Listing Agreement - No Deposit Receipt Contract: When Agency Is Executed +8California · Real Estate · English

A broker earns a commission when, within the life of the contract, the broker fulfills the terms of the agency. The buyer must be ready, willing and able on the owner's terms, shown only by an actual offer to purchase. Merely putting a prospect on the track of the property, or opening negotiations without inducing an offer, does not entitle the broker to a commission, even if the owner later sells to that same person on the original terms. The broker's obligation is to achieve a 'meeting of the minds' between buyer and seller on price and terms. If a valid contract is executed, the broker earns a commission even if the sale is never consummated.

• ✓Readiness and willingness can be shown only by an actual offer to purchase
• ✓Merely introducing a prospect or opening negotiations without inducing an offer does not earn a commission
• ✓If a valid contract is executed between buyer and seller, the broker earns the commission even if the sale never closes

Under an open listing, the broker who FIRST produces a ready, willing and able buyer per the listing is the procuring cause and is entitled to the commission. The broker must notify the principal upon finding a buyer. The seller may accept the first satisfactory offer. There is no duty on the seller to determine who the procuring cause was unless the seller has notice another broker was the procuring cause. A seller who accepts a nonconforming offer is ordinarily liable to pay the presenting broker under the contract's terms. The owner has a reasonable time to investigate the buyer's financial responsibility.

• ✓Under an open listing, the broker who first produces a ready, willing and able buyer is the procuring cause
• ✓The broker must notify the principal upon finding a buyer
• ✓The seller has no duty to ascertain the procuring cause unless on notice that another broker was procuring cause
• ✓The owner is entitled to a reasonable time to investigate the buyer's financial responsibility

A seller who negotiates the terms bears responsibility for the contract's form and contents. The broker does not lose the commission if, after producing a ready, willing and able buyer on the listing terms, an unenforceable contract results from the seller's mistake, inadvertence or ignorance. If the seller alone undertakes to complete the contract, the broker is discharged from responsibility and the seller is estopped to deny the commission on the ground that the contract is unenforceable (see B&P Code § 10147.5).

• ✓A seller who negotiates the contract bears responsibility for its form and contents
• ✓The broker keeps the commission even if the seller's mistake or ignorance makes the contract unenforceable
• ✓When the seller alone completes the contract, the seller is estopped from denying the commission based on unenforceability

If a buyer presented by Broker A declines but is later induced by Broker B (or another) to enter the contract on substantially the same terms, Broker A is NOT the procuring cause. However, Broker A IS the procuring cause if Broker A negotiated the 'meeting of the minds' even though the written contract was executed through Broker B's negotiations.

• ✓Broker A loses procuring-cause status if the buyer declines and Broker B later induces the same buyer
• ✓Broker A remains procuring cause if Broker A achieved the meeting of the minds even though Broker B executed the written contract

Under an open listing, competing brokers must be permitted to act freely and independently without interference by the owner. Where that freedom exists, the owner owes nothing to the unsuccessful agent. However, the owner may not avoid a commission by personally negotiating a contract with a prospect produced by the agent on substantially similar terms.

• ✓Under an open listing, the owner must allow competing brokers to act freely and independently without interference
• ✓The owner cannot avoid a commission by personally negotiating with an agent's prospect on substantially similar terms

California consolidated the licensing of non-depository lenders into single license categories.

• ✓Effective July 1, 1995, the Finance Lender Law created the California Finance Lender (CFL), replacing personal property brokers, consumer finance lenders, and commercial finance lenders
• ✓Effective January 1, 1996, the Residential Mortgage Lending Act (RMLA) created Residential Mortgage Lenders (RMLs)
• ✓CFLs and RMLs are licensed and regulated by the Department of Corporations (DOC); RMLs may not use an REB license for residential loans

A period of deregulation reduced regulatory restraints and leveled the playing field between state and federal institutions.

