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Basic Real Estate Transactions

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Elizabeth Bagby

on 16 June 2015

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Transcript of Basic Real Estate Transactions

Basic Real Estate Transactions
Various Roles in Real Estate Transactions
The Broker
Lockridge v. Hale
, 764 S.W.2d 84, (Ky. App. 1989) – Found no enforceable commission under contract for one who acted as a real estate broker without being licensed to do so. “The purposes of the statute include the protection of the public from unscrupulous and incompetent brokers, and to provide good business ethics.” Id. at 86.
Givan v. Aldemeyer/Stegman/Kaiser, Inc. (Ask Realty)
, 788 S.W.2d 503 (Ky. App. 1990) states that “brokers owe duties of honesty, candor and fair dealing to all those with whom they deal, even in the absence of an express principal/agency relationship.” Id. at 505, referencing
Hughey v. Rainwater Partners
, 661 S.W.2d 690 (Tenn. App. 1983).
KRS 324.010(10) – “Broker” means any person who is licensed under KRS 324.046(1) and performs acts of real estate brokerage
The Attorney
Attorneys can serve many functions in the real estate transaction, mostly noticeably in the formation and drafting of the necessary agreements. Attorneys can also, however, act as agents or brokers, subject to license requirements and ethical rules
There are ethical issues inherent in the representation of multiple clients (handling the sale for both buyer and seller)
SCR 3.130-1.7

(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:
(1) The lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and
(2) Each client consents after consultation.
(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interests, unless:
(1) The lawyer reasonably believes the representation will not be adversely affected; and
(2) The client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.

Purchase Agreements
201 KAR 11:250 §2
An offer to purchase or a counteroffer prepared by or at the direction of a licensed agent shall include the:

(1) Purchase price, the amount of contract deposit given and who is to hold the deposit;

(2) Date and time of signing of the offer or counteroffer for all parties who sign;

(3) Date and time when the offer or counteroffer expires;

(4) Street address or a general description of the real estate sufficient to identify the parcel;

(5) Names of the offering party and the agent who prepared the offer or counteroffer; and

(6) Provision setting forth the date by which the closing shall occur and when possession shall be given to the buyer.

KRS 371.010 – Statute of frauds – Contracts to be written
No action shall be brought to charge any person:

(6) Upon any contract for the sale of real estate, or any lease thereof for longer than one year;

Unless the promise, contract, agreement, representation, assurance, or ratification, or some memorandum or note thereof, be in writing and signed by the party to be charged therewith, or by his authorized agent. It shall not be necessary to express the consideration in the writing, but it may be proved when necessary or disproved by parol or other evidence.

Remember this from law school?
Provisions of the Purchase Agreement
Necessary Parties

Identification of the Property

Purchase Price and Terms of Payment

Contingency Clauses

Taxes and Assessments

Closing, Timing and Possession

Title

Risk of Loss

Other Provisions
Identify every relevant party to prevent confusion as to who is bound by the agreement

Marital status of the seller - make sure all of the property interests are conveyed (make sure spouse doesn't have a right that isn't conveyed in the agreement)

Has seller filed for bankruptcy?

Is seller legally competent?

Does agent for either party have Power of Attorney?
Purchase agreements have a lower standard of description than deeds and other recordable instruments, but use a higher degree of specificity whenever possible.

Street address - This may be okay.

Legal description of the property - a full description of the property, describing boundaries. - This is much better, however.
Fixtures that a seller intends to remove should be identified as personalty in the purchase agreement.

Likewise, any personalty that is included in the sale should be listed in the agreement, although consideration for personalty should be listed separate from consideration for real property for tax purposes.
Make the amount of consideration given as specific as possible when listing the price.

Set out the manner and timing of the payment.

If there is earnest money deposited, it can only be released if the contract has been performed, the parties agree in writing, or there is a court order.
Contingency clauses in a purchase agreement set conditions precedent to the sale:

Subject to financing

Subject to sale of other property

Subject to inspection or repair

These clauses require good faith efforts to meet the conditions.

