Real Estate Law Midterm 2

Rights and Interests that can be Title Insured

- Fee simple interests (whether fee simple absolute, fee simple determinable, or fee simple subject to a condition subsequent) - An estate for years (a possessor interest of substantial duration is frequently insured) - Life estates (although rarely insured) - Easements (whether appurtenant or in gross) - Profits (profits a prendre) - Some licenses - Surface and subsurface rights - Air rights - Mineral rights - Liens (such as mortgages and deeds of trust) In about half of the states, title insurance also may insure security interests and other rights in a borrower's personal property.

4 Basic Collection Strategies of a Lender:

1. Collection methods Example: The borrower and lender may work out and compromise their respective positions. The lender may also sue for damages for the amount due under the promissory note and not foreclose on the property. This would be beneficial if the borrower has substantial assets that can satisfy a judgment. 2. Judicial foreclosure 3. Non-judicial foreclosure (trustee's sale under a deed of trust) 4. Lender takes over the operations of the property (receivership)

An agent may have the authority to act on behalf of an agent under the following methods:

1. Express Authority 2. Implied Authority 3. Apparent Authority 4. Ratification

Common Law Remedies

1. Fraud - A fraud claim may exist if the loan broker or lender failed to disclose any material facts relating to the terms of the loan. A fraud claim may also arise if the lender or loan broker made any representations or promises to the borrower that contradicted the terms of the loan documents. 2. Negligence or duress - When a lender or its representative makes errors that a reasonably diligent mortgage professional would not have made, a negligence claim for damages might be made. 3. Breach of contract - The loan documents are a contract. The loan broker who usually prepares the documents must ensure consistency between the loan documents and required disclosures, such as in the way the interest is calculated and the penalties the lender assesses. The lender may have breached the contract if it failed to comply with the contract after the loan closed. 4. Fraud or negligence claims relating to loan assignments and loan servicing - Loan servicers may have falsified documents by backdating them or had persons without proper authority execute agreements to authorize acts on behalf of mortgage investors. These acts may permit the assignment to be set aside by the borrower. 5. Bad faith in negotiating loan modification -Sometimes a borrower may contact a loan servicer or other lending representative about a loan modification and be told that a modification is possible only if the borrower defaults. If the borrower defaults, but would otherwise have continued making payments while attempting a modification, this advice may be the basis for a lawsuit against the lender for bad faith, fraud, or other statutory claims, such as one alleging an unfair business practice.

Mortgage Terms

1. Identification of parties. The borrower and lender are identified. 2. Property description. The mortgaged property will be described unambiguously, usually with the legal description and a description of all personal property that is included as collateral for the loan. 3. Promissory note terms and conditions. Mortgages often include all the same provisions found in the promissory note including loan amounts, maturity dates, interest rates, prepayment charges and penalties, late fees, acceleration charges, and due on sale provision. 4. Property insurance. The lender will usually require the borrower to obtain property insurance to protect the lender's interest in the property in the event of a fire, earthquake, or flood. Where a borrower fails to maintain insurance, the lender often has a right to purchase the insurance on the borrower's behalf and charge the borrower for the cost of insurance. 5. Maintenance and protection of the property. The lender will require the borrower not to destroy, damage, or impair the property or allow the property to deteriorate or commit waste on the property. The lender is often provided the right to inspect the property (often annually in commercial mortgages) and make any necessary or reasonable repairs to maintain the property. By maintaining the property, the lender can maximize a return in the event the property needs to be sold. 6. Impound Account. The borrower is responsible for paying property taxes and insurance costs. Property taxes are usually paid annually or twice a year, and a homeowner's insurance fee is often paid once a year. To alleviate the financial burden these large payments can have on homeowners' cash flow, lenders can provide, and in some cases require, an impound, escrow, or reserve account. An impound account is an account in which the borrower prepays for the insurance and property taxes. These prepayments are paid monthly, along with the mortgage payment. The lender then pays the property taxes and insurance when due. 7. Assignment-of-rents clause. This clause is common in commercial mortgages. It entitles the lender to any rents or profits generated from the property in the event of default. This enables the lender potentially to recover proceeds during the debtor's default. 8. Cross-collateralization and cross-default clauses. Cross-collateralization refers to situations in which a lender makes multiple loans to a single borrower and provides that each piece of collateral is security for each and every loan. In the event of a default of one of the loans, the collateral from all of the loans may be used to pay the lender.