• ✓Depository Institutions Deregulation and Monetary Control Act of 1980
• ✓Depository Institutions Act of 1982 (Garn-St. Germain Act)
• ✓Alternative Mortgage Lending Act of 1982 preempted state law allowing state institutions to make loans under federal law

Re-regulation began with FIRREA in 1989 to address savings and loan industry losses.

• ✓FIRREA (1989) was designed to bail out the savings and loan/savings bank industry because FSLIC lacked reserves
• ✓OTS was structured as an office within the Fed, replacing the FHLBB
• ✓FSLIC was restructured into SAIF as a subset of the FDIC

Congress returned to deregulation with restructuring of deposit insurance funds.

• ✓FIRRA (Paper Reduction Act of 1996) terminated SAIF, transferring insurance function to BIF
• ✓Federal Deposit Insurance Act of 2006 merged BIF and other funds into the Deposit Insurance Fund (DIF), effective March 31, 2006
• ✓The 2006 Reform Act set capital reserve ranges of 1.15% to 1.50% (Designated Reserve Ratio/DRR)

California consolidated depository institution regulation into a new department in 1996.

• ✓In 1996 the DFI replaced the Department of Banking and the Department of Savings and Loans
• ✓DFI acquired oversight of state-chartered thrift and loans (industrial loan companies) and credit unions from the DOC

Unstable market forces reduced profitability of depository institutions as non-banks drew savings away with higher interest instruments.

• ✓By end of 1980, prime rate reached 21.5%
• ✓On September 14, 1981, FHA and VA single-family loan rates reached 17.5%
• ✓Non-banks used uninsured money market funds, commercial paper, and hedge funds to attract deposits

The Gramm-Leach-Bliley Act of 1999 repealed Glass-Steagall, allowing integration of banking, investment, and insurance activities.

• ✓Repeal allowed banks to integrate with investment bankers and insurance carriers and issue mortgage-backed securities and derivatives
• ✓A derivative is a financial instrument based on the future price movement of an underlying asset, not a current concomitant exchange
• ✓Common derivatives include swaps, futures, and options tradable on open markets

Foreclosure terminates the borrower's rights by selling the property. A mortgage without power of sale can only be foreclosed judicially. A deed of trust with power of sale may be foreclosed non-judicially by trustee's sale. Most California instruments include a power of sale.

• ✓Mortgage without power of sale requires judicial foreclosure
• ✓Deed of trust with power of sale permits non-judicial foreclosure (Civil Code 2924)
• ✓Judicial foreclosure required where anti-deficiency judgment is sought

California's one-action rule requires the lender to first foreclose the security before seeking a personal money judgment against the borrower. Exceptions exist where the security is legally worthless, nonexistent, or where fraud is involved, allowing a direct suit on the note.

• ✓Lender must first foreclose before seeking money judgment (CCP 726)
• ✓Only after security is exhausted may lender seek personal judgment
• ✓Exception for legally worthless security or fraud allows direct suit on note

Under a deed of trust, the trustor and certain others may reinstate the loan by curing default any time up to five business days prior to the trustee's sale (or postponed sale). Reinstatement requires paying delinquencies plus fees. A due-on-sale breach is a non-curable default.

• ✓Reinstatement allowed up to 5 business days before trustee's sale
• ✓Requires paying all delinquencies plus authorized fees and costs
• ✓Due-on-sale/further encumbrance breach is a non-curable default

Only the judgment debtor or successor may redeem after a judicial sale (junior lien holders eliminated effective July 1, 1983). Redemption is three months if sale proceeds satisfy the debt, or one year if insufficient. No redemption applies after a trustee's (non-judicial) sale.

• ✓3-month redemption if sale proceeds satisfy debt (CCP 729.030)
• ✓1-year redemption if proceeds insufficient
• ✓No redemption after trustee's sale; sale is absolute
• ✓No redemption if deficiency judgment waived/prohibited (CCP 726(e))

A deficiency judgment is a personal judgment for the difference between debt and sale proceeds. Non-judicial (power of sale) foreclosure automatically bars a deficiency judgment (CCP 580d). CCP 580b prohibits deficiency judgments for purchase money loans. Anti-deficiency protections are generally non-waiveable.