The agreement should set out how assessments against the property will be handled at the closing, and by what party.
A purchase agreement should set out the terms of the closing, although these terms can be negotiable and either as specific or general as the parties prefer:

Date, time and place

Whether time is of the essence

Time of possession
May be necessary to include remedy for seller holdover
Marketable Title

It is implied that the seller will convey marketable title, but this should be explicitly stated, along with the type of deed that will be conveyed.

Title isn’t marketable if there’s a reasonable fear that another entity retains the right to use or transfer the property

Risk of loss passes to the purchaser when the purchase contract is executed, but a buyer may wish to modify this in the agreement.
There may be other provisions required by statute, regulation or just the agreement of the parties.
Lead paint disclosures
Property condition disclosures

Commercial vs. Residential Considerations
Commercial real estate purchase agreements can take on other forms:

Letters of intent - not meant to be binding on the parties

Option contracts - a binding commitment from the seller without a commitment from the buyer, locking in a price and terms on payment by the buyer of consideration for the option
Consideration for the option must be separate.

Ford v. McGregor
, 234 S.W. 2d 493 (Ky. App. 1950) - an option contract specified that the consideration given for the option could be refunded at the election of the potential buyer. Since this was not mutual consideration, the option contract was considered to be an offer rather than a contract, which was then withdrawn by the potential seller. The potential purchaser could not then enforce the option contract.
An option must be exercised in an unqualified fashion
.

Phelps v. Gover
, 394 S.W. 2d 927 (Ky. 1965) – Attempt to fulfill the terms of the contract by tendering the deed, only to have it rejected by the purchaser's attorney, fulfilled the option, terminating it, and any further qualifications or actions by them were unnecessary.
An option contract that is too vague or lacks an essential element won’t be enforced.

Bennett v. Dudley
, 391 S.W. 2d 375 (Ky App. 1965) – Dudley gave an option agreement to Bennett, saying that if he “desires” to sell to Bennett, he’d notify him. Dudley sold to someone else, Bennett sued – the court held that the contract is unenforceable, since it was conditioned on Dudley’s desire to sell to Bennett specifically.
Commercial transactions often involve business entities:

Agency - identify the legal nature and true name of an entity that is a party to any contract, and determine authority of agent acting on the entity's behalf

Foreign corporations may have more requirements placed on them in the transaction
Title
Title is legal ownership of real property. There are four different ways to hold title in Kentucky:

Fee simple - absolute full rights to the property now and in the future

Joint tenancy - two or more owners share an undivided interest, and this usually comes with a right of survivorship

Tenancy in common - two or more owners share an undivided interest in the property, but the proportional share passes via will or intestate succession at the death of the interest holder

Tenancy by the entireties - this interest is for married couples and comes with a right of survivorship
Potential title problems that can delay or inhibit transferability:

Past ownership claims

Liens

Covenants of record
Title search and examination

This is a basic function of an attorney in a real property transaction.

If the title is discovered to be not marketable or is otherwise unacceptable, the seller must be given notice and reasonable time to cure defects.

The buyer has the right to demand the exact condition of the title specified in the purchase agreement, no matter how trivial the defect.
Liens
Types:
Mortgages
Mechanic’s Liens
State Tax Liens
County/City Ad Valorem Property Taxes
Judgment Liens
Federal Tax Liens
UCC Financing Statements
Unemployment Liens
Inheritance Tax Lien
Workers’ Compensation Lien
Bail Bonds
Condominium Liens
Attachment of Liens
Can a lien against an owner of only an equitable interest attach to the property?
Sebastian v. Floyd
, 585 S.W.2d 381 (Ky. 1979) –The seller’s interest under a land sale contract is treated as a lien against the property. These types of contracts should be looked as if they were a deed with a lien from the seller.
Title Insurance

Title insurance protects against loss that comes about as a result of defects of title to real property. It’s different from what one generally considers insurance to cover in that it protects against future losses from events that occurred in the past. Insurance in general is designed to protect against future losses due to future events.