Terms in a Promissory Note

1. Loan amount. The loan amount or principal is the total amount financed in the transaction. The loan amount is not necessarily the purchase price because purchasers may put an earnest-money deposit down on the property or pay a portion of the purchase price with cash. 2. Maturity date. The maturity date is the date on which the loan must be repaid. The maturity date for residential properties is often 30 years, while 20 years is frequently the standard for commercial properties. The term may be as short as 10 years or as long as 40 years. Generally, the longer the term, the higher the interest rate 3. Interest rate. The rate of interest at which the debtor agrees to pay the payee must be stated. Related to interest rates is the concept of usury. All state laws regulate the interest rates that may be charged by noninstitutional lenders (lenders that do not take deposits from the general public, such as individuals, pension funds, mortgage companies, and brokers). Usury occurs when a noninstitutional lender charges in excess of the state-allowed interest rate maximum. The penalties for violating usury laws can be severe. States may allow the borrower to recover amounts paid over a certain period of the loan and damages for amounts paid (including potentially punitive damages). Often the borrower can obtain a judgment canceling all future interest payments over the remainder of the loan. 4. Late fee clause. The monthly (or other periodic date) payment due date is normally stated. Often, lenders provide a grace period in which no penalties or fees apply if the payment is received during this time. Late payment fees may be assessed if payment is made after the grace period; the customary late fee is 5 percent of the payment amount. However, Federal Housing Administration or Veteran's Administration loans cannot charge more than 4 percent of each payment for payments that are more than 15 days late. 5. Interest on Interest. If any interest payment under this Note is not paid when due, the unpaid interest shall be added to the principal of this Note, shall become and be treated as principal, and shall thereafter bear like interest. 6. Notice. Any notice or demand to be given to the parties hereunder shall be deemed to have been given to and received by them and shall be effective when personally delivered or when deposited in the U.S. mail, certified or registered mail, return receipt requested, postage prepaid, and addressed to the party at the addresses set forth above, or at such other address as the one of the parties may hereafter designate in writing to the other party. 7. Waiver. The Borrower, endorsers, and all other persons liable or to become liable on this Note, waive presentment for payment, protest, demand, notice of protest, notice of dishonor, and notice of nonpayment, and expressly agree that this Note, or any payment hereunder, may be extended from time to time by the Lender without in any way affecting its liability hereunder. 8. Miscellaneous. This Note shall be governed and construed in accordance with the Laws of the State of ___________. This Note shall bind and inure to the benefit of Borrower's and Lender's successors and assigns. Time is of the essence for every obligation under this Note. If any court of competent jurisdiction holds any provision of this Note to be illegal, unenforceable, or invalid in whole or in part for any reason, the validity and enforceability of the remaining provisions, or portions of them, will not be affected. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in interpreting this Note. In the event any action is required to enforce the terms of this Promissory Note, the prevailing party is entitled to recover his reasonable attorney fees, costs, and expenses in such collection action.

Three Approaches to Appraising

1. Market approach - also known as the sales comparison approach. This method of valuation is most often used in single-family residential appraisals and is one of the oldest appraisal methods. Under this approach, the value of the subject property is determined by comparing the selling price of similar properties and making adjustments for the differences among them (such as the presence or absence of amenities and other factors compared to the property being appraised). 2. The cost approach - estimates the value of the completed project and the cost of building a comparable project. The appraiser does not try to determine a cost of creating an exact replica because construction methods and building codes may have changed, and the original materials may have become obsolete in new construction. Calculates the cost of reproducing the building and other improvements with a comparable design and materials.T he value of the land is then added. Depreciation is then subtracted from the value to reflect the age and decreased useful life of the existing project. The cost approach is most applicable when appraising new or relatively newly constructed projects. It is also used when comparable properties are available. Such a situation often occurs when a property is unique or highly specialized. 3. Income approach- which determines the appraised property value based on the property's ability to generate income or potential income. The income approach is most often used for purchases of commercial or investment property. With this approach, appraisers often consider the property's highest and best use. Highest and best use is defined as use that is legally permissible, physically and financially feasible, and yields the best benefit to the landowner.

Types of Foreclosure Workout Plans

1. Modification of the terms of the loan 2. Loan reinstatement (the borrower cures the default) 3. Voluntary conveyance to the lender (deed-in-lieu of foreclosure) - A deed-in-lieu passes title subject to all existing liens. Tax law may recognize income to the borrower resulting from the cancellation of indebtedness. 4. Sale to third party (such as a short sale whereby the lender accepts less than what is owed in full satisfaction of the debt) 5. Lender takes over the property

General Requirements for a Deed

1. The deed must be in writing and signed by the grantor. 2. The grantor and grantee must be clearly identified. 3. The grantor must have legal capacity. 4. The property must be adequately described. 5. The deed must express the intent to immediately convey a property interest to the grantee. 5. The deed must specify the type of interest and rights given to the grantee. 6. The deed must be acknowledged. 7. The deed must be delivered by the grantor and accepted by the grantee.

Factors Influencing Valuation

1. Utility. The higher the property's useful purpose, the higher the market value. 2. Scarcity. The relative scarcity of similar properties on the market affects value. The fewer similar properties are on the market, the higher the market value. 3. Demand. The demand for the property by those who can afford to buy it affects the price. If demand is low, prices are generally lower. When demand for a property is high, the price is generally higher. 4. Transferability. The ease of obtaining and transferring title to the property will affect the price. Where property can be easily transferred, it has more value. Properties that cannot be transferred or that have requirements or regulations that make it difficult to transfer will have a decreased value.

Equity of Redemption

A borrower may be able to stop the foreclosure sale by satisfying the debt. This process is commonly known as equity of redemption. It is the mortgagor's right to pay the indebtedness before the foreclosure sale occurs and thereby redeem the property. This right to reinstate the mortgage or deed of trust is guaranteed under most state laws. Under equity of redemption, the borrower or trustor pays the amount in default at the time the foreclosure proceedings commence, plus all foreclosure costs and the trustee or attorney fees. When payment is made, the loan is considered current from the lender's perspective and is then reinstated. When a mortgage or deed of trust is reinstated, the mortgage foreclosure proceedings are canceled

Deed of Bargain and Sale

A deed of bargain and sale used to convey real property implies that the grantor has a claim of ownership in the property, but the grantor makes no other covenants to the grantee. Sometimes a deed of bargain and sale is referred to as an "as is" deed. States may allow a grantor to provide for warranties in the deed.

