Title, Ownership, Contracts and Agency Primer

Title, Ownership, Contracts and Agency Primer

Title, Ownership, Contracts, and Agency
By Dallin Wall
Note: The following information has been prepared for the benefit of private real estate investors and professionals in the real estate industry, including agents, attorneys, etc., as a primer on common strategies and agreements used by investors, and the specific differences in these situations between acting as an agent or as a principal in a transaction. Please feel free to share this document with real estate professionals to assist in defining your role and rights in transactions.
Frequently, as investors, it is necessary for us to employ techniques and strategies that are a little different than conventional real estate purchases. We’re not just trying to buy a property for our family to live in, we are trying to be profitable! We often refer to these purchase techniques as being creative, but creative does not have to mean that they are illegal, immoral, or unethical. In many cases, they are the ONLY way that a deal can be done to help both parties get what they want. While the laws vary a little from state to state, the techniques and strategies taught in the program have been used successfully in all states for many years.
Understanding the legal rights and responsibilities in creative transactions is vital to your ability to use leveraging in investing. Many real estate agents, mortgage brokers, and even attorneys are not well versed in the use of these techniques, and this can lead to confusion, delays and even litigation in real estate matters. In this article we will address various important topics, such as Title, Ownership, Options, Contracts, and Agency. We will speak from general national legal perceptions and precedents and encourage the reader to seek local advisement from an attorney in their own state.
TITLE
Title to a property is commonly misinterpreted to mean “having your name on the title.” Most people think that in order for you to be an “owner” of a property, your name must be on the title. From a legal standpoint, Title is divided into two categories: Legal Title, and Equitable Title.
Legal Title to a property means having your name on the Title. A person, or entity, whose name is on the title certainly has an ownership interest in a property. But this is not the only way of having an ownership interest in a property.
Equitable Title is defined as: “All incidents of ownership except Legal Title.” This bundle of rights can be held or dispersed individually or severally. When a person or entity holds some equitable rights to a property, such as a mortgage, lien, or taxation rights, under the right circumstances, that person/entity’s rights can sometimes supersede Legal Title, and the property can be taken away from the Legal Title owners, as in a foreclosure. Legal Title owners have a right to transfer some or all of their Equitable Title to other parties, through various forms of contract documents, such as a Real Estate Purchase Contract, an option agreement, or a lease agreement. This type of contract document is an agreement/contract which transfers/conveys some equitable ownership rights to another party. This document does not transfer Legal Title, but if the Legal Title owner does not perform under the terms of this contract, the Legal Title owner can incur damages, and their remaining rights regarding the property can be taken away from them.
What we have established is that ownership is a little more complex than just having your name on title, and that the rights of other Equitable Title owners must be protected as well as the Legal Title owner’s, and can in some circumstances prevail over the Legal Title owner’s rights.
OWNERSHIP
Equitable Ownership in a property can be a very valuable thing. It can include the right to purchase a property, to use the property, to live in the property, to offer the property for sale or for lease (of course subject to the terms of any contract document entered into with the Legal Title owner). The Equitable Ownership party becomes, in the eyes of the law, an owner of the property, by holding an equitable interest in that property. In any and all acts defined within the contract document, this Equitable Ownership party will act as a principal, rather than as an agent of the Legal Title party. For example, if the contract document includes the right to purchase a property, and does not exclude the right to transfer or assign these rights to another party, then the Equitable Ownership party has the right to market the property for sale (of course subject to the terms and conditions of purchase included in the original contract document).
OPTIONS
One type of agreement that transfers a series of equitable rights is the option contract. When we mention options, we are referring here to an option to purchase real estate. The real estate purchase option is often combined with a lease to become a lease/option. Typically, a real estate option contains a transfer of Equitable Ownership rights through a unilateral contract. Unilateral means “one-way.” The optionee has a right to buy or not to buy, but the optionor must accede to the decision of the optionee—if the optionee party wishes to buy within the legal term of the option, the optionor party must sell, if the optionee party wishes to vacate at the end of the option, the optionor party must accept the property back, and the optionee’s Equitable Ownership interest in the property ends.
Since most option agreements are unilateral agreements, laws in virtually every state require the payment by the optionee of “Option Consideration,” a non-refundable payment to the seller to induce the seller to enter into the option agreement. Acceptable option consideration varies from state to state, is generally a negotiable amount depending on the length of the agreement, value of the property, and what additional “good and valuable consideration” is included in the agreement.
