Home Notes Real Estate Prelicensing Course Notes

Notes from the Illinois Real Estate Salesperson Pre-Licensing Course

Charles E. Oyibo

Text: Modern Real Estate Practice In Illinois, 4th Edition, by Galaty, Allaway, and Kyle.

1: Introduction to Real Estate

Specializations in Real Estate

• Brokerage
• Appraisal
• Property Management
• Financing
• Subdivision and Development
• Counseling
• Education

Professional Organizations

• National Association of REALTORS® (NAR)
• National Association of Real Estate Brokers (NAREB)
• Appraisal Institute
• American Society of Appraisers (ASA)
• National Association of Independent Fee Appraisers (NAIFA)
• Real Estate Educators Association (REEA)
• Real Estate Buyer's Agent Council (REBAC)
• National Association of Exclusive Buyer Agents (NAEBA)
• Building Owners and Managers Association (BOMA)
• Institute of Real Estate Management (IREM)
• Commercial Investment Real Estate Institute (CIREI)
• Association of Real Estate License Law Officials (ARELLO)
• American Society of Real Estate Counselors (ASREC)

Types of Real Property

• Residential: All property used for single-family or multi-family housing whether in urban, suburban, or rural areas and whether houses or condominiums consisting of one to four units;

• Commercial: Business property, including office space, shopping centers, stores, theaters, hotels, and parking facilities;

• Industrial: Warehouses, factories, land in industrial districts, and power plants;

• Agricultural: Farms, timberland, ranches, and orchards;

• Special Purpose: Churches, schools, cemeteries, and government-held lands.

The Real Estate Market

As with other products in a capitalist economy, real estate market values are determined by the forces of demand and supply. Essentially, when supply increases and demand remains stable, prices do down. Conversely, when demand increases and supply remains stable, prices go up.

Two characteristics of real estate govern the way the market reacts to the pressures of supply and demand: uniqueness and immobility. Real estate is unique in that no matter how similar two parcels of real estate may appear, they are never exactly alike. Each occupies its own unique geographic location, and two properties are never exactly the same inside. Immobility refers to the fact that property cannot be relocated to satisfy demand where supply is low. Nor do buyers necessarily make relocation decisions based on greater housing supply in a certain locale.

Factors Affecting Supply

• Labor force and construction costs: A shortage of skilled labor or building materials or an increase in the cost of materials can decrease the amount of new construction.

• Government controls and financial practices: The government's monetary policy can have a substantial impact on the real estate market. The Federal Reserve Board regularly establishes a discount rate of interest for the money it lends to commercial banks. That rate has a direct impact on the rates that banks charge to borrowers. Other governmental and quasi-governmental agencies like the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Government National Mortgage Association (GNMA or Ginnie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) also have impact by supporting or guaranteeing loans. Additionally, the government's police power to "take" land, policies on taxation, land-use controls, building codes, and zoning ordinances all affect the supply side of the real estate market.

Factors Affecting Demand

• Population: The demand for housing grows with the population

• Demographics: Family size, the ratio of adults to children, the ages of children, the numbers of retirees, family income, lifestyle, and the growing number of single-parent and empty-nester households are all demographic factors that contribute to the amount and type of housing in a locale

• Employment and wage levels: Decisions about whether to buy or rent and how much to spend on housing are closely related to income. When job opportunities are scarce or wage levels are low, demand for real estate usually drops--and vice versa.

Top

2: Real Property and the Law

Land, Real Estate, and Real Property

Land is defined as the earth's surface extending downward to the center of the earth and upward to infinity. The term includes permanent natural objects such as trees, water, and boulders. Land also includes minerals and substances that lie far below the earth's surface (subsurface), as well as the air above the earth, all the way up into space (airspace).

Real estate is defined as land at, above, and below the earth's surface, plus all things permanently attached to it. These attachments may be natural or artificial (man-made). Real estate includes the natural land, along with all man-made improvements. An improvement is any artificial addition to land, such as a building or a fence. (Note that the term improvement as used in real estate refers to any addition to land. The word is neutral. It does not matter whether the artificial attachment makes the property better-looking or more useful, or more valuable or less valuable; the land is still said to be improved. Land also may be improved by street, utilities, sewers, and other additions that make it suitable for building.

Real Property is defined as the interests, benefits, and rights that are automatically included in the ownership of land and real estate. Real property includes the surface, subsurface, airspace, and any improvements, as well as the bundle of legal rights--the legal right of ownership that attach to ownership of a parcel of real estate. Real property is coupled with the word appurtenance. An appurtenance (such as parking spaces, easements, water rights, etc.) is anything that is associated with the property although not necessarily a direct part of it. An appurtenance is connected to the property in both a concrete and legal way. Appurtenance ownership normally "runs with the land."

Real Property vs. Personal Property

Personal property (also personalty or chattel) refers to all property that does not fit the definition of real property. An important distinction between real property and personal property is that personal property are movable.

• A mobile home is generally considered to be personal property unless it becomes permanently affixed to land. (Note, however, that the distinction is usually one of state law).

• Trees and shrubbery generally fall into one of two classes. Trees, perennial shrubbery, and grasses that do not require annual cultivation are considered real estate (because they, obviously, attach to land). Annual planting or crops of wheat, corn, vegetables, and fruit, known as emblements, generally are considered personal property. (The term used in the law for plants that do not require annual cultivation (such as trees and shrubbery) is fructus naturales (fruits of nature); emblements, plants that require annual cultivation are known as fructus industriales (fruits of industry)).

• An item of real property can become personal property by severance (such as when a growing tree is cut down).

• A item of personal property can become real property by annexation (such as when cement, stones, and sand are mixed into concrete and used to construct a sidewalk.)

• Real property is conveyed by deed, while personal property is often conveyed by a bill of sale.

Fixtures

A fixture is an item of personal property that has been so attached to land or a building that, by law, it becomes part of the real estate. Examples of fixtures include heating systems, elevator equipment, radiators, kitchen cabinets, attached bookcases, light fixtures, and plumbing fixture

Legal Test of a Fixture

Courts use four basic tests to determine whether an item is a fixture or personal property:

1. Intent -- Did the person who installed the item intend for it to remain permanently on the property or for it to be removable in the future?

2. Method of annexation -- How permanent is the method of attachment? Can the item be removed without causing damage to the surrounding property?

3. Adaptation to real estate -- Is the item being used as real property or personal property?

4. Agreement -- Have the parties agreed in writing on whether the item is real or personal property? What does the contract say?

Trade fixtures refer to a special category of fixtures which include property used in the course of business. Some examples of trade fixtures (also called chattel fixtures) are bowling alleys, store shelves, bars, restaurant equipment, agricultural fixtures such as chicken coops, tool sheds. etc. Trade fixtures must be removed on or before the last day the property is rented. The tenant is responsible for any damage caused by the removal of the trade fixture. Trade fixtures that are not removed become the property of the landlord. Acquiring property in this way is known as accession.

Ownership of Real Property

Real property is described as a bundle of legal rights. These rights include the right:

• of possession
• to control the property within the framework of the law
• of enjoyment (that is, to use the property in any legal manner);
• of exclusion (to keep others from entering or using the property); and
• of disposition (to sell, will, transfer, or otherwise dispose of or encumber the property).

Characteristics of Real Estate (Economic)

• Scarcity. The supply of land in a given location (or of a particular quality -- e.g. crop land) is generally considered to be limited.

• Improvements. Building an improvement on one parcel of land can affect the land's value and use as well as that of neighboring tracts and whole communities. For example, constructing a new shopping complex or selecting a nuclear power or toxic waste dump can dramatically shift land values in a large area.

• Permanence of investment. The capital and labor used to build an improvement represent a large fixed investment. The return on such investments tend to be long term and relatively stable.

• Area preference. The most important economic characteristic of land, also called situs, refers to people's preferences (even illogical ones) for given areas. The unique quality of these preferences often results in different values for similar units.

Characteristics of Real Estate (Physical)

• Immobility. The geographic location of any given parcel of land can never be changed. It is fixed or immobile.

• Indestructibility.

• Uniqueness. (Also heterogeneity or non homogeneity) No two parcels of land are exactly the same. Although they may be substantially similar, all parcels differ geographically because each parcel has its own location.