Closings
The closing is the final step in the real estate transaction, a ceremony that is the end result of all the negotiations, document preparation, etc. This is the completion of the transfer between the parties and ends with the transferee receiving legal title.
The closing process includes the completion and delivery of several documents.

1. Purchase contract/agreement

2. Survey - legal confirmation of the extent of the property

3. Title - a legal opinion or commitment by a title insurer rendered after examination of the record

4. Deed - this document conveys title to the property.
There are generally three kinds of deeds in real estate transactions:
General Warranty Deed
Special Warranty Deed
The seller convey title with certain warranties or covenants.
Covenant of seisin
– the grantor warrants that they are the true owner of the property and they have the legal right to convey it
Covenant against encumbrances
– unless they are otherwise listed in the deed, the grantor warrants that the property is free of liens or encumbrances
Covenant of quiet enjoyment
– the grantor warrants that the title will be good against third parties trying to claim title to the property
Covenant of further assurance
– the grantor makes a promise to deliver any document or instrument necessary to make the title good
This is different from a general warranty deed in that a special warranty deed will only apply to claims against the title by and through the grantor.

Special warranty deeds only warrant against claims for the duration of a the seller’s tenure in a property.

Used more commonly in commercial real estate transactions


Quitclaim Deed
The seller merely releases a hold on any right to any title in the property and makes no warranties about whether the title is even good


5. The Settlement Statement - the HUD-1, the predominant settlement statement, will be replaced on August 1st by the TRID (TILA-RESPA Integrated Disclosure)

6. Lien payoffs

7. Tax Proration

8. Title Insurance

9. Commissions
10. Division of charges (what seller and buyer agree to pay/do in the closing process)

11. IRS Form 1099 - real estate transactions are reported to the IRS

12. TILA disclosures (this will change on August 1st)
The closing agent should have a list of the required documents and check them all as well as checking the identification of the parties and making sure necessary parties are present.
Recordation
KRS 382.080(1) - No deed conveying
any title to or interest in real property
, .... for a longer time than five (5) years, ... shall be good against a purchaser for a valuable consideration without notice thereof, or any creditor, unless the deed is acknowledged by the party who executes it, or is proved and lodged for record in the proper office, as prescribed by law.
A deed or mortgage must be filed to be valid, and deeds and mortgages take effect in the order that they're recorded.

KRS 382.270, 382.280
Instruments that may be recorded:

1. Deeds
Recordation requirements:

1. Recorded in county clerk's office of the county where property is located
2. Source of the grantor's title
3. Acknowledgment of Proof
4. Statement of full consideration
5. Scrivener's certificate and address of the parties
2. Offers to sell and option contracts
3. Bond of deed/contract for deed/land contract
Sebastian v. Floyd
, 585 S.W.2d 381 (Ky. 1979) – The Kentucky Supreme Court held that these types of contracts have the effect of conveying a property interest to the purchaser. The seller’s interest then becomes a lien, even if the contract contains a forfeiture clause. These types of contracts should be looked as if they were a deed with a lien from the seller. Land sale contracts are analogous to conventional mortgages and must be enforced through foreclosures.
4. Mortgages
Recordation requirements:

1. Recorded in county clerk's office of the county where property is located
2. Lender's address
3. Date and maturity of the obligation
4. Acknowledgment of Proof
5. Scrivener's certificate and address of the parties
5. Power of Attorney
Requirements:

1. There must be at least two parties
2. If real estate is conveyed, POA MUST be recorded
3. Same recordation requirements as a deed, but a preparation certificate isn't necessary

