REE4433-2

REE4433

Test 2

February 22 2007

Chapter 12:

Installment Contracts for the Sale of Real Estate

I. Ch12 (installment contracts) contracts vs. Ch11 (regular contracts for sale) contracts

a. The main difference between the contracts is the gap of time between the time both parties sign and the actual transfer of interest.

b. Ch12 contracts are known as installment contracts. These types of contract are mostly seen in lower income homes or borrowers that have poor credit and cannot get a good loan from a bank.

c. When the buyer does not have good enough credit to receive a loan he/she must pay the seller directly in agreed installments through the years.

i. This is why the actual transfer of deed takes longer; the deed is not transferred until all the money has been paid to the seller.

d. In regular sale contracts, all the transactions usually take weeks to be finalized, where the transactions in installment contracts might take years.

e. In installment contracts, the seller pays the role of the lender and loans money to the buyer, usually at a higher interest rate.

II. Legal Title and equitable title

a. Equitable title – when the buyer enters into an installment contract he/she gains equitable title of the property. An equitable title gives the buyer the right to use the property but not ownership. The buyer should record the contract to show that he/she is pursuing the deed.

b. Legal title – In an installment contract, the seller receives a legal title. This title ensures that the seller gets his property back in case the buyer defaults.

III. Buyer should seek (even though not legally required)

a. Title search before signing

i. Ensure that the title is marketable.

b. Record contract

i. Protect the buyer from someone else buying the house.

c. Signed deed in escrow

i. Hire a third party to hold the deed. By having a third party hold the deed, the buyer avoids problems transferring the deed if the seller dies or becomes incompetent.

d. Right to assign

i. Allows the buyer to assign the rights and interest of the house to someone else.

1. Example: X buys a house at $200,000. X gave a $1,000 down payment. After five years, $5,000 of the principal had been paid. Also in five years, the house appreciated to $250,000. If Y wants to buy X’s interest in the house, Y must pay $56,000 to X and continue the installment payments to the original seller. $56,000 = $50,000 (appreciation) + $6,000 (down payment and principal paid by X)

e. No prepayment penalty

i. The buyer can pay the principal without penalties

IV. Seller should seek

a. Down payment from the buyer – the amount should not be too much because, in the case of a dispute, a high down payment can be can be enforced in court and the buyer could get back some of the down payment.

b. Credit check - Make sure the buyer can pay

c. Shift taxes, repairs, insurance to buyer

d. Keep property in shape, leave no waste behind, keep inspections up to date

e. Acceleration - If the buyer forgets the payment of the 5th year, then on the 6^th year the buyer owes the payment for both (5^th and 6^th)

V. Either side of the mortgage can sell their interests unless contract prohibits this

a. The seller (already in an installment contract with an original buyer) can sell the house’s interest for a lump sum to a third person. The third person would then receive the seller’s interest of the house and the payments from the original buyer.

b. A buyer’s example on how to sell his interest is found under the right to assign

VI. No forfeiture in Florida, use foreclosure instead

a. Forfeiture – if a buyer defaults then he/she must leave all their interest on the property and the money paid towards it behind.

b. In Florida, if a buyer defaults, the house goes into foreclosure and public auction.

i. If somebody buys the house for a price lower than the amount owed by the original buyer then the original buyer owes the difference to the original seller.

ii. If nobody buys the house then the original seller keeps the house and the buyer walks away.

iii. If somebody buys the house for a price higher than the amount owed by the original buyer then the original buyer receives the difference and makes a profit.

VII. Example of buyer equity calculation

a. A buyer buys a house for $200,000 under an installment principal. The buyer gave $1,000 down payment and paid down $5,000 of the principal after five years. If, after five years, the house appreciated by $50,000 the buyer’ equity would be $56,000. $50,000 of the appreciation, $1,000 of down payment and $5000 paid principal. Any third party that wants to buy the house would pay the buyer $56,000 and take over the payments to the original seller. (Explained under the right to assign)

VIII. Give example of seller’s right to receive income

a. Under installment contracts the seller has the right to receive installment payments from the buyer. This right can be sold to a third party.

IX. Under installment contract, buyers like low down payments, sellers like marketing and possible tax advantage

a. Buyers usually pay a low down payment because it is the only thing they can afford.

b. Sellers can market themselves to more potential borrowers because there are more borrowers that have poor credit than borrowers that have good credit.

c. By receiving installments instead of a lump sum in the sale of the house, the seller saves tax money at the moment of sale.