• ✓Non-judicial foreclosure bars deficiency judgment (CCP 580d)
• ✓Purchase money loans prohibit deficiency judgment (CCP 580b)
• ✓Anti-deficiency protections are non-waiveable public policy (Civil Code 1667)
• ✓Spangler v. Memel exception for subordinated purchase money construction loans

A first deed of trust foreclosure extinguishes junior liens (lien cleansing) except super liens. A junior lien holder becomes 'sold out.' A sold-out purchase money junior cannot sue for a money judgment, but a sold-out non-purchase money junior can pursue such a suit.

• ✓First deed of trust foreclosure extinguishes junior liens (lien cleansing)
• ✓Sold-out purchase money junior cannot sue for money judgment
• ✓Sold-out non-purchase money junior may sue on the note

A deed of trust has three parties: trustor (borrower), trustee (third party), beneficiary (lender). A mortgage with power of sale has mortgagor, trustee, mortgagee. Technical title conveyed to the trustee is a hypothecation/pledge; California is a lien theory state.

• ✓Deed of trust: trustor, trustee, beneficiary
• ✓Trustee reconveys title on payoff and can foreclose via power of sale
• ✓California is a lien theory not title theory state

Effective January 1, 2011, SB 931 amended CCP 580e so a lender holding a first deed of trust on a dwelling of no more than 4 units cannot obtain a deficiency judgment in a short sale if the lender agrees in writing to accept sale proceeds as payment in full. Fraud or waste allows damages.

• ✓First deed of trust lender cannot obtain deficiency in short sale if agreeing in writing (CCP 580e)
• ✓Applies to dwellings of not more than 4 units
• ✓Borrower fraud or waste allows lender to seek damages

A third-party guarantor may waive rights of subrogation, reimbursement, and defenses including CCP 580a, 580b, 580d, and 726. Waiver must be affirmatively made with language required by Civil Code 2856, known as the Gradsky waiver. A borrower cannot guaranty his own debt.

• ✓Guarantor may waive defenses under CCP 580a, 580b, 580d, 726
• ✓Waiver requires Civil Code 2856 Gradsky waiver language
• ✓Borrower/maker cannot guaranty his own debt

Financial Code 7460 authorizes depository institutions to seek fraud damages not exceeding 50% of actual damages, unless the property is owner-occupied and the loan is $150,000 or less (adjusted annually by CPI). Worthless security does not include marketplace/economic value declines.

• ✓Fraud damages limited to 50% of actual damages for depository institutions
• ✓Exception for owner-occupied residence with loan $150,000 or less
• ✓Worthless security excludes market or economic value declines

The traditional secondary market (Fannie Mae, Freddie Mac) dictated standard underwriting ratios. The front-end ratio (28%) is housing expenses (PITI plus HOA dues in CIDs) not exceeding 28% of gross monthly income. The back-end ratio (36%) includes housing expenses plus other long-term installment debt (more than 10 months remaining), revolving debt, and support obligations, not to exceed 36% of gross monthly income.

• ✓The front-end ratio limits housing expenses (PITI) to 28% of gross monthly income
• ✓The back-end ratio limits total monthly obligations to 36% of gross monthly income
• ✓Long-term installment debt is defined as obligations with more than 10 months of payments remaining
• ✓In restructuring existing debt, an acceptable front-end ratio is as much as 38%

The underwriter assesses risk and recommends whether to approve the loan, ensuring compliance with laws and lender policies. The analysis evaluates the borrower's capacity/ability and willingness/desire to repay, plus the adequacy of collateral. The loan may be approved, declined, or closed for incompleteness.