Bankruptcy
Automatic Stay
– under § 362 of the bankruptcy code, upon a filing of bankruptcy, creditors are prevented from taking any action against the debtor for the duration of the stay without judicial intervention
Once the seller files a bankruptcy petition, the property in question becomes part of the estate in bankruptcy, and the automatic stay will prevent any action to commence or enforce the contract. The seller will have to ask the court for permission to complete the sale, leading to a delay of the closing. The contract is then an executory contract, and the trustee can accept or reject it. If the trustee rejects the contract, it becomes unenforceable.
Unless there is a ruling by a judge, the stay remains in effect until:
a. The case is closed
b. The case is dismissed
c. The debtor is granted or denied a discharge
d. The item of property is no longer the property of the estate
e. OR – when a debtor fails to file a Statement of Intentions under §521(a)(2) within 30 days

In effect, an automatic stay delays foreclosure once a debtor files, and a creditor must get judicial approval and show some form of loss of an interest if the approval isn’t granted.
Tax Issues
Capital Gains
Personal real estate -

1. Gain of up to $250,000 (filing single) or $500,000 (married filing jointly) can be excluded from capital gains on the sales of a house, if you have owned the house for at least two of the five years prior to the sale date and used it as your main home for an aggregate of two years of the five years prior to the sale date.

2. Gain can’t be excluded if you received the home as part of a § 1031 like-kind exchange.

3. Gain can’t be excluded if you used this exclusion at any time within the last two years.
Commercial or investment real estate –

Capital gain rate of unrecaptured § 1250 gain on real property is 25%

Unrecaptured § 1250 gain is the gain on the sale of real property over the depreciated value. If an asset property is depreciated over thirty years to a value of $0 and is theoretically worthless, the sale of the property for $100,000 produces $100,000 of gain and is taxed at the 25% rate.

Internal Revenue Code § 1031 allows for those with a capital gain in business/investment property to reinvest proceeds from the sale of that property in new property to defer taxation on those capital gains.

It’s a sale and a reacquisition that is treated like a trade of the properties.

The results of the sale of the first qualified property are placed with a third party intermediary who then buys the second piece of property with the money and “sells” it to the original investor. In this way, the intermediary acts as the party the investor is swapping property with.

§ 1031 (Like-Kind) Exchanges
There are two rules that must be followed:

1. The total purchase price of the replacement "like kind" property must be equal to, or greater than the total net sales price of the relinquished, real estate, property, or the investor will be taxed on the remainder, or “boot”

2. All the equity received from the sale of the relinquished real estate property must be used to acquire the replacement "like kind" property.


These transactions all must take place within allotted time periods -

1. 45 days from the date of the sale of the first property, the investor must identify other properties to purchase.

2. Within 180 days of the transfer of the first property, the investor must receive the replacement property
Real Property at Death
Power of sale in a will
KRS 395.220 authorizes the ability of a testator to direct a personal representative to sell land, but without this power, the executor cannot sell land without a court order.

If there's such an order, there's a thirty-day waiting period before the attempted sale or mortgage of the property so that aggrieved parties may bring suit.
A testator may give the power of sale generally or for a limited purpose.

The testator may condition the power of sale upon a specific event or condition, which limits the power of the executor to sell the property.
Intestate Succession
When a decedent dies intestate, real property that passes under Kentucky’s laws of descent require the filing of an affidavit of descent with the county clerk of the county the property is situated in.

It must include:
1. The name of the ancestor
2. The date of the ancestor’s death
3. Whether the ancestor was married or single, and the name and address of the surviving spouse if married
4. The place of residence of the ancestor at the time of death
5. The fact that the ancestor died intestate
6. Names and addresses of the heirs at law who inherit the property and the relationship of each to the ancestor as well as the interest in the property inherited by each.

Any questions?
Christopher A. Richardson
crichardson@mmlk.com
(502) 327-5400, ext. 304
www.linkedin.com/in/chrisarichardson
www.mcbrayerrealestatelaw.com
www.mmlk.com
@McBrayer_Law
Christopher A. Richardson
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