As an example of state laws, the State of California defines an option as a right given for a consideration to purchase or lease a property upon specified terms within a specified time, and indicates that if a real estate broker who holds a listing also takes an option on the property, the broker is placed in a dual position of agent and principal.
In most states, there are formal requirements for an option agreement to be legal. These requirements generally include the payment of good and valuable consideration, an established purchase price, signatures of optionor and optionee, and a set time period for exercise of the option. As long as these requirements are adhered to in the establishment of the option agreement, the optionor has transferred Equitable Ownership rights to the optionee.
PURCHASE CONTRACT
A Real Estate Purchase Contract (REPC), or Purchase and Sale Agreement is another agreement that transfers Equitable Ownership rights to the buyer from the seller. Technically, a REPC governs the time period from execution (signed commitment by both parties to the agreement) to Closing (transfer of Legal Ownership from seller to buyer), and the purchase contract is fulfilled and becomes null and void after closing. During the contract period, certain Equitable Ownership rights have already been transferred, including inspection rights and rights to disclosure that are clearly delineated in the contract verbiage, as well as implied rights that include the right to market and sell the property (subject to the fulfillment of the terms of the contract), and to transfer the contract rights, benefits and obligations to a third party (see Assignment Agreement below). In exercising these rights, the buyer will be acting as a principal (owner) in the property.
ASSIGNMENT AGREEMENT
Transfer/Assignment of an agreement is an implied right in real estate agreements, unless prohibited by law or specifically forbidden in the contract. Frequently an assignment clause is added to an agreement as a further affirmation of this right to assign/transfer the contractual rights to a third party. If the third party agrees to accept the rights, privileges, and obligations contained in the original agreement documents, the third party can usually close directly with the seller. The original buyer has a legal right to increase the price of the property in order to earn a profit on the transaction because he/she is acting as a principal in the transaction with the seller, and as a principal in the agreement with the assignee. Important to the legality of the above transaction is that the buyer must have a signed contract document with the seller prior to any representation of the specific property for sale, lease, etc. The transfer/assignment is then enacted by means of a simple Assignment Agreement, and an assignment fee is charged to the assignee as compensation for the value presented in a pre-negotiated agreement with a property seller.
AGENCY
An agent in a real estate transaction is a person/entity contracted to perform a specific service normally reserved to an owner. There are leasing agents who are contracted by owners to lease their property to a renter/lessee. There are real estate agents who are contracted by owners to sell their property to a buyer. Requirements in all 50 states mandate real estate agents to be licensed by the state’s real estate commission after passing an examination and paying a fee. Licensees are regulated by the state’s real estate commission, and must abide by numerous requirements regulating the purchase and sale of real estate.
Real estate agents represent principal parties in real estate transactions, or act as a transaction broker wherein they do not officially represent either a buyer or a seller, but merely facilitate a real estate transaction. A “Principal” would be either a buyer or a seller. “Principal” sellers must be selling a property in which they hold an ownership interest, either Legal Ownership, or Equitable Ownership, or both. “Principal” buyers must be buying for themselves, not for other parties.
There are important disclosure rules for licensees. Agency status must be divulged in every contact with a principal. If a licensee fails to disclose in a required situation, licensee status can be revoked and other penalties can be imposed.
A real estate agent can also be an owner of the property. In most states, when a property is being marketed by a licensee who also holds ownership interest in the property, the status owner/agent is required in disclosure. In the case of an option, a licensee who also holds an option would have to use the owner/agent status in disclosure.
ADDITIONAL NOTES
While legal requirements do not require recording of options and assignments, legal recordation insures notification of any infringements on legal rights insured by the option or assignment agreement. Although rare, greedy sellers have been known to attempt to sell a property despite a previous encumbering agreement. Greedy buyers also sometimes disavow the ownership rights granted in an option agreement. In such cases, the legitimacy of the option agreement may fall into question. Recordation asserts the existence of a contract document and requires those dealing with ownership transfer of the property to contact the affiant who has filed an affidavit or notice of interest in a given property. Knowledge of infringement on an affiant’s rights is essential to the defense of those rights. Regardless of recordation, an option, a purchase contract, or an assignment agreement constitute a legitimate Equitable Ownership/Interest in a property. Equitable Ownership/Interest includes a bundle of rights that are defensible in all states.
As a reminder, our country is fraught with non-meritorious lawsuits. Work with people who want to work with you. Be prepared to defend your rights when you have fulfilled the legal requirements. Always have your agreements reviewed by a local attorney to make sure you are in precise compliance with local laws. Record your documents for a firmer legal stance. And fight the battles that are worth fighting.
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Dallin Wall
Real Estate Training Team