Laws Affecting Real Estate

Real Estate Laws

• Contract law
• General property law
• Agency law
• Real Estate licence law
• Federal regulations
• Federal, state, and local tax laws
• Zoning land use laws
• Federal, state, and local environmental regulations
• Federal and state fair housing laws
• Federal ADA
• Federal antitrust laws

7 Sources of Law

1. United States Constitution
2. Laws passed by Congress
3. Rules of the regulatory agencies
4. State constitutions
5. State statutes
6. Local ordinances
7. Common law

Top

3: Concepts of Home Ownership

Home Ownership

Three important reason (among a plethora of others) that people buy homes:

1. Capital gains from sale of property at a higher price than the purchase price
2. Increase in equity (and hence net worth) by amortization of mortgage debt and/or area appreciation of the property
3. Tax benefits

Types of Housing

• Apartment Complexes

• The Condominium. A popular form of residential ownership for people who want the security of owning property without the care and maintenance that a house demands. Condominium owners share the ownership of common facilities such as halls, elevators, swimming pools, and the surrounding grounds. Management and the maintenance of building exteriors and common facilities are provided by the governing association or by outside contractors with expenses paid out of monthly assessments charged to the owners.

• The Cooperative. Similar to the condominium except that the owners do no actually own the units. Instead they buy shares of stock in the corporation that holds title to the building. Owners receive proprietary leases that entitle them to occupy particular units. Like condominium unit owners, cooperative unit owners pay their share of the building's expenses.

• Planned Unit Developments (PUDs), also Master-planned Communities. Merge such diverse elements as housing, recreation facilities and commercial concerns in one self-contained development.

• Retirement Communities.

• Highrise Developments. Also called Mixed-use Developments (MUDs). Combine such elements as office spaces, stores, theatres, and apartment units into a single vertical community.

• Converted-use properties. Factories, warehouses, office building, hotels, schools, churches, and other structures that have been converted to residential use. (Developers often find renovation of such properties more aesthetically and economically appealing than demolishing a perfectly sound structure to build something new).

• Mobile Homes. Mobile-home parts make residential environments possible with community facilities, semi-permanent home foundations, and hookups for gas, water and electricity.

• Modular Homes. Each room is preassembled at a factory, driven to the building site on a truck, then lowered onto its foundation. Later workers finish the structure and connect the plumbing and wiring. In the end, entire developments can be built at a fraction of the time and cost of conventional construction.

• Time Share. Multiple purchasers share ownership of a single property, usually a vacation home. Each owner is entitled to the use of the property for a certain period of time each year, and in addition to the purchase price, pays an annual maintenance fee.

Housing Affordability

Mortgage Terms

Ownership Expenses & Ability to Pay.

Home ownership involves many expenses, including utilities (such as electricity, natural gas, and water), trash removal, sewer charges, and maintenance and repairs. Owners also must pay real estate taxes and buy property insurance, and they must repay the mortgage loan with interest.

Formula for determining ability to pay

The monthly cost of buying and maintaining a home (mortgage payments--both principal and interest--plus tax and insurance impounds) should not exceed 28% of gross (pretax) monthly income.

The payments on all long-term debt combined with the house payment should not exceed 36% of monthly income. (Expenses such as insurance premiums, utilities, and routine medical care are not included in the 36% figure but are considered to be covered by the remaining 64%

Investment Considerations

Purchasing a home offers several financial advantages to a buyer:

• If the property's value increases, a sale could bring in more money that the owner paid, creating a long-term gain.

• As the total mortgage debt is reduced through monthly payments, the owner's actual ownership interest in the property increases. This ownership interest, or equity, represents the paid-off share of the property held free of any mortgage. Equity also increases when the property's value rises through area appreciation.

• The federal government allows homeowners certain income tax advantages that are not available to renters. Homeowners may deduct from their income some or all of the mortgage interest paid as well as real estate taxes and certain other expenses. They may even defer or eliminate tax on profit received from selling the home. Specifically, the federal government now excludes $500,000 from capital gains tax on sale profits from a principal residence as long as the taxpayers are filing jointly. Taxpayers who file singly are entitled to a $250,000 exclusion. The exemption may be used repeatedly, as long as the homeowners have occupied the property as their residence for two out of the last five years. Also, first-time home buyers may make penalty-free withdrawals from their tax-deferred individual retirement funds (IRAs) to make a down payment on a home. The limit on such a withdrawal is $10,000
  
  Tax deductions. Homeowners may deduct from their gross income any of the following

  • Real estate taxes on all property owned
  • Mortgage interest payments on most first and second homes (interest)
  • Loan origination fees in the year of purchase (interest paid upfront) (Rules differ from refinance and equity loans)
  • Loan discount points in the year of purchase (interest paid upfront) (Rules differ from refinance and equity loans)
  • Loan prepayment penalties (interest charged for paying off a loan)
  • When a homeowner adds to a property's value in preparation for its sale, the homeowner may deduct certain expenses from any gain in determining the adjusted sales price for capital gains purposes. The cost of materials such as paint, carpeting, and wallpaper and the cost of other repairs may be deducted if the expense meets specific IRS requirements.

Homeowner's Insurance

Mortgage lenders usually require that a homeowner obtain insurance when a debt is secured by the property.

Coverage & Claims

The most common homeowner's policy is called a basic form, and it provide coverage against

• fire and lightning,
• glass breakage,
• windstorm and hail,
• explosion,
• riot and civil commotion,
• damage by aircraft,
• damage from vehicles,
• damage from smoke,
• vandalism and malicious mischief,
• theft, and
• loss of property removed from the premises when it is endangered by fire of other perils.

A broad-form policy also is available, and it covers

• falling objects;
• damage due to weight of ice, snow, or sleet;
• collapse of all or part of the building;
• bursting, cracking, burning, or bulging of a steam or hot water heating system or of appliances used to heat water;
• accidental discharge, leakage or overflow of water or steam from within a plumbing, heating, or air-conditioning system;
• freezing of plumbing, heating, and air conditioning systems and domestic appliances; and
• injury to electrical appliances, devices, fixtures, and wiring from short circuits or other accidentally generated currents.

Subrogation. When an insurance company settles a covered claim, it usually acquires the right to any legal damages available to the insured. This right is called subrogation. For example, if a house burns down due to a utility company's negligence, and the insured accepts compensation from the insurance company, then the insurance company gains the rights related to possible further payment for damages from the utility company.

Actual Cash Value and Guaranteed Replacement Cost Policies. When determining what will be paid to the insuree, actual cash value policies usually subtract depreciation from the value of the property and may result in lower-than-market-value compensation for the structure. Guaranteed replacement cost policies (with coinsurance) usually require that the owner maintain insurance equal to at least 80% of the full replacement cost of the dwelling (insurance does ont usually cover the land). ...

Federal Flood Insurance Program

The National Flood Insurance Act of 1968 was enacted by Congress to assist owners of property in flood-prone areas by subsidizing flood insurance for these homeowners and by implement land-use and land-control measures.

Being in a floodplain is a very important disclosure for sellers. Purchasers buying property that is in flood-prone areas must obtain flood insurance if they are seeking a federally related loan (most loans). If a borrower can produce a survey showing that the lowest part of the building is located above the 100-year-flood mark, the borrower may be exempted from the flood insurance requirement.

4: Real Estate Agency

Agency is the word used to describe the special relationship between a real estate licensee and the person he or she represents. Agency is governed by two kinds of law:

• common law: the rules a society established by tradition and court decisions, and
• statutory law: the laws, rules, and regulations enacted by legislatures and other government bodies.

Article 15 of the Real Estate License Act of 200 established the current statutory laws of agency in Illinois. (Visit www.obre.state.il.us/LAWS/Laws.htm).

Law of Agency

The law of agency defined the rights and duties of the principal and the agent.

Definitions--Common Law

• Agent. The individual who is authorized and consents to loyally represent the interest of another person.
• Subagent. The agent of an agent; that is, indirectly the agent of another agent's principal. (Subagency may no longer by legally offered through an Illinois MLS).
• Principal. The individual who selects the agent and delegate to him or her the responsibility of representaing the principal's interest.
• Agency. The fiduciary relationship of trust between the principal and the agent.
• Fiduciary. The relationship in which the agent is held in a position of special trust and confidence by the principal; also the individual who is placed in a position of trust.
• Client. The key principal.
• Customer. A party to which some level of service is provided and who is entitled to fairness and honesty.
• Nonagent. (also facilitator, transactional broker, transactional coordinator, contract broker), an intermediary between a buyer and seller (or landlord and tenant) who assists both parties with the transaction without representing either party's interest.