Deficiency Judgement

A deficiency judgment is a money judgment against a borrower whose foreclosed property was sold but yielded insufficient sale proceeds to pay the loan in full. Only the party foreclosing is entitled, if available, to a deficiency judgment. Deficiency judgments are available for judicial foreclosures but not for non-judicial foreclosures. In some states, antideficiency laws exist that provide that a deficiency judgment is not allowed for purchase money mortgages

General Warranty Deed

A general warranty deed contains a full warranty and set of legal promises by the grantor to the grantee. In some jurisdictions, it is known as the full covenant and warranty deed. A general warranty deed gives the highest level of protection to the grantee and provides six covenants (warranties) to the grantee. Present Covenants 1. Seisin. At the time the deed is delivered to the grantee, the grantor covenants that he or she owns the interest conveyed to the grantee. This covenant is breached if the grantor does not own the interest conveyed. 2. The right to convey. The grantor warrants that she or he has the legal right and the power to convey title. With this covenant, a grantor would warrant that she or he is an authorized corporate officer, the trustee of a trust, and so on, with the power to convey the property. 3. Covenant against encumbrances. The grantor promises that the property has no undisclosed encumbrances This covenant relates to private encumbrances on title such as those mentioned. It is not breached by the presence of public land-use ordinances and building codes or by an encumbrance on the property to which the grantor accepts title. Future Covenants 4. Covenant of warranty. With this covenant, the grantor promises to defend and compensate the grantee for any losses suffered from all claims that might arise from a defect in the grantor's purported title (undisclosed easements, undisclosed leases, etc.) 5. Covenant of quiet enjoyment. The covenant of quiet enjoyment is similar to the covenant of warranty. The grantor promises that the grantee will not be disturbed in possession or enjoyment by a third party asserting a claim of superior title. 6. Covenant of further assurances. The grantor promises to perform whatever acts are reasonably necessary to cure a defect in (perfect) the grantee's title. This covenant is often utilized to require the execution of corrective conveyancing documents without having to compensate the grantor. The covenants contained in general warranty deeds are not limited to the time during which the grantor owned the real property interest; they relate back to the creation of the property interest. Thus, the future covenants contained in a general warranty deed extend to future grantees of the property, allowing a future owner of the property to sue for a breach of a future covenant. If one of the covenants is breached, the grantee or his or her successors can recover monetary damages for the breach. To avoid relying upon the financial strength of the grantor (because the grantor may, for example, be insolvent), the grantee should obtain title insurance to protect the grantee's interest.

Judicial Deed

A judicial deed, sometimes called a sheriff's deed, is a deed issued as a result of a judicial foreclosure proceedings. Judicial deeds are quitclaim deeds and do not provide any warranty of title to the grantees.

Partially Disclosed Principal

A partially disclosed principal is a person whose existence is known to the third party but whose identity is not known. Generally the principal, and not the agent, is liable to third parties for contracts entered into by the agent on the principal's behalf. An exception is made when the principal's identity is only partially disclosed or undisclosed. In such cases, both the principal and the agent can be held liable.

Performance Bond

A performance bond protects the owner. With a performance bond, a surety guarantees payment for the completing the project should the prime contractor fail to do so. Performance bonds are available for either public or private works projects.

Quitclaim Deed

A quitclaim deed is a deed in which the grantor conveys what interest, if any, she or he has in a specific piece of property. In essence, the grantor states, "If I hold an interest, and I may in fact own no interest in the property, I am conveying whatever it is I do own to you." With a quitclaim deed, the grantee receives no protections and no warranties regarding title to the property.Upon acceptance of a quitclaim deed, the grantee holds whatever interest the grantor had in the real property. If the grantor holds no interest at all, no interest passes. This is the weakest form of deed and is used as a means of removing any ambiguities in the record of title.

Stop Notice

A stop notice (see Exhibit 20.5) is a statutory remedy allowing an unpaid subcontractor or material supplier to reach the unexpended construction funds held by the owner. Stop notices may be used on public works projects; in a few states, they may also be used on private projects.Since mechanic's liens cannot attach to public property, one of the remedies available to an unpaid contractor is to serve a stop notice on the owner. Upon receipt, the public works owner must segregate funds from the amounts to be paid the prime contractor. The stop notice claimant may then proceed against the funds withheld by filing a timely lawsuit for enforcement of the stop notice.

Title Commitment

A title commitment is an agreement by a title insurance company to issue a policy in favor of the proposed insured at the time the transaction closes. Commitments may be requested in place of or in addition to a preliminary report. They are most often used in commercial transactions and seldom used in residential transactions.

Workout

A workout is a nonforeclosure response to the default. The term "workout" describes a situation in which the borrower restructures its loan with the lender. In a workout, the parties renegotiate the terms and conditions of the loan as an alternative to the lender filing for foreclosure, the borrower filing for bankruptcy, or the parties engaging in litigation. Workouts involve the review of every document related to the loan. If a violation of the Truth in Lending Act (TILA)1 has occurred, the borrower may be eligible for a loan rescission, which may include crediting back to the borrower all interest collected by the lender on the loan, loan origination fees, broker fees, lender fees, statutory penalties, and attorney fees. As an alternative, when a borrow makes a TILA claim, lenders are often willing to compromise with a loan modification that meets the needs of the borrower.

Endorsement

A written amendment to a title insurance policy modifying the policy. It may alter, enlarge, or reduce coverage. However, endorsements (amendments) insuring against land-related risks may be purchased from the insurer. These may include endorsements for types of improvements, location of structures, boundaries, encroachments and minerals, as well as physical access. Some endorsements are issued without cost; other endorsements increase the cost of the base policy.

Merger Doctrine

Acceptance of the deed discharges the seller from liability for any promises or warranties contained in the contract. This concept is known as the merger doctrine. The buyer must look to the covenants contained in the deed, because the warranties and promises made in the purchase and sale contract do not survive closing. The rationale for this rule is that the buyer accepts the deed because it is assumed that the seller has complied with the sales contract.

Recording Statute

All states have enacted a recording statute. These statutes are intended to protect title by preventing fraud. Recorded deeds can be searched by prospective purchasers or lenders to determine what type of title, if any, is owned by the prospective seller or prospective debtor. Recording statutes are also used to establish the priority of rights between and among conflicting deeds on a particular property. These statutes are important in clarifying title in situations of the "double dealer." Ex: Example: Ryan purchases an unimproved lot from Glen. Ryan takes title but does not record the deed. Unknown to Ryan, Glen sells the same property to Kathy, who is unaware that Glen has already sold the property to Ryan. Kathy records the deed. In this example, either Ryan or Kathy will have title to the property, depending upon the type of recording statute the state has enacted. Title claims are determined by one of three types of recording statutes. Each state has adopted one of these three types: (1) race statute, (2) notice statute, or (3) race-notice statute.

