More Key Concepts in Civil and Criminal Law

CHAPTER 12

Real Estate--Home Sweet Home

Real estate refers to buying and selling a house. Real estate also refers to realty: land, houses, trees, driveway, garage, and everything else attached to the land. Everything else is personal property or personalty: cars, jewelry, furniture, books, CDs, and the lawn mower.

Sally and Sam Sellers want to sell their house. When they do, theyíll be the grantors. As youíll see, this is quite a process.

First they have to answer some basic questions. How do they hold title? That is, what do they own that they can sell?

TYPE OF TITLE HELD BY SELLER

Fee:

Ownership of real estate. A funny word, it comes from 'fiefdom' in the Middle Ages. There are various types of ownership interests. For example:

Fee simple or fee simple absolute:

Complete ownership, with the right to sell or devise (give in a will) the property.

'I grant, sell, convey my house at to William Smith and his heirs and assigns forever.'

Most American homeowners have this type of fee.

Fee simple conditional:

Complete ownership, but limited in some way. For example, property sold (devised) so long as it's used for religious purposes; or as a working farm; or whatever. If the use ever changes, then the property reverts (goes back) to the grantor or his heirs or assigns. This is called a 'reversion.'

'I grant, sell, convey my house at to Brother John so long as it is used for religious purposes.'

If you buy or get one of these properties, youíd better know about this condition!

Life estate:

Freehold interest with no inheritance rights. Ownership for the life of the person holding it or some other life (per autre vie). When the person dies, the life estate terminates and the fee simple reverts to the grantor or his heirs.

'I grant, sell, convey my house at to Kate Brown as long as she lives or as long as_ lives (the other life; the autre vie).'

Two other forms of ownership are new; created by statute - not the old common law. As you can see, these are hybrids of the law: part this and part that! These are:

1. Condominium:
   The owner has separate ownership of an airspace inside an individual apartment, office space, et cetera, in a multiple-unit building or complex of buildings. The owner also has a right to use (and part ownership of) the common areas, such as the halls, elevators, land, walls, garage, swimming pool, whatever.
   The single unit is a fee simple; the shared areas are tenancies in common.
2. Cooperative:
   The entire property - real estate (land, buildings) and personal property related to it (lawn mowers, snowblowers, shovels) is owned by a cooperative corporation. Every ìownerî owns a share of stock in the corporation and is entitled to a ìproprietary leaseî from the corporation of a unit - a dwelling or office, et cetera. The corporation may have a loan from a bank used to buy the property. If so, if one member defaults in his payments, all members chip in to cover the default. Often an owner will get a personal loan from a bank to buy his or her share of stock. This is an individual - not group obligation.
   Let's assume Sally and Sam has a fee simple absolute.

TYPES OF OWNERSHIP INTEREST

Next, how do they hold it? What does each of them actually own that each can sell? As you may have guessed, there are several forms of ownership. These include, among others, the following:

Sole tenancy:
also called several tenancy or tenancy in severalty: One person owns the entire property and can sell it or devise it (unless heís getting a divorce in a community property states and acquired the property during the marriage). (See community property, below.)

Joint tenancy with right of survivorship:

Two persons own the entire property in equal interests. If one dies, the property goes to the other. The conveyance must clearly state the intent to form this tenancy: 'To Sally and Sam as joint tenants with the right of survivorship.'

Tenancy by the entirety with right of survivorship: A special form of joint tenancy, only possible for married couples.

Tenancy in common:

Property held by two or more persons, each owning a separate and separable interest, with no right of survivorship. When an owner dies, his interest is devised to his heirs, not to his cotenant. This can make for strange bedfellows!

Community property:

(Exists only in some states.) Property obtained after the marriage, through the work and efforts of one or both spouses, becomes the property of both, regardless of how the title is held. In case of divorce the property is divided equally. At death, however, the decedentís interest passes to his heirs; the survivor retains his interest.

In legalese, this is because there is no automatic right of survivorship to the spouse in community property.

Let's assume Sally and Sam own the property as tenants by the entirety and can sell it.