Definitions--Statutory (Licence Act of 2000)

• Agency. A relationship in which a real estate broker or licensee, whether directly or through an affiliated licensee, represents a consumer by the consumer's consent, whether express or implied, in a real property transaction.
• Brokerage Agreement. A written or oral agreement for brokerage services to be provided to a consumer in return for compensation or right to receive compensation from another.
• Client. A person who is being represented by a licensee.
• Consumer. A person or entity who seeks goods and services.
• Customer. A consumer who is not being represented by a licensee, but for whom the licensee is performing ministerial acts.
• Ministerial Acts. Those acts that a licensse may perform for a consumer, that are informative in nature and do not rise to the level of active representation.

Fiduciary/Statutory Responsibilities

The agency agreement usually authorizes the broker to act for the principal. Under the common law of agency, the agent owes the principal the following five duties (Care, Obedience, Accounting, Loyalty, and Disclosure).

Reasonable Skills and Care. Within the framework of the seller’s other goals, the seller’s agent should assist the seller to negotiate the highest possible price or the best overall package (time of closing, solidity of financing, strong earnest money, and price). Likewise, the buyer’s agent should assist the buyer toward intelligently reaching the lowest possible or best overall package for the buyer’s needs.

Obedience. The agent should act in good faith at all times, obeying the principal’s instructions in accordance with the contract BUT within the bounds of the law and ethics.

An agent should not exceed the authority assigned in the contract. While the agent represents the principal, it is the principal who must ultimately make all of the major decisions. (Only a universal agency backed by power of attorney could empower an agent to make ultimate decisions on behalf of the principal).

Accounting. The agent should periodically report the status of all funds or property received from or on behalf of the principal. Further, the agent should give accurate copies of all documents to all affected parties and keep copies on file.

In Illinois, brokers are required to deliver true copies of all documents to the people who signed them within 24 hours. Further, funds entrusted to a broker must be deposited in a special escrow account by the next business day following the signing of a sales contract or lease. Commingling such monies with the broker’s personal or business funds is illegal. Records of escrow account transactions must be kept on file for 5 years.

Loyalty. The duty of loyalty requires that the agent place the principal’s interest above all others, including the agent’s own self-interest. The agent should be particularly sensitive to possible conflicts of interest, and confidentiality about the principal’s personal affairs is of paramount importance.

In Illinois, an agent may not disclose person, confidential information about his or her principal. However, known material facts about the property’s physical condition or its environs must always be disclosed. A material fact is any fact that it known, might reasonably be expected to affect the course of events.

All states forbid agents to buy property listed with them for their own accounts or for accounts in which they have personal interest without first disclosing that interest and receiving the principal’s consent. Also, no buyer may sell property in which they have interest without first informing the purchaser of that interest.

Disclosure. Disclosure is the agent’s duty to keep the principal informed of all facts or information that could affect a transaction. Such facts or information include relevant information or material facts that the agent knows or that the court might later say he or she “should have known.”

The agent is obligated to discover facts that a reasonable person will feel are important in choosing a course of action, regardless or whether those facts are favorable or unfavorable to the principal’s position. (Much of disclosure is not covered by the seller disclosure form).

An agent for a buyer must disclose deficiencies of a property as well as sales contract provisions and financing being offered that do not suit the buyer’s needs.

The buyer’s agent is the one to suggest the highest range of prices the buyer should consider, based on comparable values and current market (regardless of listing price). The agent’s aim is to help the buyer get the lowest price possible, given all other buyer concerns and needs.

Creation of Agency

An agency relationship may be based on a formal agreement (written or oral) between the parties (an express agency) or it may result from the parties’ behavior (an implied agency).

Express Agency. An express agency relationship between a seller and a broker is generally created by a, written employment contact, or listing agreement. An express agency relationship between a buyer and a broker is created by a buyer agency agreement.

In Illinois, the agency agreement (and the commission) cannot be enforced in court unless the agreement is in writing. Also, under the license act of 2000, all exclusive and exclusive right-to-sell listings must be in writing.

Implied Agency. Implied agency relationships occur when the actions of the parties indicate that they have mutually consented to an agency.

In Illinois, (Article 15 of the IRELA of 2000), the licensee is presumed to be the agent of the consumer with whom the licensee is working unless:

• there is a written agreement between the broker and the consumer providing for a different relationship, or
• the licensee is clearly performing only ministerial acts on behalf of the consumer.

Compensation

The source of compensation does not determine agency.

Termination of Agency

An agency may be terminated for the following reasons:

• Death or incapacity of either the client or broker
• Destruction or condemnation of the property
• Expiration of the terms of the agency
• Mutual agreement by all parties to the contracts
• Breach by one of the parties (in which case, the breaching party might be liable for damages)
• By operation of the law (such as bankruptcy of the principal)
• Completion, performance, or fulfillment of the purpose for which the agency was created.

In Illinois, a definite termination date must be included in an agency agreement. Automatic extension clauses are illegal.

An agency coupled with interest is an agency relationship in which the agent has an interest in the subject of the agency. An agency coupled with interest cannot be revokes by the principal or be terminated on the principal’s death.

Types of Agency Relationships

Limitations of Agent’s Authority

1. A universal agent is a person empowered to do anything the principal could do personally. The universal agent’s authority to act on behalf of the principal is virtually unlimited. In Illinois, a written power of attorney is absolutely required to create a universal agency.
2. A general agent may represent the seller in a broad range of matters related to a particular business or activity. (The salespersons and associate brokers are general agents on the broker’s behalf).
3. A special agent is authorized to represent the principal in one specific act or business transaction only, under detailed instructions. A real estate broker is a “special” agent to a seller or buyer client.
4. A designated agent is a person authorized by the broker to act as the agent of a specific principal (buyer or seller). A designated agent is the only salesperson or associate broker in the company who has a fiduciary responsibility toward that principal. (In this way, two salespersons from the sale real estate company may represent opposite sides of a property sale without it being considered a dual agency).

Designated agency is permitted in Illinois.

Single & Dual Agency. In single agency, the agent or firm represents only one party in any single transaction. In dual agency however, the agent represent two principals in the same transaction.

In Illinois, dual agency is permitted; however, all parties must give their informed written consent. Dual agency must always be disclosed and agreed to in writing.

An undisclosed dual agency is created when, for example, a seller salesperson’s words and actions lead a potential buyer to believe that the salesperson is an advocate for him or her. This type of undisclosed dual agency is a violation of licensing laws and could resulting in rescission of the sales contract, forfeiture of commission or filing of a suit for damages.

Disclosure of Agency

A licensee is required to reveal who his or her client is.

See specific disclosure on p. 50.

Tip: Disclose early, disclose often.

Customer-Level Services

Though an agent’s primary responsibility is to the principal, Illinois license law does set forth the duties that licensees owe to third-party customers (buyers or sellers). Licensees are to treat all customers honestly. They may not negligently or knowingly give customers false information. Finally, licensees must disclose all material facts about the physical condition of the property to the customer that are actually known by the licensee and that could not be discovered by a reasonably diligent inspection of the property by the customer.

Opinion Vs. fact

Exaggeration of a property’s benefits is called puffing. While legal, it is important for the licensee to ensure that none of their statements can be interpreted as fraud. Fraud is the intentional misrepresentation of a material fact in such a way as to harm or take advantage of another person. That includes not only making false statements about a property but also intentionally concealing or failing to disclose important facts.

Latent Defects

The seller has a duty to discover and disclose any known latent defects that threaten structural soundness or personal safety. A latent defect is a hidden structural defect that would not be discovered by ordinary inspection.

In Illinois (Munjal v. B&W, Inc. et al, 1985), a broker or salesperson has no duty to discover “latent material defect” in a property if a seller has not disclosed these defects to him or her prior to the sale.

In Illinois, sellers of 1- to 4-unit residential properties must fill out property disclosure forms revealing any material defects in the real estate for sale. The completed forms should be given to the buyer before an offer is made…

Stigmatized Properties

“…no cause of action shall arise against a licensee for failure to disclose that an occupant of [a] property was afflicted with HIV or that the property was the site of an act or occurrence which had not effect on the physical condition of the property or its environment or the structures located thereon…

“…no cause of action shall arise against a licensee for the failure to disclose a fact situation on property that is not the subject of the transaction…

“…no cause of action shall arise against a licensee for the failure to disclose physical conditions located on property that is not the subject of the transaction that [and does] not have a substantial adverse effect on the value of the real estate that is the subject of the transaction.”