Apparent Authority

Apparent authority arises when an agent does not have authority to act on the principal's behalf, but the principal's words or conduct reasonably imply to a third party that the agent does have this authority. If a third party reasonably relies on that belief, the principal will be liable under apparent authority. The principal will be estopped (prohibited) from claiming that the agent lacked authority to act on his behalf. Apparent authority continues to exist until the third party receives notice of the termination. Ex: If a buyer learned that the seller had switched brokers, that notice would prevent the former broker from having any power to continue negotiations with the buyer.

Equal Dignity Rule

Because the Statute of Frauds requires that real estate contracts be in writing to be enforceable, the equal dignity rule requires that the appointment of an agent for a real estate contract also be in writing to be enforceable. Example: Assume an agent tells a principal that she is an expert in short sales and that the principal states orally that he wants the agent to negotiate a short sale on a certain property. If the agent negotiates the short sale, the principal will not be liable for the transaction because the agency relationship had to be in writing to be enforceable.

Mechanic's Lien

Certain persons hired to perform work or furnish materials or equipment to improve a third-party owner's real property are entitled to a type of lien known as a mechanic's lien. A mechanic's lien is a specific lien that arises from the construction or other improvement of real estate. The following are entitled by law to a mechanic's lien: contractors, subcontractors, sub-subcontractors (a subcontractor to a subcontractor), material suppliers (those who supply materials to a project), equipment rental companies, surveyors, and designers (including architects and engineers).

Deed

Deeds are written instruments used to transfer real property from one person, the grantor (seller or donor), to another person, the grantee (buyer or recipient). This chapter will review the most common forms of deeds

Delay Damages

Delay damages: Delays can cause the owner to suffer losses on the project (such as lost rent or increased loan interest). Contractors may suffer additional supervision costs and overhead expenses or increased material cost pricing. Those responsible for unjustifiable delays may be held liable for damages. Not all delays are the caused by the owner or the contractors. Some delays are beyond the control of all parties. Most commonly, such delays arise from acts of God: events caused by nature, such as hurricanes, floods, tornadoes, and earthquakes.

Statutory Redemption Period

During this time, the debtor has a right to repurchase the property after the foreclosure sale by paying the amount of money for which the property was sold, interest from the sale date at the mortgage's interest rate, and other costs allowed by statute. These other costs can include taxes and assessments paid by the purchaser since the sale date. After the expiration period for redemption, the borrower's rights in the property are terminated.The redemption period varies by state and is commonly between three months and one year. Many states extend the redemption period if the sale proceeds do not cover the debt owed to the lender.

Express Authority

Express authority arises when a principal expressly agrees, orally or in writing, to authorize the agent to act on his behalf. Example: A listing agreement between a seller and a real estate broker or salesperson expressly grants the agent authority to act on the principal's behalf.

Race-Notice Statute

Finally, with a race-notice statute, the first BFP to record keeps title to the property. This statute has two requirements: a grantee who records first and is without notice of prior conflicting interests in the property. Example: Day 1: O (Grantor) conveys Blackacre to A (a BFP) Day 2: O (Grantor) conveys Blackacre to B (a BFP) Day 3: O (Grantor) conveys Blackacre to C (a BFP) Day 4: A records Day 5: C records In a race-notice jurisdiction, A obtains title to the property. A is the first BFP to record.

General liens

General liens arise out of actions on the part of the property owner unrelated to the property's ownership, and they apply against all real or personal property within a jurisdiction (such as a county). A federal tax lien is an example of a general lien.

Cost Plus Contract

In a cost plus contract, the contractor is compensated for all building costs, plus an amount for overhead costs and profit. The total amount paid for overhead and profit is often between 10 and 15 percent but can range below or above those percentages.

Fixed Price Contract

In a fixed price contract (also known as a lump sum contract), the contractor agrees with the owner to build the structure for a fixed fee, which will include all of the contractor's overhead and profit. If the contractor can build the project less expensively while honoring the contractual requirements, the contractor will increase his or her profit margin. However, the contractor bears the risk that building costs exceed the fixed price stated in the contract.

Guaranteed Maximum Price Contract

In a guaranteed maximum price contract, the owner reimburses the contractor for costs, overhead, and profit, but the owner stops making those payments once it has paid the guaranteed maximum contract price. The contract is administered just as with a cost plus contract, but it offers the owner a cost ceiling. A variation on the guaranteed maximum price contract allows a shared savings provision by which the contractor and the owner share any savings in the project's cost. This setup motivates both parties to bring the project in under budget.

Priority of Mechanics Liens

In most states, mechanic's liens attach to the property as of the date the work first began on the project and not the date on which the mechanic's lien was recorded. If any work started prior to the recording of any other liens (such as a construction loan), all mechanic's liens may take priority over (will be superior to) the liens recorded on the property after the project work commenced. This is referred to as the doctrine of relation back. Under this doctrine, all mechanic's liens will relate back to the period when work started, even though the work or material provided by each individual mechanic's lien claimant was rendered subsequent to other mechanic's lien claimants and were recorded subsequent to other liens (such as a mortgage or trust deed securing the construction loan or other liens). One exception to this rule is that real property tax liens take priority over all other liens on title, regardless of when the liens were recorded.

Foreclosure Sale Proceeds - Mechanics Lien

In most states, when equity in the property upon foreclosure is insufficient to pay all of the mechanic's lien claimants in full, the mechanic's lien claimants share pro rata in the proceeds resulting from the foreclosure sale of the property. Under the pro rata distribution, payments are made in proportion to the claimant's claim to the amount to be distributed.