Chapter 13:

Fraud and Misrepresentation in Real Estate Transactions

I. Broker’s intentional misconduct, reckless misconduct, simple mistakes with potential liability for each case

a. Intentional misconduct – the broker says a false statement on purpose.

b. Reckless misconduct – the broker takes a guess at an answer and turns out to be wrong.

c. Simple mistakes – the broker says a false statement believing it is true.

d. The broker can be liable for all three types of behavior.

II. Scienter

a. Legal term for a person having the intentional mindset to hide or lie about something.

i. Scienter must be proven in court to prove fraud.

III. Fraud and Misrepresentation

a. Misrepresentation – when material (relevant) information is falsified unintentionally and someone is injured because of it.

i. The person injured has one option

1. Sue in contract (rescission)

a. Get out of the contract and get whatever interest he/she had in the contract back. Example: the buyer gets their money back and gives the deed back to the seller.

b. Fraud – when material (relevant) information is falsified intentionally and someone is injured because of it.

i. Having the duty to disclose information and not disclosing it, is considered fraud.

ii. The person injured has two options

1. Sue in contract (rescission remedy)

a. Get out of the contract and get whatever interest he/she had in the contract back. The buyer gets their money back and gives the deed back to the seller.

2. Sue in tort law

a. Fraud is a tort (might also be considered a crime)

i. Compensatory damages and also punitive damages can be received

1. Punitive damages can only be collected if sued under tort law

2. Punitive damages can add to a lot of money

ii. Florida has a law that if somebody wins punitive damages then some of the awarded money must be given to the state.

iii. Fraud can also be considered a crime. In this case, the government gets the money from the person committing fraud if he/she loses the case.

c. Even if an agent makes an innocent mistake and has a good reason to explain why, he/she could be held liable. This is why agents should have insurance to cover for error and omissions.

i. Any agent whether seller’s agent or buyer’s agent can be sued for fraud or misrepresentation because they must act with honesty, fairness and candor.

ii. Example: if the listing broker of a property tells the selling broker something wrong and the selling agent relays the message to the buyer thinking it is true, then the selling broker is liable