- Article 15, IRELA 2000

Top

5: Real Estate Brokerage

Broker-Salesperson Relationship

Independent contactor versus employee

Under the qualified real estate agent category in the Internal Revenue Code, meeting three requirements can establish an independent contractor status:

1. The individual must have a current real estate license.
2. He or she must have a written contract with the broker that specifies that the salesperson will not be treated as an employee for federal tax purposes.
3. At least 90 percent of the individual's income as a licensee must be based on sales production and not on the number of hours worked.

Broker's Compensation

License lays usually stipulate that a written agreement must establish conpensation for it to be paid. Only a licensed broker may collect commission in Illinois, which may then be shared with any salesperson or broker associate who are directly involved in or responsible for a given transaction. Cooperative agency allows the listing office to pay the selling office the amount of the cooperative (co-op) commission advertised in advance.

A commission is considered to be earned when the work for which the broker was hired has been accomplished. In Illinois, the listing broker is generally entitled to a commission after procuring a full-price offer with no contingencies from a buyer who is reade, willing, and able to buy on the seller's terms as set forth in the list. If the offer does not agree with the terms of the original listing, and the offer is acceptable, the broker is entitled to commission if terms terms have been clearlt indicated by a contract of sale signed by both buyer and seller.

Procuring cause is defined as the uninterrupted chain of events, without abandonment or estrangement, which leads to the sale of property on the seller's terms. To be considered the procuring cause of sale, the broker must have taken action to start or cause a chain of events that resulted in the sale.

Sales commissions are payable when the sale is consumated by delivery of the seller's deed.

In Illinios, even if a transaction is not consummated, the broker may still be entitled to a commission if the seller:

• has a change of mind and refuses to sell,
• has a spouse who refuses to sign the deed prior to or at closing,
• has a title with uncorrected defects,
• commits fraud with respect to the transaction,
• is unable to deliver possession within a reasonable time,
• insists on terms not in the listing.
• has a mutual agreement with the buyer to cancel the transaction.

A listing broker generally is said to be "due a commission" if a sale is not consummated becahse of the seller's default.

Sales Force Compensation

The amount of compensation a saleperson receivs from a sale is shaped by mutual agreement between the salesperson and his or her sponsoring broker and enumerated in the employment contract.

...

In Illinois, real estate licensees could complete preprinted formed that are in general usage...but only attorneys can legally prepare additional clauses and conveyancing documents.

Antitrust Violations

• Price fixing (with respect to commissions & fees)
• Group boycotting
• Allocation of customers or markets
• Tie-in arrangements

Top

6: Broker Employment Contracts

Types of Listing Agreements

1. Exclusive right to sell: ...if the property is sold while the listing is in effect, the selling must pay the broker a commission regardless of who sells the property.
2. Exclusive agency listing: ...the seller retains the right to sell the property without obligation to the broker...
3. Open (nonexclusive, general) listing : ...the seller is obligated to pay a commission to only the broker that successfully produces a ready, willing, and able buyer.

Special Listing Provisions

Multiples Listing. An MLS is a marketing organization whose broker members make their listing available for showing and sales through all other member brokers.

Net Listing. ...the seller receives a net amount of money from the sale, with the excess going to the listing broker as commission. In Illinois, NL are legal, but not recommend because of the inherent conflict between the broker's fiduciary responsibility to the principal-seller and his profit motive. Further, NL violates the REALTOR code of ethics.

Option Listing. ...gives the broker the right to purchase the listed property at some point in the future (usually at the end of the listing period).

Expiration of Listing Period

Automatic Extension. Failure to specify termination date in alisting agree is grounds for suspension or revocation of a real estate license in Illinois. Illinois law forbis automatic extension clauses.

Broker Protection Clause (Safety Clause). ...provides that the seller will pay the listing broker a commission if, within a specified period of time after the listing expires the owner transfers the title to someone who saw the property while it was listed with the broker.

The Listing Process

Pricing the property

Comparative Market Analysis (CMA) extimates market value as likely to fall within a range of values; a formal appraisal (performed by a licensed appraiser) indicates a specific market value.

Listing Contract Form

Illinois law required that the follwoign disclosures be included with listing contracts

• disclosure of material fact (fact on which a reasonable person would base a contractual decision)
• disclosure of interest (in the property, and of real estate licensure)
• disclosrue of special compensation (e.g. commission and kickbacks from financial institutions)
• earnest money and purchaser's default. If the listing provides that the seller will not receive that earnest money deposit if the buyer defaults, this fact must appear in larger print.
• disclosure of property condition. A property disclosure must be given to the buyer before an offer is made and accepted; or the buyer will have three days in which to rescind the contract.

All written exclusive listing agreements must include:

• the list price of the property
• the agreed basis of or amount of commission and the time of payment
• the time duration of the agreement
• the names of the broker and seller
• the address or legal description of the property

Types of Buyer Agency Agreements

1. Exclusive buyer agency agreement (exclusive right to represent). ...the buyer is legally bound to compensate the agent whenever the buyer purchases a property of the type described in the contract.
2. Exclusive agency buyer agency agreement (also nonexclusive buyer agency). ...the broker is entitled to payment only if s/he located the property the buyer ultimately purchases.
3. Open buyer agency agreement. ...permits the buyer to enter similar agreements with an unlimited number of brokers.

...if an agent receives compensation from more than one source in a transaction, it always needs to be disclosed to the involved parties.

Termination of Broker Employment Contracts

An employment contract may be cancelled for the following reasons:

• fulfillment of the agreement's purpose
• expiration of the agreement's term without a successful transfer
• destruction of the property or change of its use by some force outside the client's control (such as a zoning change or condemnation by eminent domain)
• transfer of the title to the property by an operation of law (such as in the case of the client's bankruptcy)
• mutual agreement by the broker and the client to end the agreement, or if one party unilaterally ends it (in which case that party may be liable to the other for damages)
• death or incapacitation of either the broker or the client
• breach of contract on either the part of the broker or the client (n which case the breaching party may be liable to the other for damages).

Top

7: Interests in Real Estate

Fee Simple Estate

• ..of limited duration, said to "run forever."
• On death of owner, passes to owner's heir(s) (hence, estate of inheritance), or as provided by will
• Two divisions:

Fee simple absolute. Highest interest in real estate recognized by law, only restricted by certain public and private restrictions (such as zoning laws and restrictive covenants initiated by builders or by owner associations.

Fee simple defeasible. A qualitied estate--that is, an estate subject to the occurence of nonoccurrence of some specified event. Two types of defeasible estates exist:

• those subject to a condition subsequent--i.e., the new owner must not perform some action or activity. The former owner retains a right of renetry so that is the condition is broken, the former owner can retake possession of the property throutgh legal action;
• those qualified by a special limitation (fee simple determinable)--i.e., the estate ends automatically on the current owner's failure to comply with the limitation . The former owner retains a possibility of reverter. There is no need for legal action.

Since the right of reentry and possibility of reverter can happen only in the future, they are considered future interests.

Life Estates

A life estate is a freehold estate limited in duration to the life of the owner or the life of some other designated person or persons. Life estates are not inheritable; it passes to future owners according to the prearranged provisions of the life estate. Two general types of life estates:

Conventional Life Estate

• created intentionally by the owner either by deed at the time the ownership is transferred during the owner's life or by a provision of the owner's will after his/her death.
• estate is converyed to the "life tenant," who has full enjoyment of the ownership for the duration of his or her life
• at the death of the life tenant, the estate ends and its ownership passes often as fee simple to another designated individual

Life Estate Pur Autre Vie ("for the life of another")

• a life estate based on the lifetime of a person other than the life tenant.

Legal Life Estate

• not created voluntarily by owner, but rather established by state law
• becomes effective when certain events occur
• examples include dower, curtesy, and homestead
  • Community property states have never used dower and curtesy, which provide that the nonowning spouse has a right to 1/2 or 1/3 interest in the real estate for the rest of his/her life, even if the owning spouse wills the estate to others. Illinois (a marital property state) has abolished the common-law concept of dower and curtesy in favor of the Uniform Probate Code.
  • Homestead is a legal life estate in real estate occupied as the family home. The home (or at least part of it) is protected from creditors during the occupant's lifetime. The amount of an homestead estate that an individual is entitled to in his/her Illinois residence is $7500. Further, a family can only have one homestead at any one time. The exemption continues after the death of the individual for the benefit of the surviving spouse as long as she or he continues to occupy the homestead residence, and for the benefit of all children living there until the youngest reaches 18 years of age.