Lien Theory

Lien theory, used in most states, provides that a mortgage does not transfer legal title to the lender; instead, the lender has a lien on the property to secure repayment of the debt. Under this theory, the lender has legal title and the borrower has equitable title to the property. In the event of a default, the lender must foreclose to take possession of the property. The borrower retains possession until foreclosure has been completed.

Liquidated Damages

Liquidated damages: Damages assessed for each day during which the project remains unfinished after the agreed upon completion date. The owner seeks to collect liquidated damages from the contracting team to compensate for the finished project's loss of use.

Lis Pendens

Lis pendens means "pending action." A lis pendens is recorded in the same location as the mechanic's liens are recorded. When it is recorded on the title to property, a lis pendens provides constructive notice to prospective buyers and lenders that another person has a claim that could result in a court order requiring the sale of the property to satisfy that person's claim.The recording of a lis pendens is not a condition for filing a lawsuit, but it will make the title to the property unmarketable (that is, it creates an encumbrance, or cloud on title) until the litigation is dismissed or the notice of lis pendens is withdrawn.

Marketable Title

Marketable title is title that is free from any encumbrances, defects, claims, or liens (except those the buyer is aware of and has agreed to accept) and free from reasonable doubt that the seller owns title. A prudent buyer or lender, if aware of all facts, would accept the title's condition. It also means that title is free from reasonable doubt that the seller owns title to the property. Marketable title is necessary at closing and requires that the title's condition does not unreasonably expose the purchaser to litigation following closing. This compels the seller to correct any defects in title or purchase title insurance to insure title to the property before the close of escrow. Most undisclosed or unrecorded easements or liens make title unmarketable. However, zoning laws, subdivision restrictions (such as conditions, covenants, and restrictions), and visible easements have no effect on marketable title. In addition, the buyer may agree to encumbrances or liens stated in the purchase contract. The three most common methods of providing proof of marketable title to the buyer are: 1. Abstract of title with an attorney's opinion 2. A policy of title insurance 3. The use of the Torrens system of title registration (discussed previously)

Grantor-Grantee Index System

Most frequently, a grantor-grantee index is used. Under the grantor-grantee index system, records are indexed and maintained alphabetically by the grantor's or the grantee's respective names. Along with the grantor's or the grantee's information, the index will contain a date and time, the type of document indexed (such as deed, mortgage, or easement), a short legal description, and a reference to the page and book in the public records where a copy is filed, along with the grantee's or the grantor's name. A title searcher begins the search with the current owner in the grantee index and then searches back in time. All referenced documents are read, and a report is made. The grantor-grantee index is subject to inherent problems in tracing back title when people change names or use a different name in transferring the property.

No-damage-for-delay Clause

No-damage-for-delay clause: A provision eliminating the contractor's recovery of delay damages in the event of delays in completing the project. This clause limits a contractor's recovery to a time extension (limiting any liquidated damages claim the owner may have against a contractor).

Mortgage Loan Market

Once a loan has been issued, it can be sold to investors. The mortgage loan market has two aspects. The first is the primary market, in which loans are originated, either through a broker or directly with the lender. The second is the secondary market, in which investors purchase loans made by others. These investors can consist of mutual funds, life insurance companies, pension companies, and others who desire a predictable rate of return from secured real property loans.Among the most well-known secondary market organizations are the Federal National Mortgage Association (commonly known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac).

Payment Bonds

Payment bonds guarantee that all claims for labor, material, equipment, and services provided to the project will be paid (see Exhibit 20.6). When the owner purchases a payment bond, a prime contractor or a subcontractor can recover on the payment bond. When the federal government is the owner of the property, the payment bond is known as a Miller Act bond and has requirements that must be followed.Usually, all public works projects—construction projects with a public owner—require a payment bond that provides a source of payment to the contractors and material suppliers in the event of nonpayment. Payment bonds are available on private works projects—construction projects with a private owner—but owners may be reluctant to require payment bonds because they can add considerable cost to the project.

Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is available from private companies. As previously noted, the insurance premium is paid on a monthly basis. Homebuyers who make a down payment of less than 20 percent are usually required to pay PMI.PMI indemnifies (compensates for a particular loss suffered) the lender, not the borrower. If the buyer defaults, and the property is sold at a foreclosure sale, the PMI will reimburse the lender for a loss up to 20 percent of the loan amount. The presence of PMI reduces the lender's exposure to loss at foreclosure.

Trustee Deed

Property can be placed into a trust. In a trust, the owner of the property conveys title to a trustee until the owner has paid the financial obligation to a third party (the beneficiary). When the beneficiary is not paid and the owner defaults, the trustee has the power to sell the trust property through a trustee deed. Trustee deeds are quitclaim deeds that do not usually provide any warranty of title to the grantees.

Purchase Money Mortgage

Purchase money mortgage is one in which the borrower's funds are used to finance the purchase of a one- to four-unit residential property. These laws were intended to protect homeowners and buyers who purchased overvalued properties secured by a mortgage or deed of trust.

Ratification

Ratification occurs when the principal approves unauthorized acts committed by the agent, such as when the agent acts either without authority or beyond the scope of the authority expressly given by the principal. If a principal ratifies the agent's actions, the principal becomes bound to the terms of the contract. Generally, any words or conduct by the principal showing an intention to adopt the agent's act ratifies the contract. Ex: A broker is given authority to purchase an estate home for $2.5 million. The broker finds the perfect home for the buyer, listed at $2.6 million, and submits an offer on the buyer's behalf. The buyer may ratify the $2.6 million offer made by the agent.

Retention

Retention: The amount deducted each month from the contractor's and subcontractor's billings (usually in the amount of 5 to 10 percent). The owner reserves the amount until the work is completed. The sums are held to ensure that the entire project is completed and that the contracting team remedies minor imperfections in the work.