	REE4433 REE4433 Test 2 February 22 2007 Chapter 12: Installment Contracts for the Sale of Real Estate I. Ch12 (installment contracts) contracts vs. Ch11 (regular contracts for sale) contracts a. The main difference between the contracts is the gap of time between the time both parties sign and the actual transfer of interest. b. Ch12 contracts are known as installment contracts. These types of contract are mostly seen in lower income homes or borrowers that have poor credit and cannot get a good loan from a bank. c. When the buyer does not have good enough credit to receive a loan he/she must pay the seller directly in agreed installments through the years. i. This is why the actual transfer of deed takes longer; the deed is not transferred until all the money has been paid to the seller. d. In regular sale contracts, all the transactions usually take weeks to be finalized, where the transactions in installment contracts might take years. e. In installment contracts, the seller pays the role of the lender and loans money to the buyer, usually at a higher interest rate. II. Legal Title and equitable title a. Equitable title – when the buyer enters into an installment contract he/she gains equitable title of the property. An equitable title gives the buyer the right to use the property but not ownership. The buyer should record the contract to show that he/she is pursuing the deed. b. Legal title – In an installment contract, the seller receives a legal title. This title ensures that the seller gets his property back in case the buyer defaults. III. Buyer should seek (even though not legally required) a. Title search before signing i. Ensure that the title is marketable. b. Record contract i. Protect the buyer from someone else buying the house. c. Signed deed in escrow i. Hire a third party to hold the deed. By having a third party hold the deed, the buyer avoids problems transferring the deed if the seller dies or becomes incompetent. d. Right to assign i. Allows the buyer to assign the rights and interest of the house to someone else. 1. Example: X buys a house at $200,000. X gave a $1,000 down payment. After five years, $5,000 of the principal had been paid. Also in five years, the house appreciated to $250,000. If Y wants to buy X’s interest in the house, Y must pay $56,000 to X and continue the installment payments to the original seller. $56,000 = $50,000 (appreciation) + $6,000 (down payment and principal paid by X) e. No prepayment penalty i. The buyer can pay the principal without penalties IV. Seller should seek a. Down payment from the buyer – the amount should not be too much because, in the case of a dispute, a high down payment can be can be enforced in court and the buyer could get back some of the down payment. b. Credit check - Make sure the buyer can pay c. Shift taxes, repairs, insurance to buyer d. Keep property in shape, leave no waste behind, keep inspections up to date e. Acceleration - If the buyer forgets the payment of the 5th year, then on the 6^th year the buyer owes the payment for both (5^th and 6^th) V. Either side of the mortgage can sell their interests unless contract prohibits this a. The seller (already in an installment contract with an original buyer) can sell the house’s interest for a lump sum to a third person. The third person would then receive the seller’s interest of the house and the payments from the original buyer. b. A buyer’s example on how to sell his interest is found under the right to assign VI. No forfeiture in Florida, use foreclosure instead a. Forfeiture – if a buyer defaults then he/she must leave all their interest on the property and the money paid towards it behind. b. In Florida, if a buyer defaults, the house goes into foreclosure and public auction. i. If somebody buys the house for a price lower than the amount owed by the original buyer then the original buyer owes the difference to the original seller. ii. If nobody buys the house then the original seller keeps the house and the buyer walks away. iii. If somebody buys the house for a price higher than the amount owed by the original buyer then the original buyer receives the difference and makes a profit. VII. Example of buyer equity calculation a. A buyer buys a house for $200,000 under an installment principal. The buyer gave $1,000 down payment and paid down $5,000 of the principal after five years. If, after five years, the house appreciated by $50,000 the buyer’ equity would be $56,000. $50,000 of the appreciation, $1,000 of down payment and $5000 paid principal. Any third party that wants to buy the house would pay the buyer $56,000 and take over the payments to the original seller. (Explained under the right to assign) VIII. Give example of seller’s right to receive income a. Under installment contracts the seller has the right to receive installment payments from the buyer. This right can be sold to a third party. IX. Under installment contract, buyers like low down payments, sellers like marketing and possible tax advantage a. Buyers usually pay a low down payment because it is the only thing they can afford. b. Sellers can market themselves to more potential borrowers because there are more borrowers that have poor credit than borrowers that have good credit. c. By receiving installments instead of a lump sum in the sale of the house, the seller saves tax money at the moment of sale. Chapter 13: Fraud and Misrepresentation in Real Estate Transactions I. Broker’s intentional misconduct, reckless misconduct, simple mistakes with potential liability for each case a. Intentional misconduct – the broker says a false statement on purpose. b. Reckless misconduct – the broker takes a guess at an answer and turns out to be wrong. c. Simple mistakes – the broker says a false statement believing it is true. d. The broker can be liable for all three types of behavior. II. Scienter a. Legal term for a person having the intentional mindset to hide or lie about something. i. Scienter must be proven in court to prove fraud. III. Fraud and Misrepresentation a. Misrepresentation – when material (relevant) information is falsified unintentionally and someone is injured because of it. i. The person injured has one option 1. Sue in contract (rescission) a. Get out of the contract and get whatever interest he/she had in the contract back. Example: the buyer gets their money back and gives the deed back to the seller. b. Fraud – when material (relevant) information is falsified intentionally and someone is injured because of it. i. Having the duty to disclose information and not disclosing it, is considered fraud. ii. The person injured has two options 1. Sue in contract (rescission remedy) a. Get out of the contract and get whatever interest he/she had in the contract back. The buyer gets their money back and gives the deed back to the seller. 2. Sue in tort law a. Fraud is a tort (might also be considered a crime) i. Compensatory damages and also punitive damages can be received 1. Punitive damages can only be collected if sued under tort law 2. Punitive damages can add to a lot of money ii. Florida has a law that if somebody wins punitive damages then some of the awarded money must be given to the state. iii. Fraud can also be considered a crime. In this case, the government gets the money from the person committing fraud if he/she loses the case. c. Even if an agent makes an innocent mistake and has a good reason to explain why, he/she could be held liable. This is why agents should have insurance to cover for error and omissions. i. Any agent whether seller’s agent or buyer’s agent can be sued for fraud or misrepresentation because they must act with honesty, fairness and candor. ii. Example: if the listing broker of a property tells the selling broker something wrong and the selling agent relays the message to the buyer thinking it is true, then the selling broker is liable