Encumberences

A claim, charge, or liability that attaches to real estate; a right or interest held by someone else other than the fee owner of the property that affects title to real estate. An encumberance may lessen the value or obstruct the use of the property, but it does not necessarily prevent transfer of title. Two general classifications:

1. Encumberences that affect title (liens--usually monetary charges), and
2. Encumberances that affect the use of physical condition of the property (restrictions, easements, licenses and encroachments)

• Lien. A charge against a property that provides security for a debt or an obligation of the property owner. (Includes real estate taxes, mortgages and trust deeds, judgements, and mechanics' liens)
• Deed restrictions (also covenants, conditions, and restrictions, CC&R). Private agreement that affect the use of land.
• Easements. The right to use the land of another for a particular purpose. An easement may exist in any portion of the real estate (including the airspace above or a right-of-way across the land). An appurtenance easement is annexed to the ownership one parcel and allows the owner the use of a neighbor's land. For an AE to exist, two adjecent parcels of land must be owned by two different parties. The parcel over which the easement runs is called the servient tenement and the neighoruing parcel that benefits is called the dominant tenement. An easements is commonly created by a written agreement between parties that establish the easement right. However, an easement can be created by longtime usage, as in an easement by prescription, by necessity, or by implication.
  • Easement by prescription. An appurtenant easement that results from a claimants use of another's land for a certain period of time. The claimant's use must have been continuous, exclusive, and without the owner's approval ("adverse"). The use must be visible, open, and notorious; i.e. the owner must have been able to learn of it. To establish an easement by prescription in Illinois, the use must be adverse, exclusive , under claim of right, and continuous and uninterrupted for a period of 20 years.
  • Easement by necessity. An appurtenant easement that arises when an owner sells part of his/her land that has no access to a street or public way except over the seller's remaininig land. An easement by necessity is created by court order. [All owners have the right of ingress (entrance) and egress (exit) with respect to their property--they cannot be landlocked].
  • Easement by implication.
  • Easement in gross. An individual interest in, or right to use someone else's land. Commercial easements in gross (such as the right of the power company to rule lines over someone else's land) may be assigned, conveyed, or inherited... Personal easements in gross are usually not assignable and usally terminate upon the death of the easement owner.
  • Easement by condemnation. Aquired for a public purpose, through the right of eminent domain. The owner of the servient tenement must be compensation for any loss in property value.
  • Terminating an easement. an easement may be ended
    • when the purpose for whcih the easement was created no longer esists,
    • when the owner of either the dominat or servient tenement ecome the owner of both properties (termination by merger),
    • by releast of the right of easement to the owner of the servient tenement,
    • by abandinment of the easement,
    • by nonuse of a prescriptive easement,
    • by adverse possession by the owner of the servient tenement,
    • by desctruction of the servient tenement (e.g. the demolition of a "party wall"),
    • by lawsuit ("action to quiet title") against someone claiming an easement, or
    • by property conversion (e.g. residential to commercial)

Licences. Personal privilege (not right) to enter the land of another for a specific purpose.

Encroachments. Occur when all or part of a structure illegellay estends beypnd the land of its owners or beyond the legal building lines.

The Impact of Governemtn of Real Estate: Govenrment Powers

Police Power. The power to enact legislation (enabling acts) to preserve order, protect the public health and safety, and promote the general welfare of its citizens. A states police power is generally used to enact environmental protection laws, zoning ordinances, building codes, etc.

Eminent Domain. The right of the governemtn to acquire privately owned real eastat for public use or purpose. Condemnation is the process by which the government exercies this right. However:

• the proposed use must be for the public good
• just compensation must be paid to the owner
• the right of the property owner must be protected by the due process of law

Taxation. A charge of real estate to raise funds to meet the public needs of a government.

Escheat. (Not a limitation on ownership), an avenue by which the state may acquire privately owned real or personal property when an owner dies without a will or any identifiable heirs. In Illinois, real property will escheat to the county in whcih it is located.

Nature & Water: Rights & Restrictions

Riparian Rights. Common-law rights granted to owners of land along the course of a river, stream, or similar body of flowing water. An owner of a land that borders a nonnavigable waterway owns the land under the water to the exact center of the waterway. Land adjoining commecially navigable rivers, however, usually is owned to the water's edge, with the state holding the title to the submerged land.

Navigable waters are considered public waterways on whcih the public has an easement or right to travel.

Littoral Rights. Rights that owners whose land borders commercially navigable lakes, seas and oceans. Owners with littoral rights enjoy unrestricted use of available waters, but own the land adjacent to the water only up to the mean (average) high-water mark.

Littoral and riperian rights are appurtenent (attached) to the land.

Accretion. Increases in land resulting from the deposit of soil by water action. (Such deposits are called alluvion or alluvium).

Reliction. Land acquired as a result of recession of water.

Erosion. Loss of land through the gradual and imperceptible wearing away of land by natural forces such as wind, rain, and flowing water.

Avultion. A rapid change in land; the immediate removal or shifting of the lands surface (even hundreds of feet below the surface) by an act of nature. (A major earthquake of mudslide could cause a land holding to become worthless within seconds.)

Doctrine of Prior Appropriation

"... the right to use any water, with the exception of limited domestic use, is controlled by the state rather than by the landowner whose property lies adjacent to the water." To secure water rights in prior appropriation states, a landowner must demonstrate that she/he plans a beneficial use for the water, such as crop irrigation.

Top

8. Forms of Ownership in Real Estate

Ch. 7 covered different interests in real estate (fee simple, life estates, easements); Ch. 8 will cover the different forms in which these interests may be held.

A fee simple estate may be held in three basis ways:

1. in severalty (title is held by one individual)
2. in co-ownership, also concurrent ownership (title is held by two or more individuals)
3. in trust (title is held by a third individual for the benefit of another)

Ownership or Tenancy in Severalty

...

Co-ownership

Individuals may co-own property as:

• tenants in common,
• joint tenants,
• (if married), tenants by the entirety, or
• they may co-own community property in states recognizing community property.

Tenancy In Common

• each tenant holds an undivided fractional interest in the property (e.g. a tenant in common may own 1/2 or 1/3 interest in the property, but the property is not divided into a specific half or third); The co-owners have unity of possession--it is the ownership interest, not the property that is divided.
• the only kinds of personal co-ownership where the owners can have unequal shares.
• tenants in common also hold their ownership interests in severalty--each can sell, convey, mortgage, transfer, or will his/her interest; the consent of the other co-owner(s) is not needed. Of course, no individual tenant may transfer the ownership of the entire property.
• In Illinois, tenancy on common is the "default" form of co-ownership. Special wording is necessary to give the owners joint tenancy or tenancy by the entirety.

Joint Tenancy

• co-owners have unity of ownership--title is held as though all owners collectively constitute one unit
• includes right of survivorship--the death of one joint tenant does not terminate the ownership unit, but reduces by one the number of peope who make up the unit (the surviving tenant(s) acquire the interest of the deceased tenant). When one joint tenant remains, that tenant then holds title in severalty.
• can be created only by the intentional act of conveying a deed or giving the property by will. can not be implied or created by operation of law.
• four "unities" are requried to create a joint tenancy (PITT):
  1. unity of possession--all joint tenants hold an undivided right of possession
  2. unity of interest--all joint tenants hold equal ownership interests
  3. unity of time-- all joint tenants acquire their interest at the same time
  4. unity of title-- all joint tenants acquire their interest by the same document

These four "unities" combine to create the unity of ownership.

• A joint tenency is destroyed when any one of the four unities is terminated. Specifically, a joint tenant may unilaterally sever the tenancy by conveying to himself/herself as a tenant in common even without the consent of the co-owners. The joint tenancy of the other tenants, however, remain unaffected. That is, the party in question becomes a tenant in common with the other joint tenants.

Ownership by Married Couples: Tenancy by the Entirety

• each spouse has an equal, undivided interest in the property (the term, "entirety" refers to the fact that the owners are considered one indivisible unit; married couples, here, are viewed as one legal entity).
• have right of survivorship
• (during their lives) can convey title only by deed sighed by both parties
• one party may not convey 1/2 interest; generally, there is no right to partition or divide
• a lawsuit against one spouse will not put a lien against the house
• may be terminated by (J's DAD)
  • a court-ordered sale of the property to satisfy a judgement against the husband and wife as joint debtors
  • the death of either spouse (the survivign spouse becomes the sole owner in severalty)
  • agreement between both parties (through execution of a new deed)
  • divorce (which leaves the parties as tenants in common)

Community Property Rights

Illinois is a marital rather than community property state.