Absolute Priority Rule

Sale proceeds are disbursed by absolute priority. With the absolute priority rule, the first-priority debts (those that have the highest seniority) are paid in full before any second-tier debts (junior liens) are paid. The time of recording determines the priority of mortgages, liens, and other encumbrances. The sale proceeds are disbursed in the following order: 1. Property tax liens 2. Expenses and costs of the foreclosure (court costs, publication, and recording costs) 3. Payment to the first-priority debt (senior lien), including accrued interest and principal 4. Payment to the second-priority debt (junior lien) and any additional junior liens, in order of priority 5. Balance of any surplus sale proceeds (very unlikely) goes to the borrower (mortgagor or trustor)

Foreclosure by Power of Sale

Several states allow a lender or a trustee, under a deed of trust (discussed in chapter 9), to exercise a non-judicial foreclosure remedy if the right is stated in the mortgage or deed of trust. This non-judicial foreclosure remedy is known as foreclosure by power of sale. It is also known as a trustee sale or a foreclosure by advertisement. The foreclosure occurs without court involvement if the lender properly and timely gives notice of the foreclosure for the statutory periods of time. 1. Notice of Default 2. Serve Foreclosure Notice 3. Set Sale Date 4. Trustee Sale Most states provide a right of redemption for a trustee sale; however, the right of redemption often extends only up to several days before the sale date. Usually no postsale rights of redemption exist in a trustee sale.

Grant Deed

Some states use a form of the warranty deed known as the grant deed. A grant deed implies two covenants: 1. The grantor has not previously conveyed the same estate to anyone other than the grantee. 2. The property is free of encumbrances placed on it or permitted by the grantor. A conveyance passes all easements related to it, even if they are not expressly included in the grant. In those states where warranty deeds are uncommon, the grant deed, combined with a title insurance policy, generally is sufficient to protect grantees.

Specific Liens

Specific liens arise out of events or actions related to the ownership, development, or improvement of a property. Specific liens attach to a particular parcel of land only. Mechanic's liens, discussed below, are examples of liens specific to a particular parcel of land.

Marketable Title Records Act

Statutes often limit this examination period to 40 to 50 years. These statutes have been adopted in many states and are known as marketable record title acts. They require an examination of the records within the required time for the chain of title. Defects in title occurring outside that period have no effect upon the transaction's current owner or buyer. Thus, a deed missing the name of a spouse from a century before will not impact a current transaction. If the title-ownership chain is unbroken, and the title is clear from encumbrances or liens, a marketable title exists.

Department of Veteran Affairs

The Department of Veterans Affairs (DVA) guarantees loans for veterans who default on their mortgages. The DVA will pay up to 25 percent of the loan balance, up to certain limits.

FHA

The Federal Housing Administration (FHA) is not the lender but rather the insurer of the loan made by an institutional lender. The FHA will pay any loss to the lender following foreclosure. The lender may also assign the loan to the FHA, with its approval. A loan-assignment program is also available from the FHA, which allows loans to be assigned to the U.S. Department of Housing and Urban Development (HUD). HUD will pay the loan, and then homeowners make payments to HUD on terms that meet their needs.

RESPA

The Real Estate Settlement Procedures Act (RESPA)6 is a federal act administered by the federal Consumer Financial Protection Bureau. RESPA ensures that consumers are provided with information about the cost of their mortgages and closings. This information protects consumers from unnecessarily high settlement charges caused by abusive financing and closing practices.

Acknowledgement

The deed must be acknowledged (that is, executed before a notary public or attested by witnesses) before it can be recorded. Acknowledgment is a declaration that the person executing the deed is actually the person executing it. The acknowledgment assists in authenticating that the proper parties conveyed the deed.

Escrow (Method of Closing)

The escrow holder is responsible for meeting the agreement's requirements. The escrow agent facilitates the efforts of the parties to close the transaction. The escrow process is a mechanism to close both the title and the mortgage transaction simultaneously. Closing occurs at the moment when the seller is paid the purchase price, existing liens against the property are satisfied, the conveyance to the grantee is recorded, and the mortgage lender's mortgage or deed of trust is recorded.

Habendum Clause

The habendum clause specifies the type of interest and rights given to the grantee (fee simple, fee simple determinable, life estate, express easement). If the grantor desires to place a restriction in the deed (such as a fee simple determinable), the restriction must be stated in the habendum clause. A conveyance of real property passes fee simple unless it appears from the deed that a lesser estate was intended.

TRID

The integrated forms are known as the TILA-RESPA Integrated Disclosure (TRID) rule. These disclosures are intended to protect the consumer-buyer in residential mortgage transactions. By requiring use of the forms, CSFP intended to obtain clarity and transparency in defining the elements of the mortgage obligation. The TRID rule does not apply to the following: - Home equity lines of credit (HELOC) - Reverse mortgages - Mortgages secured by a mobile home - Mortgages secured by a dwelling that is not attached to real property (that is, land)

A.L.T.A. Owners Title Policy

The most commonly purchased policy is an ALTA Owner's Policy. This type of policy protects the insured from defects in title. The lender will protect its interest in title defects by obtaining a loan policy (discussed later in this chapter). The Owner's Policy insures the owner of the property against loss or damage. The Owner's Policy is broken down into several parts. First, it introduces the risks that are covered by the title insurance policy; Schedule A then identifies many policy attributes; Schedule B then identifies the policy exclusions; and the policy then concludes by discussing the conditions of the title insurance policy.

Preliminary Report

The preliminary report informs the prospective buyer, lender, or tenant of any liens, defects, or encumbrances that will be shown as exceptions to coverage in the title insurance policy issued at closing. The preliminary report reflects what the insurer would include in a title policy if it issued a policy as of the preliminary report's effective date. This report allows the parties to consider the risks of the stated defects and seek to remove them.