• ✓The underwriter evaluates both borrower capacity (ability) and willingness (desire) to repay
• ✓The underwriter ensures compliance with applicable laws and lender policies
• ✓A loan file may be closed for incompleteness if required documentation is not provided

Fannie Mae abandoned separate housing ratios in favor of a total benchmark debt ratio of 36% to 38%, considered with other factors in a comprehensive risk assessment. A ratio less than 30% decreases overall risk; a ratio over 42% increases overall risk. Net available income for general obligations and living expenses (taxes, food, utilities, transportation) is also considered.

• ✓The benchmark ratio is 36% to 38% considered as a guideline with other factors
• ✓A ratio under 30% may decrease risk; a ratio over 42% may increase risk

The credit report measures the borrower's willingness/desire to repay. Most lenders rely on credit scores summarizing the borrower's credit profile. A Notice of Default, bankruptcy, or judgment for non-payment will likely require a letter of explanation. Scores range from 300–850, with higher scores representing lesser risk.

• ✓Credit scores range from 300 to 850, with higher scores representing lesser risk
• ✓A Notice of Default, bankruptcy, or judgment will likely require a letter of explanation
• ✓The credit report measures the borrower's willingness/desire to repay

Fannie Mae automated underwriting through Desktop Underwriter (DU), a knowledge-based tool that assesses risk and determines eligibility for Fannie Mae purchase. MLBs/MLOs access DU through Desktop Originator (DO) for point-of-sale decisions. Scores rely on three national repositories: Experian, TransUnion, and Equifax. Freddie Mac offers Loan Prospector (LP) operating similarly.

• ✓Credit scores derive from three repositories: Experian, TransUnion, and Equifax
• ✓Fannie Mae uses Desktop Underwriter (DU); MLOs access it via Desktop Originator (DO)
• ✓Freddie Mac's automated system is Loan Prospector (LP)

Statistical analysis suggests one of 39 consumers scoring 660–679 will become 90+ days late. A score of 700 or higher is very good and qualifies for most programs. General benchmarks used are 620, 650, and 680. A score below 650 likely results in a higher interest rate; a score above 680 likely results in a lower preferential rate.

• ✓A credit score below 650 will likely result in a higher interest rate
• ✓A credit score above 680 will likely result in a preferential lower interest rate
• ✓General benchmarks used by lenders are 620, 650, and 680

TILA/Reg Z disclosures may be made in a language other than English if made available in English upon the borrower's request (this English-on-request rule does not apply to advertisements under 226.16, 226.24, 226.27). Under California law, when a transaction is negotiated in Spanish, Chinese, Tagalog, Vietnamese, or Korean, disclosures and transactional documents must be provided in that language.

• ✓Non-English disclosures allowed if English version is available on borrower request
• ✓English-on-request rule does not apply to advertisements under 226.16, 226.24, 226.27
• ✓California Civil Code 1632 requires documents in the negotiation language: Spanish, Chinese, Tagalog, Vietnamese, or Korean

A security agreement creates a security interest in personal property, analogous to how a trust deed or mortgage encumbers real property. To perfect that interest against other creditors and purchasers, a Financing Statement (UCC-1) is usually filed. The Financing Statement should not be confused with the security agreement itself.

• ✓The security agreement creates the security interest; the Financing Statement (UCC-1) perfects it
• ✓A security interest is perfected when it has attached and been properly filed with the appropriate filing officer
• ✓A written security agreement signed by the debtor and describing the collateral is usually required unless the collateral is a pledge in the secured party's possession

A security interest attaches when three conditions are met, and once perfected, the secured party's interest is protected against the debtor's other creditors. Perfection generally requires attachment plus proper filing.

• ✓A security interest attaches when: the parties agree it attach, value has been given, and the debtor has acquired rights in the collateral
• ✓Perfection requires attachment plus proper filing with the appropriate officer (Secretary of State or county recorder)
• ✓Once perfected, the secured party's interest is protected against the debtor's other creditors

Agents in transactions involving both personal and real property must understand personal property transfer/encumbrance. Because it is often difficult to determine if an item is a fixture, obligations should be secured by both a trust deed/mortgage and a personal property security instrument (mixed security). Antideficiency limits differ between real and personal property foreclosures.