• Separate property: real or personal property owned solely by either spouse before th emarriage, or acquired by gift or inheritance during the marriage, as well as property purchased with separate funds during the marriage...
• Community property: all nonseparate property, real and personal, acquired by either spouse during the marriage. Any conveyances or encumberance of community property required the signature of both spouses.(Community law does not provide for automatic right of survivorship; when one spouse, the survivor automatically owns 1/2 of the community property; the other 1/2 is disposed of according to the will of the deseased spouse... If there is no will, the 1/2 is inherited by the surviving spouse.)

Illinois breaks property into two major categories based on marital status:

• Marital property: husband and wife acquire joint rights to property acquired after the date of the marriage and for the duration of the marriage--all of which is divided between the two parties in the event of a divorce;
• Nonmarital property: property acquired prior to marriage or by gift or inheritance at any time, even during the marriage. However, if nonmarital property is commingled with marital property, a presumption of transmutation is created: the resulting "mixed" property is presumed to be marital property.

Trusts

A device by which one person transfers ownership of property to someone else to hold or manage for the benefit of a third party. Comprises of:

• the trustor--the person who creates the trust, the benefactor
• the trustee--the party who hold legal title to the property (often a financial institution, like a bank) and is entrusted with carrying out the trustor's instruction regarding the purpose of the trust; a fudiciary
• the beneficiary--the person who benefits from the trust

RE can be owned under living or testamentary trusts and land trusts. It can also be held by a group of investors in a real estate investment trust (REIT).

• Living Trust--created by agreement during the property owner's lifetime (e.g. to cater for the owner in his/her retirement)
• Testamentary Trusts--established by will after the owner's death (e.g. for the benefit of a benefitiary)
• Land Trust--title to the property is conveyed to a trustee, and the beneficiary interest longs to the benefitiary; however, the trustor is often the beneficiary; continues for a definite term, such as 20 years.

Ownership of RE by Business Organisations

Partnership

• Uniform Limited Partnership Act (ULPA) permits RE to be held in a partnership name...with profits and losses passing through to the partners, whose individual tax situation determines the tax consiquences

Corporations

• A legal entity, and hence, can own RE in severalty
• S Corporation avoid double taxation

Syndicates and Joint Ventures

• S~: two or more people ror firms joined together to make and operate a RE investment; not a legal entity in itself, but can hold title in the different ownership forms including co-ownership (tenancy in common, joint tenancy), partnership, trust, or corporation.
• JV: two or more people or firm carry out a single business project.

LLC

• Combines the most attractive features of limited partnerships (tax advantage) and corporations (limited liability) without the complicated requirements of S Corporations or the restrictions of limited partnerships.

Condos, Co-ops, & Time Shares

Condos

• Each owner holds a fee simple interest as well as a specified share of the undivided interest in the remainder of the building and land, the common elements (including courtyears, lobbies, elevators, etc.; common elements are held as tenants in common--each condo owner has a fractional, undivided interest in these common locations).
• Creation governed by the Illinois Condominium Property Act.
• Termination of condo status by unanimous consent of all owners and all lienholders... owners become tenants in common.

Co-op Ownership

• Corporation holds title to land and building; shareholders in stock occupy the units (each holding a proprietary lease for the life of the corporation)
• Stock (proprietary lease) is personal property; co-op tenant owners do not own real estate, but interest in the corporation that owns the building
• Unlike with condos where the governing association has the authority to impose a lien on the title held by a unit owner who defaults on maintenance payments, the burden of any defaulted payments in a co-op falls on the remaining shareholders.

Time-Share Ownership

• Also called interval ownership, permits multiple purchasers to buy interests in RE, usually a resort property, each receiving the right to use the property for a certain period of time
• Regulated by the Illinois Real Estate Time-Share Act of 1999
• A time-share estate includes a real property interest in condominium ownership; a time-share use is a contract right in which a third party (often the developer) retains ownership of the real estate.
• A time-share estate is a fee simple interest; however, the owner's occupancy and use of the property are limited to the contractual period purchased.
• A time-share use does not convey a fee simple interest; rather, it consists of the right to occupy and use the facilities for a certain number of years. At the end of that time, the owner's rights in the property terminates.

Top

9: Legal Descriptions

A description is "legally sufficient" if it allows a competent surveyor to locate the parcel. This means that the surveyor must be able to define the exact boundaries of the property.

Methods of Describing Real Estate

Metes-and-Bounds Method

These descriptions rely on a properties physical features to determine the boundaries and measurement of the parcel. Metes-and-bounds descriptions start at a POB (point of beginning) and refer to linear measurements, natural and artificial landmarks (called monuments), and directions, and end back at the POB so that the tract being described is completely enclosed. Measurements often include the words "more of less" because the location of the monument is more important than the distances given in the wording.

Rectangular (Government) Survey System

Established by congress in1785 to standardize the description of land acquired by the newly form federal government. The system is based on two intersecting lines: principal meridians and base lines. Locations in Illinois are described by their relation to one of three meridians: the Second Principal Meridian located in Indiana, the Third Principal Meridian beginning at Cairo, and the Fourth Principal Meridian beginning near Beardstown. Note that not all property is described by reference tot he nearest principal meridian. There are no options with regard to the meridian and baselines used to describe a particular property; once made, a legal description will not change. The Rectangular (Government) Survey System is further divided into townships, ranges, sections, and quarter-section lines.

• Township tiers. Lines running east and west, parallel to the base line and six mile apart are called township lines. They form strips of land called township tiers.

• Ranges. The land of either side of a principal meridian is divided into six-mile-wide strips by lands running north and south, parallel to the meridian. These north-south strip of land are called ranges

• Township squares. When the horizontal township lines and the vertical range lines intersect, they form squares. These township squares are the basic units of the rectangular survey system. Townships are 6 miles square and contain 36 square miles (23,040 acres).

• Sections. Each township contains 36 sections, numbered 1 through 36 in a backward-S fashion. Each section is one square mile, or 640 acres. By law, each section numbered 16 is set aside for school purposes. Sections are often divided into halves (320 acres) and quarters (160 acres), so that a legal description might be written as: SE1/4 of SW1/2 of NE1/4. (A semicolon or the word "and" in a legal description indicates two parcels of land with different legal descriptions that are being tallied together).

• Correction lines. Range lines are parallel only in theory. Owing to the curvature of the earth, range lines gradually approach each other. To compensate, every fourth township line, both north and south of the base line, is designated as a correction line.

• Fractional sections and government lots. Undersized and oversized sections are classified as fractional sections.

Lot-and-Block System (or Recorded Plat)

A lot-and-block survey is performed in two steps: (1) A large parcel of land is described either by metes and bounds or by rectangular survey, then, (2) it is broken into smaller parcels. For each parcel described under the lot-and-block system:

• the lot refers to the numerical designation or any particular parcel, and
• the block refers to the name of the subdivision under which the map is recorded.

Survey

• Survey--states the property's legal description
• Survey sketch--shows the location and dimension of the parcel
• Spot Survey--shows the location, size, and shape of buildings on the lot (that is, in addition to the location and dimentsion of the parcel)

Legal descriptions, once recorded, affect title to RE, and hence should only be prepared by a professional surveyor. Further, LDs should be copied with extreme care as an incorrectly worded legal description in a sales contract could result in a conveyance or more or less land than the parties intended

Measuring Elevations

• An owner may subdivide the air above his or her land into air lots. Air lots are composed of the airspace within specific boundaries located over the parcel of land.
• Datum--a point, line, or surface from which elevations are measured or indicated. (For the purposes of the US Geological Survey, datum is defineds as the sea level at New York Harbor).
• Bench Marks--permanet reference points that have been established throughout the US used, principally, for marking datums.