REAL ESTATE BROKER

Next, they decide whether to sell the house on their own or with a real estate broker (or ìagentî or ìrealtor.î For our purposes these professionals are treated interchangeably).

Let's assume they opt to use a broker. The broker is the seller's representative (agent). Therefore, when the house sells, itís the seller/ grantor who will pay the commission. Buyers beware!

Commission:

A fee paid to the broker for services performed. It's not a salary, which generally is payment for time worked. A commission is usually the same amount whether it takes one week or one year to find a buyer. The amount of the fee is usually a percentage of the sale price.

Sally, Sam, and the broker enter into a listing agreement-yes, another contract (K)! Sally and Sam agree to pay a commission if the broker sells the house (and sometimes even if he doesnít. Watch this one!).

As you probably guessed, there are several types of listing agreements. For example:

1. Exclusive:
   Here, the broker gets a commission if the house is sold during the period of the agency, no matter who sells it! Thus, even if you alone find someone to buy it, you owe the commission.
   To avoid this, when writing the listing agreement (K), the seller may be able to write in an exception for the potential buyers who have already been shown the house. Then, if any of them buy it, there will be no commission.
2. Open listing:
   You can list your house with any and all agents you wish. Whoever sells it gets the commission. It's a free-for-all.
3. Multiple listing service (MLS):
   Here, you list your house with a broker, who places it on a master list to which all member brokers have access. Your broker is the 'listing broker.'

Then the broker who sells your house splits the commission with the listing broker.

When does a broker get paid? There are lots of different possible times: when the house is sold at closing; or when he or she presents a buyer who is ìready, willing, and ableî to buy your house; or when you reach a purchase and sale agreement; or...

Make sure you get the listing agreement to say what you want. Negotiate and read carefully before you sign!

Yeah! Just when you were tired of cleaning your house all the time and had given up hope of selling it ... here come Betsy and Bill Buyer. They love your house! They are ìready, willing, and ableî to buy it.

If they actually buy the house, they will be the grantees. Great! Break out the champagne? No, not quite so fast...

It's time to write a purchase and sale agreement (P & S). (Again, a K!)

THE PURCHASE AND SALE AGREEMENT

What's in a purchase and sale agreement? It should state all the important terms of the agreement between the buyer and seller, such as the price, date, and other important terms. Who gets the carpeting? the stove? the chandelier? and so on. It may include the following legalistic terms:

Date:

The date for transfer of the house (the actual sale) is listed in the P & S agreement. If the date is critical to either party, it should state, ìTime is of the essence.î If not, the date may be changed without penalty or breach of K.

Title:

What type of ownership can the seller convey? Not all owners own the same rights even if they ownî their own house.

The seller's ownership (title) can be affected (limited) by an:

Eccumbrance:

Any right someone has to the property, such as a lien, lease, mortgage, easement, taxes due, et cetera.

Lien:

A legal claim against the property. For example, a tax lien for taxes owed a mechanic's lien for payment for work performed on the property, a judgment lien for payment of a court order. There are lots of types of liens.

Mortgage: Defined below.

Easement:

A right others have to use your property for specific purposes. For example, someone may have a fight to cross it to get to a road; a utility company may have rights to construct and repair power lines on it. Easements are created either in writing or through continued use. ìBut weíve always gone this way. Now you canít stop us. We have an easement!î Or ìWeíve always parked here.î Well, you get the idea.

Covenants that ìrun with the land.î A covenant is an agreement. One that ìruns with the landî ìtouches and concernsî the land. For example, there may be ìno liquorî laws; there may be restrictions in the subdivision. These covenants must be in writing.

Zoning regulations:

These are governmental rules and restrictions that regulate the types or use of buildings and land. They may be ordinances and bylaws. For example, in a historic district the renovations you make may be restricted. In a residential area you may not be able to have your office at home, with clients coming and going. In a commercial district you will undoubtedly have to build according to codes and standards.

Riparian rights:

Rights belonging to the owners on the banks of a river (sometimes a sea or lake also). These give all owners along the river the right to use it for useful purposes, as long as they donít deprive others of use of the water.

Lease:

An agreement that sets up a landlord-tenant relationship on the land. Unless the lease says otherwise, even if you sell the property, you may not be able to evict the tenant until the end of the lease period.