• ✓Because fixture status is often unclear, use both a trust deed/mortgage and a personal property security instrument (mixed security)
• ✓Code of Civil Procedure Sections 580(b), 580(d) and 726 prevent or limit deficiency judgments in real property foreclosure
• ✓Unless expressly stated in a contract, no antideficiency limitation exists in a personal property foreclosure

Business opportunity brokers are routinely involved in personal property transactions which must satisfy the Bulk Sales Law (UCC Division 6) and secured transaction statutes (UCC Division 9). Business assets are commonly used as collateral to create a security interest in the seller or lender.

• ✓Business opportunity transactions must satisfy the Bulk Sales Law (UCC Division 6)
• ✓Business opportunity transactions must satisfy secured transaction statutes (UCC Division 9)
• ✓Business assets are commonly used as collateral to create a security interest

The Real Estate Investment Trust Act of 1960 provided an investment structure in real estate similar to what mutual funds provide for stocks. REITs are entities that own and in most cases operate income-producing real estate or related assets—shopping centers, office buildings, hotels, apartments, and mortgages secured by real estate. Some REITs concentrate in one type of real estate or one region of the country.

• ✓The Real Estate Investment Trust Act was enacted in 1960
• ✓REITs function similarly to mutual funds but for real estate investing
• ✓REITs own/operate income-producing real estate such as shopping centers, offices, hotels, apartments, and mortgages

If a REIT distributes 90% or more of its income annually to shareholders and otherwise qualifies under IRS rules, the REIT is permitted to be taxed at corporate rates on only its retained earnings. Shareholders may be taxed on dividends received from the REIT and any capital gains. A REIT receives special tax treatment because most of its income comes from real estate and is distributed to shareholders.

• ✓A REIT distributing 90%+ of income annually is taxed only on retained earnings
• ✓Shareholders are taxed on dividends received and any capital gains
• ✓Special tax treatment results from income being derived from real estate and distributed to shareholders

REITs come with disadvantages, especially in taxation. Dividends from a REIT are currently taxed at a higher rate than other stock dividends. A REIT investment cannot be used to defer capital gains tax under the IRS Section 1031 Like-Kind Exchange rules. Additionally, a REIT cannot pass tax losses through to its investors as may be possible in certain other real estate investments.

• ✓REIT dividends are taxed at a higher rate than other stock dividends
• ✓A REIT cannot be used for IRS Section 1031 Like-Kind Exchange capital gains deferral
• ✓A REIT cannot pass tax losses through to its investors

To qualify for special tax treatment, a REIT must meet IRS qualifications and limitations, including being structured as a corporation, trust, or association managed by a board of directors or trustees; having transferable shares or certificates of interest; being an entity taxable as a corporation; not being a financial institution or insurance company; being jointly owned by at least 100 persons; distributing at least 90% of taxable income annually; and satisfying various asset and income tests. The usual penalty for failing qualifications is loss of REIT status.

• ✓Must be a corporation/trust/association managed by directors or trustees, with transferable shares
• ✓Must be owned by at least 100 persons; no more than 50% of shares held by 5 or fewer individuals in the last half of the year (5/50 rule)
• ✓At least 75% of assets in real estate; at least 75% of gross income from rents or mortgage interest; no more than 25% of assets in taxable REIT subsidiary stock; must distribute at least 90% of taxable income; penalty for noncompliance is loss of REIT status

REIT advantages include: pooling funds to take advantage of large investment opportunities; diversification across a number of different properties; publicly traded REITs can be readily traded or sold for cash; REIT stock returns have historically had a low correlation with other equities or bonds (though not during the recent financial crisis); and publicly traded REITs must make detailed disclosures and submit regular SEC financial reports, offering greater transparency.