Land Units & Measurements

Top

10: Real Estate Taxes & Other Liens

Liens

• A charge or claim against property that is made to enforce the payment of money
• For most RE purchases involving loans, the RE itself is the security, or collateral that backs the loan
• The RE purchase holds title, but the bank or lender has strong rights with regard to the collateral, if the loan is not paid
• The security (or collateral) that is in the form of RE is called a lien
• Any valid lien must be paid off at or before closing--befire any leftover equity is paid to the seller.
• A lient represents an interest in property; however, it does not constitude ownership of the property. All liens are encumberances; but not all encumberances are liens

Types of Liens

• Voluntary Lien. Created intentionally by the property owner's action (such as when he/she takes out a loan)
• Involuntary Lien. Created by law, and can be either statutory or equitable
  • Statutory lien: created by statute; (a real estate tax is an involuntary, statory lien)
  • Equitable lien: created when parties agree in writing that a certain property will be held as security for a debt or other obligation; (a judegement lien applies to all real and personal property of a debtor. It is created by a court to ensure the payment of a judgement)

  Liens can also be classified as:

• General lien--affects all property, both real and personal, of a debtor; includes judegements, estate and inheritance taxes, decedent's debt, corporate franchise tax, and IRS taxes. A lien attaches to real property at the moment it is filed, but does not attach to personal property until it is levied on or seized by the sherrif.
• Specific lien--secured by a particular property and affects only that property; includes mortgage liens, we have tax liens, liens for special assessments & utilities, and mechanic's liens.

Effect of Liens of Title

• Effort to refinance or create an equity line of credit is impaired
• may drastically reduce the value of the RE is a sale transaction

Priority of Lients

• "First come, first served" ("first is time, first in right")
• Exception: RE taxes and special assessments take priority (followed by mechanic's liens) over other liens
• Subordination agreements: written agreemnet s between lienholders to change the priority of mortgage, judegement, and other liens.

Real Estate Tax Liens

Two types of RE taxes: General (ad valorem) and special assessment (or improvement) taxes.

General Tax (Ad Valorem, according to value, Tax)

• made up of taxes levied on RE by governemtal agencies and municipalities based on the value of the property being taxed
• these are specific, involuntary, statutory liens
• Properties that are used for tax-exempt purposes (like schools, parks, hospitals, educational institutions, cities, counties, states, and federal governements, etc.) are generally exempt from general RE taxes
• state laws might also reduce the RE tax bills for certain property owners or land users (such as senior citizens) or certain industrial or commercial properties (as an incentive to attract investment in such industries)
• Other exemptions:
  1. The Homeowner's Exemption (applies to owners of single-family homes, condos, co-ops, and one- to six-unit apartment buildings... The amount of the exemption is the current year's equalized assessed value up to a maximum of $3500 ($4500 in cook county)
  2. The Senior Citizen's Homestead Exemption (available to homeowners over 65... The exemption amount ($2000) is subtracted from the property;s equalized assessed value before tax rate is applied
  3. The Senior Citizens Assessment Freeze Homestead Exemption (allows Illinois seniors to freeze their assessed valuation for the rest of their lives once they've turned 65, if the household income does not exceed $40000. Also, seniors with income lower than $25000 may defer all their property taxes during their lifetime.
  4. The Homestead Impovement Exemption (allows any Illinois homeowner who has recently improved his or her home to forestall an increase in the home's overall assessed value for up to 4 years up to an improvement value of $45000. If the value of the addition exceeds $45000, the homeowner will be assessed for the overage without the delay period

In all counties except Cook, real property is assessed at 33% of fair market value. Depending on how the property is classified, real property in Cook county is assessed based on a sliding scale of percentages of fair market value from 16% to 36%.

Equalization

In some jurisdictions, when it is necessary to correct inequalities in statewide tax assessments, an equalizatio factor is used to achieve uniformity. An euqlization factor may be applied to raise or lower assessment in a particular disctict or county.

To determine taxes: (1) determine assessed value--usually 1/3 market value; (2) "equalize assessed value; (3) deduct any exemptions; (4) multiply adjusted assessed value by tax rate to get tax owed.

Budgets and Tax Rates

Suffice it to say that: Proposed expense ÷ Total assessed property values = Tax Rate

Appropriation

The way a taxing body actually authorizes the expenditure of funds and provides for the sources of the funding. A tax levy is the formal action taken to impose the tax, usually by way of a vote of the taxing district's governing body.

In Illinois general RE tazes are levied annually for the calendar year and become a prior first lien, superior to all other liens, on January 1 of that tax year. However, they are not due and payable until the following year. General RE taxes are payable in two equal installments in the year after they are levied: one-half by June 1 and the second hald by September 1 (in cook county March 1 and August 1, under an accelerated billing procedure) Taxes in Illinois are paid in arrears. The payment due dates are also called penalty dates, after which a 1.5%-per-month penalty is added to any unpaid amount.

Enforcement of RE taxes

RE taxes must be valid to be enforceable. To be valid, they must be:

• levied properly,
• used for a legal purpose
• applied equitably to all property

When a property owner failes to pay taxes on RE in Illinois, the propety may be sold in one of three ways:

• At an annual tax sale
• At a forfeiture sale
• At a scavenger sale

Annual Tax Sale

• If the taxes on a property have not been paid by the due date of the second installment, the county collector can enforce the tax lien and request that the circuit court order a tax sale. The court order would allow only the sale of the tax lien, not the property itself.
• Prior to the sale, the owner and any other party with legal interest in the RE may redeem the property and steo the sale by paying the delinquent taxes, applicable interest, and publication costs.
• If the property goes into (tax) sale, a third party who offers to pay all outstanding taxes, interest, publication costs, processing charges, and the county treasurer'd indemnity fund fee becomes the purchaser
• If competitive bidding resluts, the bid will be for the rate fo interest that will be accepted by the bidder in case of redemption during the first 6 months of the redemtion period.
• Owners and persons with legal interest and/or their agents are not allowed to bid at the tax sale.
• Upon payment (cash, cashier's check, or certified check) the purchaser receives a certificate of purchase which will ripen into a tax deed if no redemption is made within the statutorily prescribed period (2 years).
• If no redemption is made within the statutorily prescribed period, the tax sale purchase is required o give notice to the delinquent owner and other parties who hold any interest in the property before applying for a tax deed. A tax deed must be recorded within 1 year after the expiration of the redemption period or it becomes null and void.

Forfeiture Sale

• If there are no bids on a property at the annual tax sale, the property is forfeited to the state, althought the title does not change
• the owner still may redeem the property after forfeiture by paying delinquencies, publication costs, and interest
• on the other hand, anyone who wants to purchase the property for the outstanding taxes may make aplication to the county
• if this happens, and the owner does not claim the property within 30 days of notification, the applicant will be issued a certificate of purchase once he or she pays the outstanding taxes, interest, and other fees
• if redemption is later made by the original owner, the certificate holder must be compensated based on 12% for each 6 months the certificate was held.

Scavenger Sale

• If the taxes have not been paid on a property for two years or more, the property may be sold at a scavenger sale.
• (the county must go through the same court processes as it would for tax sales and receive an order of sale)
• the successful bidder at this sael si one who is willing to pay the highest cash price for the property.
• the buyer is not required to pay the tax lien, but must pay current taxes
• former owners may not bid on their delinquent properties, either in person or through an agent, nor may a person who aleady owns property that is two or more years delinquent bid on the property
• redemption rights apply

In Illinois, geography affects which approach for enforcing tax liens is emphasized.

Special Assessments (Improvement Taxes)

• Taxes levied on RE to fund public improvements to the property (e.g. installation of paved streets, curbs, gutters, etc.).
• SA are always specific and statuttory but they can be either voluntary or involuntary liens.
• generally paid in equal annual installments (plus interest)... all installments can be prepaid to aviod future interest charges. The annual due date for assessment payments in Illinois is generally January 2.

Other Liens on Real Property

Mortgage Liens (Deed of Trust Liens)

• voluntary lien on RE given to a lender by a borrower as security for a RE loan

Mechanic's Lien

• specific, involuntary lien that gives security to persons or companies that perform labor or furnish material to improve real property
• attaches as of the date the work was ordered or the contract was signed by the owner
• In Illinois, contractors ... must file their lien notices within 4 months of completing the work. Further, the contractor's lien right expires two years after the completion of that contractor's work, unless he/she file suit within that time to enforce the lien.

Judgements

• general, involuntary, equitable lient on both real and personal property owned by the debtor
• an order issued by a court that finally settles and defines the rights and obligations of the parties to the lawsuit
• judgement covers only the county in which the judgement is issued; but creditor can submit judgement in other counties
• to enforce a judgement, the creditor must obtain a writ of execution, which directs the sherrif to seize and sell as much of the debtor's property as is necessary to pay both the debt and the expenses of the sale
• lis pendens (litigation pending): a notice of a possible future lien; recorded when their is a suit pending
• to prevent a debtor from conveying title to an unemcumbered RE while a court suit is being decided, a creditor may seek a writ of attachment, by which the court retains custody of the property until the suit concludes...