Promissory Note

The promissory note is the borrower's promise to repay the money borrowed. A borrower who defaults in the repayment may be personally liable for the debt owed. The promissory note is the contract between the parties to repay the obligation. The person who borrows money and enters into the promissory note is called the maker or the debtor. The person who provided the financing is known as the payee. The note may or may not be secured by a mortgage or deed of trust.

Special Warranty Deed

The special warranty deed contains the same warranties as a general warranty deed, with one major difference regarding the covenant period. In a special warranty deed, the grantor warrants that he has not caused any defects in the title during his period of owning the property. In a general warranty deed, the grantor warrants that no one has ever caused any defects in the title.

Title Abstract

The title abstract provides a condensed chronological summary of the title's history. The title abstract contains a legal description of the property and summarizes every related instrument in chronological order. Because many of the transfer documents may require an interpretation regarding whether a person had legal authority to transfer title (such as a trustee transferring title on behalf of a deceased heir), a title opinion rendered by a title attorney is obtained.

Title Opinion

The title opinion is a written opinion by an attorney describing who owns the real estate, the quality of title, and exceptions, if any, to clear title for the transaction. The title opinion is not a guarantee that title is marketable. It is the opinion of an attorney, upon review of the chain of title, that determines whether the title is marketable.

Certified residential appraiser

This appraiser can evaluate one to four residential units without regard to value or the complexity of the transaction. The appraiser must complete education and experience requirements and pass the appraisal exam.

Licensed residential appraiser

This appraiser is qualified to appraise one- to four-unit noncomplex residential properties having a transaction value of up to $1,000,000 and complex one- to four-unit residential units if the value is at or below $250,000. The term complex is difficult to define but is usually characterized as a property that is atypical for its surroundings. A licensed residential appraiser must complete education and experience requirements.

Certified general appraiser

This appraiser may evaluate all types of real property (residential and commercial) regardless of value or complexity. The appraiser must complete education and experience requirements.

Spearin doctrine

This warranty is known as the Spearin doctrine, after the Supreme Court case of that name. When the owner supplies the drawings and specifications on a project, she or he warrants that the design will work for the structure's intended purpose. Where the contractor is required to build the improvement in accordance with owner-supplied plans and specifications, the contractor will not be responsible for defects in those plans and specifications. The Spearin warranty can be disclaimed in the prime contract (that is, requiring the subcontractor to accept liability for defective plans and specifications). Unless this implied warranty is specifically disclaimed in the contract documents, however, contractors can use it as a defense from owner and lender claims. They can also use it as a basis for a damages claim against the owner if the contractor incurs losses or delays because of deficiencies in the owner-supplied design documents. Some jurisdictions recognize a limitation to the Spearin doctrine known as the no-damages-for-delay rule. This rule permits the contractor to recover only an extension of time to complete the project, not damages, in the event the owner has breached its implied warranty to the contractor.

Title Assurance

Title assurance means a person is recognized as having evidence of title in real property. Title-assurance issues arise when the landowner conveys the property to one person and later conveys the same property to another person. These circumstances put the grantees and their mortgage lenders in jeopardy. How do buyers and lenders protect themselves against a title defect that is discovered after the purchase or loan transaction? Four methods of assuring the buyer of title are discussed in this chapter: 1. The six covenants of title arising from a general or special warranty deed 2. A system of recording land titles 3. Title registration (sometimes called the Torrens system) 4. Title insurance

Title Insurance

Title insurance is another form of assurance designed to protect buyers and lenders from title defects. Because title examinations are not always perfect and occasionally fraudulently recorded, title insurance helps to protect parties to a real estate transaction against damages that arise from purchasing or financing of real property.Title insurance protects the insured by eliminating risk at the time the policy is issued. It is unlike other forms of insurance, which cover risk for events that may occur after the policy is issued, such as an automobile accident or a residential burglary. Title insurance gives parties to a real estate transaction some comfort. It assures them that the title should be clear and not subject to risks of adverse claims and that, if claims do arise, the insurance carrier will pay or be responsible for the loss or injury caused, including attorney fees. Title insurance requires a one-time premium payment. Generally, the cost of title insurance is a few dollars per each $1,000 of coverage.A title insurance policy does not guarantee good title to the buyer or lender. It is not a representation that the title is in any sort of condition, good or bad, or free from any type of defect or encumbrance.

Title

Title is the ownership of land. When title is known, the ownership of real property allows a person to transfer title of an estate from one person to another. The transfer usually takes one of several forms: sale, gift, testamentary transfer (a transfer pursuant to the owner's will or by operation of law on the owner's death), or adverse possession.

Title Theory

Title theory, used in a minority of states, provides that a mortgage is a transfer of property title to the lender for security purposes. The lender has legal title to the mortgaged property until the borrower repays the debt. The borrower has the right to possession during the mortgage, but the lender may take possession of the property upon the borrower's default. When the borrower defaults, the lender remains in possession during the foreclosure proceedings. This approach allows the creditor to protect the property from deterioration while managing the property.

Deed Delivery

To be effective, the deed must also be delivered by the grantor and accepted by the grantee. Once the grantee accepts a deed, any covenants or restrictions (such as those contained in the deed's habendum clause) become effective. Delivery of the deed may be accomplished by either actually delivering it or by constructively delivering it to the grantee. Actual delivery occurs when the grantor physically hands the deed to the grantee. Constructive delivery occurs when the grantor releases all control of the deed. If the grantor retains the right to recall the deed, no delivery has occurred because the grantor has not intended immediately to convey a property interest to the grantee .Courts presume that a deed has been delivered if: 1. The deed is physically handed to the grantee 2. The deed is acknowledged by the grantor before a notary, or 3. The deed has been recorded. No delivery is presumed if the grantor retains possession of the deed. Each of these presumptions is rebuttable based on evidence presented.