The buyer/grantee gets title insurance. The insurance protects the buyer against any deficiencies (ìcloudsî) in the title.

Other terms in a P & S agreement:

Financing:

The buyer who does not have enough cash to pay the entire price for the home (as most of us donít), will seek a mortgage.

A mortgage is a written document, in which the borrower (mortgagor) pledges his property as security in exchange for getting a loan from the mortgagee (often, a bank). The property is the mortgageeís security interest. The mortgage is a conditional transfer of legal title pending repayment of the loan. The mortgagee retains the right to redeem legal title in case the mortgagor defaults.

If all goes well, after a specific period of time of paying mortgage payments (for example, fifteen years or thirty years), the legal title to the house will again belong to the grantee/buyer and he can ìburnî the mortgage.

If all does not go so well, particularly if he fails to make his payments (he defaults), the mortgagee may foreclose the mortgagorís right to redeem legal title to the house. The mortgagor may be forced out and the house may be sold at a foreclosure sale.

But let's not worry about this now....

Inspection:

The grantee/buyer will seek to have the property inspected by an engineer, termite, lead-paint (in some jurisdictions) inspectors, and so forth.

Let's assume all goes well you get a mortgage, there are no termites, and the house will stand for the next hundred years - no problems! It's on to the closing!

THE CLOSING AND THE DEED

Closing:

The transfer of title from grantor to grantee (seller to buyer) by a deed. Basically, the buyer pays for the house at the closing.

Deed:

A signed document that transfers property. The transfer is also called a 'conveyance.'

Again, have you guessed? There are several types of deeds, depending on how much is promised and sold.

Remember that a covenant is an agreement, a K. A warranty is a promise that the title is good. The buyer may be buying one of several types:

Full covenant and warranty deed:

The best! It conveys good title to the property, that it is free of any encumbrances. The grantee/buyer gets a covenant of quiet enjoyment. Lovely term, isnít it? It means that no one can have competing claims or better title to his property. Quiet here means that no one can disturb your right of ownership. Yes, you may still be bothered by loud parties or dogs, but that gets into another area of law altogether-nuisance in tort law!

Bargain and sale deed:

Not so good. This covenant does not guarantee title. Here, the grantor/ seller warrants that he has not done or will not do anything to interfere with the granteeís quiet enjoyment. But there may be a prior defect in the title. No promises (warranties) are made about that.

Quitclaim deed:

Here, the grantee buys 'as is.' The grantor conveys all he has but makes no warranties about what that might be. In some states he also warrants that he did not impair the title.

Title insurance protects against encumbrances you don't know about, such as survey errors.

Other provisions in a deed:

Consideration:

As in any K the deed will list the amount paid.

Legal description of the property:

Description of the exact boundaries of the property measured in longitude and latitude (degrees and minutes) or metes and bounds (listing distances of the boundaries; using compass directions).

Granting language:

The words of transfer. 'I, Miriam Freedman, sell my house to Paul Harris and his heirs and assigns forever . . .'

Habendum clause:

It starts with words 'To have and to hold . . .' It usually follows the granting clause.

Signatures:

Signing the deed authenticates it; says you mean to do what the deed says.

Notary:

Is proof that the document has been executed (signed, completed, et cetera); that it was a free act by the parties. Sometimes a seal is used. Sometimes the notaryís jurat is sufficient: stating the date, location, and person before whom the deed is signed. As in ìSigned, sealed, and deliveredî!)

Recording:

The deed should be filed at the local recording office or registrar of deeds (usually the courthouse).

Why would you want to do this? So that the entire world has notice of your deed. It creates a record of ownership. Mortgages and liens are also recorded to give notice that the property is thus encumbered.

The type of notice created here is called ìconstructive notice.î Constructive means ìas if.î This means that anyone who may make a claim against the property is deemed to have been notified of its status, whether or not he or she actually went to the records to check. That person canít claim he didnít know about the sale or the mortgage or lien, or whatever. He had notice and should have known.

Now - finally - congratulations. Break out the champagne! Betsy and Bill Buyer, you are homeowners!

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• Chapter 13

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