Estate and Inheritance Tax Liens

• (as well as debts of decedents) are general, statutory, involuntary liens that encumber a deceased person's real and personal property

Liens for Municipal Utilities

• specific, equitable, involuntary liens imposed on the property or an owner who refuses to pay bills for municipal utility services

Bail Bond lien

• a real estate owner who is charged with a crime for which he/she must face trial may post bail in the form of RE rather than cash; execution and recording of such a bail creates a specific, statutory, voluntary lien against the RE. (if the accused fails to appear in court, the lien may be enforces by the sherriff...)

Corporate Franchise Tax Lien

• general, statutory, involuntary lien created by corporate franchise tax levied by state government on corporations as a condition for allowing them to do business in the state

IRS Tax Lien

• general, statutory, involuntray lien (on all real and personal property) resulting from a person's failure to pay any portion of federal taxes, such as income or withholding taxes
• priority is based on date of filing or recording; it does not superceed previously recorded liens.

In Illinois, commercial brokers can place a lien on property in the amount of the commission they are entitled to receive for leasing as well as sales under a written listing agreement in the event that they are not paid for their services.

Top

11: Real Estate Contracts

A contract is a voluntary agreemetn or promise between legally competent parties, supported by legal consideration, to perform (or refrain from performing) some legal act. Hence, a contract must be

• voluntary
• an agreement or a promise
• made by legally competent parties
• supported by legal consideration (that is, supported by something of value that induces a party to enter into a contract)
• having to do with a legal act

Express or Implied Contracts

A contract may be:

• express when the parties show their intention in words (oral or written), or
• implied when the agreement of the parties is demonstrated by their acts and conducts.

Certain types of contracts including those for the sale of real property must be in writing to be enforceable.

Bilateral or Unilateral Contracts

• Bilateral: both parties agree to do something: one promise is given in exchange for another (e.g. RE contract)
• Unilateral: a one-sided agreement: one party makes a promise to induce the seond party to do something; the second party is not legally obligated to act. However, if the second party does comply, the first party is then obligated to keep the promise. (e.g. reward for assisting in the capture of a criminal; or, an option contract ro retain one's option to possibly make a purchase later).

Executed and Executory Contracts

• Executed: a contract in which all the parties have fulfilled their promises
• Executory: a contract in whcih one or more parties are yet to fulfill their promise

execute: the act of signing the contract

Essential Elements of a Valid Contract

1. Offer and acceptance ("mutual assent") between offeror and offeree
• (in cases where statute of frauds applies, offer and acceptance must be in writing);
• the terms of the offer must be definite and specific;
• proposing any deviation from the terms of the offer constittutes a rejection of the original offer and becomes a new offer (or counteroffer)
• the possibilities: acceptance (by offeree), counteroffer (by offeree), revocation (by offeror), rejection (by offeree)
2. Consideration: something of legal value offered by one party and accepted by another as an inducement to perform or refrain from performing an act
   • must be "good or valuable" between the parties
   • anything that has been bargained for and exchanged is legally sufficient to satisfy the requirementfor consideration
   • parties must agree to the consideration: no undue influence or fraud should take place
3. Reality of consent: a contract must be entered into as a free and voluntary act
   • each party must be able to make a prudent and knowledgeable decision without undue influence (a mistake, misrepresentation, fraud, undue influence, or duress deprives a person of that ability
4. Legally competent parties: All parties to the contract must have legal capacity: they must be of legal age and have enough mental capacity to understand the nature or consequences of their actions in the contract

Validity of Contracts

• valid: meets all the essential elements that make it legally sufficient or enforceable
• void: has no legal force or effect because it lacks some or all of the essential elements of a contract
• voidable: appears on the surface to be valid but may be rescinded or disaffirmed; a voidable contract is considered by the courts to be valid if the party that has the option to disaffirm the contract does not do so within a period of time prescribed by state law. A contract entered into under durress or intoxication, or as a result of fraud, mistake, or misrepresentation is always voidable by the compelled or defrauded party.

...leases or rental agreements signed by minors are enforceable because short term housing in considered a necessity and contract made by minors for what the law terms "necessaries" are generally enforceable.

• unenforceable: a contract that seems on the surface to be valid but cannot be used is court to force performance: the contract has no real legal impact in terms of forcing the paries to perform on the terms of the contract; an unenforceable contract is said to be valid between the parties.

While suit to force performance cannot be enforced in based on an oral contract, suit for damages are permissible.

Discharge of Contracts

Performance of a contract

• time is of the essense: a party that fails to perform on time is liable for breach of contract;

Assignment

• a transfer of rights or duties under a contract; rights may be assigned to a third party (an assignee), unless the contract forbids it
• obligations may also be assigned (or delegated), but the original party remains primarily liable unless specifically released

Novation

• the substitution of a new contract in place of the original (for instance, when a RE purchaser assumes the seller's existing mortgage loan, the lender may choose to replace the seller and substitute the buyer as the party primarily liable for the mortgage debt--in effect, replacing the old contract with a new one)

Breach of Contract

• a violation of any of the terms or conditions of a contract without legal excuse; the defaulting party assumes certain burdens, and the nondefaulting party has certain remedies
• statute of limitations: In Illinois, for oral contracts, 5 years; for written contracts, 10 years.

Termination of Contracts

• partial performance of the terms, along with written acceptance by the other party
• substantial performance (which might be enough to force payment with adjustment for any damages suffered by the other party)
• impossibility of performance (in which an act requried by the contract cannot be legally accomplished
• mutual agreement of the parties to cancel
• operation of law (such as the voiding of a contract by a minor), as a result of fraud, due to the expiration of the statute of limitations, or because a contract was altered without the written consent of all parties involved.

Contracts Used in the Real Estate Business

• employment contracts:
  • listing agreements
  • buyer agency agreements
• real estate sales contracts
• options
• land contracts or contracts for deed
• leases and escrow agreements

Contract forms: pertinent questions:

1. what to write in blanks
2. what to strike through
3. what additional clauses (riders or addenda)--appropriately initialled by all parties involved--to add

A licensee (who isn't a lawyer) may not advice a client of the legal significance or ramifications of any portion of the contract...doing so, or even as much as interpreting the language of a contract--constitutes the unauthorized practice of law.

A licensee may not request or encourage a party to sign a contract or document that contain blank spaces to be "filled in later..." Licensees are, further, required to give each person signing or initialing the contract and original "true copy" within 24 hours of the time of the signing.

A licensee may not prepare or complete any document subsequent to the sales contract or related to its implementation, such as a deed, bill of sale, affidavit of title, note, mortgage, or other legal instrument.

a licensee should not use a form titled "Offer to Purchase" if the form is intended to become a binding real estate contract. Illinois law requires that sales contracts indicate at the top "Real Estate Sales Contract" in bold type.

Regardless of what it is called, the document prepared and signed [by] the purchase is an offer to purchase real estate... as soon as it is accepted and signed by the seller, it ripens into a contract of sale.

Earnest Money Deposits

• customary deposit made by (potential) purchaser when making an offer to purchase RE--given as an intention of the buyer's intention to carry out the terms of the contract in good faith
• broker holds money in special account (in some areas, held in escrow by seller's attorney)
• if offer is not accepted, earnest money is returned immediately to the would-be buyer
• amount to be agreed on by the parties; "reasonable amount"; should be sufficient to
  • discourage the buyer from defaulting
  • help the seller feel comfortable in taking the property off the market, and
  • cover any expenses the seller might incur if the buyer defaults
• In Illinois...brokers...must establish special trust (or escrow) accounts for the deposit of funds entrusted to them in connection with real estate transactions;
  • should be non-interest bearing, unless the parties agree in writing to interest-bearing or if the deposit is required by law to accrue interest (usually if over $5000);
  • must notify OBRE of the name of the federally insured institution where the money is deposited;
  • all monies must be deposited into account no later than the end of the next business day following the acceptance of the real estate contract or lease;
  • broker record need to be produced within 24 hours of official request;
  • only broker (or authorized agent) may withdraw funds from the account
  • etc.
  • broker are strictly prohibited from comingling earnest monies with business or other funds

Owners or property managers of apartment building of 25 units or more must pay interest on security deposits held for at least 6 months.

I took the two seven-week pre-licensing courses at Harold Washington College in Fall 2003. I passed the final (exit) exam in December 2003.

Top of page

Contact Information

Page Last Updated: Saturday January 15, 2005 10:16 PM