Transactional work is practical in nature. Rather than looking backwards to piece together the facts of your client in litigation work, transactional work works with a client with an eye towards the future. In this case, your client has goals, aspirations, dreams, and a vision for growth. They simply need a lawyer to help those dreams become a reality. So, what do lawyers do that can help? For a real estate transaction, the lawyer needs to 1) strategically craft the proper documentation, 2) manage when the transaction occurs, and 3) mitigates the risk by identifying, reducing, and shifting the risk.
Types of Real Estate Transactions
Nowadays, there are typically two types of real estate transactions: residential and commercial.
Residential transactions have become more saturated with non lawyers where most of the legal work can be completed via standardized forms and basic online searches. As a result, residential transactional lawyers typically find success in one of two ways: 1) increasing the volume of their cliental and creating cheap standardized means of satisfying their needs, or 2) tacking residential real estate sales as a side job in connection with other forms of legal practice (such as estate planning).
Commercial transactions requires a much more extensive knowledge of market factors in addition to the legal knowledge. Consequently, the field has not been saturated with non lawyers because these transactions tend to be much more complex.
Real Estate Brokers
The first step of selling real estate is by finding the parties necessary to facilitate a sale (a seller and a buyer). A broker is often used to find these parties. Because of the sensitive nature of home-buying, brokers are often regulated by law. Many brokers become members of the National Association of Realtors (NAR). A member of the NAR is called a realtor. As such, many people consider brokers and realtors as synonymous.
Brokers are typically hired by the sellers and paid in a commission basis. The broker’s right to payment comes from an agreement between the seller and broker called a listing, which is often governed by the state where the deal is taking place (see the case below). There are four main types of listings that provide varying levels of control to the seller and the broker:
- Open listing – Any broker can sell and the first to sell gets the commission. If the property is sold by the owner (For Sale By Owner or FSBO), then no commission is paid.
- Exclusive agency – Only brokers from an agency can sell. If a sale is facilitated without the agency, then the agency is still entitled to their commission. However, if the sale is a FSBO, the agency receives no commission.
- Exclusive right to sell agreement – Only the hired broker has the right to sale. Any sales facilitated without the broker will still entitle the broker to a commission.
- Net Listing – A seller wants to recoup a sum of a property. The broker is entitled to set the listing price higher and recover any surplus made within the sale.
Many brokers utilize a Multiple Listing Service, where the listings can be placed online for all potential buyers to view.
Samann L.C. v. Victory Lodging, Inc.
2010 WL 1375186 (Iowa App.)
Samann and Bassman were the plaintiffs. Bassman won at trial and Victory Lodging appealed.
Was Bassman entitled to the commission?
For a commission to be paid, there must be a valid listing agreement between the parties.
There was no listing agreement. Thus, Bassman is not entitled to the commission. Reversed.
Bassman was the broker for a sale of a Ramada Inn between Samann (buyer) and Victory (seller). However, due to Victory’s breach, closing never occurred and the sale fell apart. Bassman sued for the commission regardless, claiming that Victory knew of the commission and there was an addendum to the purchase agreement (not listing agreement) that a commission was to be paid.
Iowa law required that the commission is to be listed in a valid listing agreement. Here, there is no listing agreement. The oral agreement in addition to the addendum does not meet the requirements of a listing agreement. Thus, there can be no means of recovery for the commission total.
Broker or listing agreements typically contain four elements:
- Duration (natural or termination)
- Mode and amount of compensation
- When the compensation is due (typically this is when the buyer is procured)
- And whether dual agency (the broker can represent both the seller and buyer) is permitted.
Real Estate Transactions Timeline
“The informational stage.” This period is when the parties have identified each other and are exchanging information that is necessary to facilitate the sale but retain enough information for negational leverage. There may be mandatory disclosures, but this stage appears to be mostly a battle of wits.
If the parties elect to go forward, they enter into an executory contract where the parties agree to complete certain tasks before closing. At this point, the doctrine of equitable conversion applies. That is, title is split between the buyer and seller. The seller has legal title and the buyer having equitable title.
At the end of the executory period, the parties meet to “close” the deal. Here, deed documents are transferred and payment is made. Along with the deed the seller is likely to provide covenants (warranties) to the buyer.
Finalizing all the paperwork by recording the transaction and obtaining insurance.
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.