower’s income grow as the
payments increase
Reverse-annually mortgage- RAMs
Lender makes regular monthly payments, line
of credit or 1 lump sum made to the borrower.
Repaid upon sale of property or death of
borrower
Real Estate Financing
Practices
Chapter 15/246-247
Loan programs are normally based on
their LOAN TO VALUE LTV
The lower the ratio of debt to value the
higher the down payment, which mean
more security to the lender
Conventional Loans- viewed as the
most secure loan because the LTV
ratio is lowest. Traditionally the ratio is
80% of the purchase price or
appraised vale whichever is less.
- Borrower needs to qualify for the loan,
28/36 ,a conforming loan, allows the
lender to sell the loan to the
secondary market
- A non- conforming loan ( higher than
28/36 & 95% LTV higher than 33/38
Real Estate Financing
Practices
Chapter 15/247
Private Mortgage Insurance- PMI
Insurance that protects the lenders loan amount
should the borrower default. Required by the lender
when LTV is higher than 20%, monthly premiums
require until value is below a certain amount.
FHA-
-
-
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Part of the Federal Housing Administration &
HUD/Department of Housing Urban Development.
Competitive with Conventional mortgages . Most
common loan 203(b)allows:
A higher LTV, borrower is charged a percentage of
the loan for a premium for FHA insurance &
monthly Insurance (MIP)
FHA approve appraiser required
Sets standards for type & construction type
Set limited loan amount for regions, purchaser
must contribute 3%
98.75% sales price/appraisal < &/or 97%
$125,000/90% & 90% of remainder
PRE-PAYMENT- Lender allows for pre payment, but
may charge 30 days of interest if no notice is
given……………………………………….
Real Estate Financing
Practices
Chapter 15/251
…….. Assumption: Loan made before 12/1986,
pretty must acceptable to assume by
anyone, After 12/1896 allowed possible
Points- If the seller pays more than 6 points
then its lender recalculates the price
accordingly
VA- Guaranteed loans- for little or no down
payment authorizes the guarantee of home
loans for eligible veterans, 90 days of active
duty.., minimum of 181 days of active
service during 7/26/47 –9/6/80, 2 full years
service during peaceful time after 9/7/80, 6+
yrs of continuous reservist
The Vet applies for a certificate of eligibility,
this doesn’t grantee a loan only that they
are eligible.
The borrower pays a loan origination fee, as
well as a funding fee, normally 2-3 %
1st time 2%/after that 3%
Assumption rules- VA loans made after 3/1/88
require approval of buyer & agreement + a
Real Estate Financing
Practices
Chapter 15/252-253
Farm Service Agency-FSA- Farmers Home,
A division of the Department of Agriculture,
helps purchase or improve rural
properties/farms & single family homes, has
guaranteed loans & direct loans, loans for
low/moderate families@ low interest rates.
Farm Credit System- provides loans, doesn’t take
deposits, loan funds are raised through the
sale of Systemwide bonds& notes
OthersPurchase Money Mortgage- The buyer normally
puts makes a down payment, assumes the
loan & seller finances remained
Package loans- includes the real estate &
personal property
Blanket loan- Normally used for several parcels
of loan, it allows for property to be release
while the loan remains on the remainder
amount
Real Estate Financing
Practices
Chapter 15/253-255
Wraparound loans- all inclusive loan, the new lender
assumes responsibility of the payment of the
existing loan and gives the borrower a new
increased loan at a higher interest rate. 1st lender
must approve
Open End- Secures a note by the borrower from the
lender & any future advances, similar to an equity
line
Construction- Periodic payments/draws, made to
general contractors or the owner, before each
payment the lender has an inspection of the
property, normally higher interest rate
Sale & leaseback- The seller sells the house then
leases the house back from the buyer
Buydowns- A way to lower the interest rate on a loan
normally form the first couple of years, points are
paid to reduce the interest rate
Home Equity- A loan against the equity in the
property, it becomes a junior lien to the 1st deed of
trust
Real Estate Financing
Practices
Chapter 15/256
Truth and Lending Act & Regulation Zrequire lending institutes to disclose the true
cost of obtaining credit. Used to compare
cost form various lenders & to avoid
uninformed use of credit.
Truth & Lending- The consumer must fully
understand the cost involved in the loan,
points, fees, finder’s fees, service charges,
interest…
The ARP- the annual percentage rate for the loanRegulation Z- applies to $25,000 or less for
families & household use & to secure
financing for a residential use
-Creditor is defined as one who extends credit
more than 25 times a years or more than 5
times years if the transaction includes a
dwelling as security.
-Subjects the credit to finance charge or contract
for payments in more than 4 installments
Real Estate Financing
Practices
Chapter 15/256-257
3 day right of rescission- most Regulation Z but not
to residential purchase money or 1st deed of
trust/ does apply to refinancing
Advertising for real estate financing- Must give
annual percentage rate & total amount of
finance charges
If any specific loan terms are mentioned then all
terms must be included, such as cash price,
required down payment…..
Penalties for noncompliance includeLiability to the consumer for twice the amount of
the finance charge with a $100 minimum & a
$1,000 maximum
-Court cost, attorney’s fees & actual damages
-Fines of up to $10,000 for each day a violation
continues after an administrative order
enforcing Regulation Z is given or for
engaging I unfair or deceptive credit practices
-For willful violations, up to $5,000 fine or one
year in prison or both
Real Estate Financing
Practices
Chapter 15/257
Federal Equal Credit Opportunity- ECOAProhibits lenders & those who grant or
arrange credit to consumers from
discriminating on the basis of:
Race
Color
Religion
National origin
Sex
Marital status
Age(provided applicant is of legal age)
Dependence on public assistance (welfare)
Lenders & creditors must inform rejected
applicants, in writing within 30 days, why
credit was denied or terminated
Real Estate Financing
Practices
Chapter 15/258
Community Reinvestment Act of 1977
(CRA)- Financial institutes are expected to
meet deposit and credit needs of community,
participate in development & rehabilitation
projects & loan programs.
Law requires statement by lender:
- defining geographic boundaries of community
- Identifying type of community reinvestment
credit offered
- Comments from public about lender’s
performance in meeting community needs-
Real Estate Settlement Procedures Act
(RESPA)- created to provide the parties to a
residential real estate transaction involving
new financing with the disclosure of all
settlement charges
Real Estate Financing
Practices
Chapter 15/258-259
Computerized Loan Origination CLO &
Automated Underwriting-An electronic network for handling loan
applications provides lists of mortgage
lenders, rates and terms
-Real Estate agents may assist buyer in selection
of lender & applying for loan on screen
-Broker may earn fees up to ½ point of loan
amount, borrower must pay fee
Automated underwriting procedures shorten loan
approval time
-lowers cost of application
-reduces lender’s time on approval process
-strengthens buyer’s offer to purchase by
including proof of loan approval
Virginia Real Estate
Chapter 9/
Virginia Real Estate
Chapter 9/
Virginia Real Estate
Chapter 9/
Virginia Real Estate
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