• ✓REITs offer pooling, diversification, and liquidity for publicly traded shares
• ✓Historically low correlation with other equities and bonds (except during recent crisis)
• ✓Publicly traded REITs must file detailed disclosures and regular SEC reports

The basis of the appraisal process. Value tends to be set by the cost of acquiring an equally desirable substitute. A buyer will pay no more, and a seller expects no less, than the price of an equivalent substitute.

• ✓Value is set by the cost of acquiring an equally desirable substitute
• ✓Principle of substitution is the basis of the appraisal process
• ✓It underlies the Sales Comparison and Cost approaches

The best use of a parcel is that which produces the greatest net return over a given period. Four tests apply: legally permissible, physically possible, economically feasible, and most productive. There may be two highest and best uses (site vacant vs. as improved).

• ✓Four tests: legally permissible, physically possible, economically feasible, most productive use
• ✓Highest and best use produces the greatest net return to the land
• ✓There may be two uses: one with site vacant and one as improved

Progression: worth of a lesser-valued object is enhanced by association with greater-value objects. Regression: worth of a greater-valued object is reduced by association with lesser-valued objects. Conformity: maximum value when land uses are compatible and architecturally harmonious.

• ✓Progression = lesser-value property enhanced by higher-value neighbors
• ✓Regression = higher-value property reduced by lower-value neighbors
• ✓Conformity = maximum value when land uses are compatible; zoning helps set standards

Supply and demand: price varies directly with demand and inversely with supply. Anticipation: value created by anticipated future benefits (basis of income approach). Contribution: a component is valued by its contribution to the whole. Change: real property is in constant flux.

• ✓Price varies directly with demand, inversely with supply
• ✓Anticipation is the basis for the income approach to value
• ✓Contribution measures a part's value by how much it adds to the whole
• ✓Change reflects constant flux affecting properties and neighborhoods

Competition is created where substantial profits are made, which can lead to oversupply. Balance: value created when opposing elements are in equilibrium. Four-stage life cycle: growth, stability, decline, and revitalization.

• ✓Competition arises where substantial profits exist, potentially causing oversupply
• ✓Balance = equilibrium of contrasting/opposing elements creates value
• ✓Four-stage life cycle: growth, stability, decline, and revitalization

The cost approach estimates the cost of all improvements on the land based on inspection, size, quality, and cost classification, then adds the land value estimated from vacant parcel sales. When improvements are new and represent the highest and best use, value by the cost approach equals land value plus new improvement costs.

• ✓Value = land value plus cost of new improvements when improvements are new and highest/best use
• ✓Land value is estimated from record search of comparable vacant parcels
• ✓Improvement cost is derived from size, quality, and cost classification

The sales comparison approach compares sales of similar houses to the subject property by time, location, and physical characteristics. Necessary adjustments are made between the comparable sales and the subject to arrive at a preliminary estimate of value.

• ✓Compare comparable sales to the subject by time, location, and physical characteristics
• ✓Make necessary adjustments between the sales and the subject property
• ✓Market comparison is given the most weight for a new property within a tract of similar houses

The income approach, applicable when rentals exist in the neighborhood, estimates market rent through experience and comparison, gathers and analyzes gross monthly multipliers of similar properties to derive one multiplier for the subject, and produces a preliminary estimate of value.

• ✓Estimate market rent using experience and comparison
• ✓Derive one gross monthly multiplier from similar properties to apply to the subject
• ✓Applicable only when comparable rentals exist in the neighborhood

Each approach is weighed and compared to reach one final value. For new property, the cost approach is generally more applicable than for older property because accrued depreciation is difficult to estimate. If the new subject is within a tract of similar houses, market comparison is given the most weight.

• ✓Each approach is weighed and compared before setting a final value
• ✓The cost approach is more applicable to new property due to difficulty estimating accrued depreciation on older property
• ✓Market comparison receives most weight for a new home in a tract of similar houses