Trainee Appraiser

Trainee appraiser. A trainee appraiser needs no experience but must be supervised by a certified residential real property appraiser or a certified general appraiser in good standing. Trainee appraisers may work only on appraisals for properties that their supervising appraisers are permitted to appraise. Applicants must complete education hours and pass a core curriculum examination.

Notice Statute

Under a notice statute, the last bona fide purchaser takes title to the property. This is the most common form of recording statute. A bona fide purchaser (BFP) is a good faith purchaser who takes title to the property without notice of a prior sale by the grantor. The good faith purchaser must pay some consideration for the property. While the purchaser does not have to pay fair market value of the property to be BFP, the BFP cannot receive property by a gift or through an inheritance. Notice may be actual, constructive, or inquiry in type. Actual notice occurs when the prospective purchaser has actual knowledge of a title defect (for example, that the property has already been sold to another). In most cases, a party to a real estate transaction lacks personal knowledge of the preexisting interests in the real property. Constructive notice arises when a search of the title records would have revealed a defect in title (such as, another owner has recorded a deed to that property). All persons are deemed to have notice of what has been made part of the public records, even if they did not search for that information. Inquiry notice arises when a party becomes aware, or should have become aware, of certain facts that, if investigated, would reveal the claim of another. Inquiry notice imputes knowledge where the circumstances are such that they would have aroused the suspicions of an ordinary purchaser (for example, a neighbor indicates that the grantor just sold the property to another person) Example: Day 1: O (Grantor) conveys Blackacre to A (a BFP) Day 2: O (Grantor) conveys Blackacre to B (a BFP) Day 3: O (Grantor) conveys Blackacre to C (a BFP) Day 4: A records Day 5: C records In a notice jurisdiction, C has title to the property because C is the last bona fide purchaser. It is irrelevant that A recorded first in this case. Note that on day 1, A owns title to the property because A was the last BFP. On day 2, B owns title to the property because B is the last BFP. On day 3, C owns title to the property because C is the last BFP. Because A and C have recorded title, constructive notice is provided to future grantees.While the last bona fide purchaser does not need to record to obtain title to the property, she should do so to protect her title from a subsequent bona fide purchaser.

Race Statute

Under a race statute (also known as a pure race statute), the first party to record takes title to the property, even if the first to record obtained his or her interest later in time. Priority is determined by who wins the race to the recording office. Very few states follow a race statute.3 In this system, actual notice of other potentially senior interests is irrelevant: The winner of the race prevails. Ex: : Day 1: O (Grantor) conveys Blackacre to A Day 2: O (Grantor) conveys Blackacre to B Day 3: O (Grantor) conveys Blackacre to C Day 4: B records Day 5: A records In a race jurisdiction, B has title to the property because B is the first to record. It is irrelevant that A received title first or that A recorded title. B was the first to record and is awarded title. C is not recognized as having an ownership interest because of B's recordation.

Mortgage

When real property is subject to a mortgage, it is hypothecated. That means the property is pledged as security to guarantee the repayment of the loan. The borrower retains possession of the property during the mortgage term. The owner-borrower is the mortgagor, and the lender or creditor is the mortgagee. If the borrower defaults on the loan, the lender can foreclose on the property and sell it at a public auction

Tract Index System

With a tract index system, instead of tracing title back through each successive conveyance from grantor to grantee, the county, parish, or township is divided into parcels of land. All documents affecting title to the parcel of land are indexed and summarized on a page for that parcel. Tracing the history of title begins with identifying the appropriate tract index for the parcel. All conveyances affecting title to the parcel will be summarized on the parcel page. While the tract index system makes it easier to find a title's history, most states are reluctant to change to this system because (1) human error will inevitably occur during the reindexing of properties, and (2) it would cost money to change from one index system to another.

Undisclosed Principal

With an undisclosed principal, the third party is unaware of the existence or identity of the principal. An agent working for an undisclosed principal is called a secret agent. Real estate developers, large corporations, and private and public schools often act as partially disclosed or undisclosed principals. Because agents acting with the authority of principals are not liable for the performance of the contract, they usually enter into indemnity agreements with partially disclosed or undisclosed principals. In an indemnity agreement, the principal agrees to defend the agent and hold the agent harmless from any costs, fees, or damages that may result.

Implied Authority

With implied authority, the principal has not expressly given authority, but the agent believes that the principal has given the agent authority through the principal's actions or conduct. This authority is implied by the conduct of the parties, customs between the parties, and acts incidental to carrying out the agent's express authority. Express authority given an agent will control over any implied authority. Example: Assume that a broker representing the seller is given authority to sell his property to a buyer. The broker will have implied authority to take pictures of the property and market the property to potential buyers.

Strict Foreclosure

With strict foreclosure, a court orders the borrower to pay the debt owed by a certain date. If the borrower is unable to pay the debt by that date, the borrower loses the right to equitable redemption of the property; the lender automatically takes title of the property and does not need to sell the property following the borrower's default. Where allowed, strict foreclosure is often used when a borrower is insolvent (unable to pay debts), has little or no equity in the property, or has abandoned the property.

Settlement Process (Method of Closing)

settlement process or "table closing." In this closing method, the parties and other interested individuals meet in person on an agreed date and time. The parties will often meet at a settlement company (often a division of a lender or title insurer). However, the closing location can be the lender's office, the office of one of the party's attorneys, the title company's facility, or the local recorder's office. Each jurisdiction has its own practices.At the meeting the parties will review the closing documents, sign the documents, pay and receive consideration for the property (most often, money), and receive title to the real estate. Buyers, sellers, their attorneys and real estate agents, and lender representatives will attend the title closing. The closing is presided over or supervised by a settlement agent, who will cause all of the conveyance documents (such as deeds, assignments of leases, and easements and the like), mortgages, notes, and monies to be exchanged between the buyer and seller and ensures that the lender's funds are properly disbursed.