1 Case 3 The Problem with Selling to Relatives, or Oops, I Sold It Again OVERVIEW (Read the following case and 4 Witnesses’ statements) Last year, Mrs. Bertha Schmidt, an elderly resident of Rochester, determined that she should sell her home because she could no longer care for it. Mrs. Schmidt found an attractive, assisted-care apartment and reserved a unit for her. Several of Mrs. Schmidt's neighbors knew of her plan and made efforts to find a good buyer for the home. John Alt, new to the area because of job transfer, heard about the property from a co-worker who also happened to be one of Mrs. Schmidt's neighbors. Mr. Alt went and inspected the house and decided to buy it. He and Mrs. Schmidt wrote up a purchase agreement without the aid of a real estate agent or an attorney. The purchase price was agreed upon without an appraisal but was based on the tax valuation. Both parties believed that the deal, and the earnest money, $1,000.00, were reasonable. Both parties kept a copy of the agreement, with Mrs. Schmidt retaining the original. Two days later, Mrs. Schmidt's grandson, Mitchell Schmidt, was visiting her and saw the purchase agreement. He told her that if he had known how much she wanted for the place, he would have bought it himself. They discussed the impending sale. Mrs. Schmidt said that she felt bad that she was letting the house out of the family. Mitchell told her that it was his understanding that she had three days after the signing of the purchase agreement in which to back out of the deal. Mrs. Schmidt said that in that case she would rather sell to Mitchell. They amended the original purchase agreement by scratching out Mr. Alt's name and inserting Mitchell's. Mrs. Schmidt then initialed the change and Mitchell gave her the same earnest money that Mr. Alt had given her. They tore up Mr. Alt's check, but though each thought the other would call Mr. Alt and tell him about the new situation, neither did. Both Mr. Alt and Mitchell Schmidt contacted lenders who then contacted the same title company, Quality Title Company (Quality), to handle the closing. Both loans were approved, and a closing was scheduled. Both lender files were sent to Quality for the closing, but somehow Quality's internal procedures did not reveal that the both closings were for the same property. Separate closing agents were assigned without knowledge that both closings involved the same property. Both closing agents thought that the closing date referred to their file, and both buyers were informed of the date. Mrs. Schmidt, who had indicated that she did not want to attend the closing, was contacted by the closing agent in order to obtain her signed deed and other documents prior to the sale. She signed the documents, but the next day she was asked to sign again, by the second closing agent, which she did. She didn't understand the closing process and also didn't unders ...

1. 1
Case 3
The Problem with Selling to Relatives, or Oops, I Sold It Again
OVERVIEW
(Read the following case and 4 Witnesses’ statements)
Last year, Mrs. Bertha Schmidt, an elderly resident of
Rochester, determined that she
should sell her home because she could no longer care for it.
Mrs. Schmidt found an
attractive, assisted-care apartment and reserved a unit for her.
Several of Mrs. Schmidt's
neighbors knew of her plan and made efforts to find a good
buyer for the home. John Alt,
new to the area because of job transfer, heard about the property
from a co-worker who
also happened to be one of Mrs. Schmidt's neighbors. Mr. Alt
went and inspected the
house and decided to buy it. He and Mrs. Schmidt wrote up a

2. purchase agreement
without the aid of a real estate agent or an attorney. The
purchase price was agreed upon
without an appraisal but was based on the tax valuation. Both
parties believed that the
deal, and the earnest money, $1,000.00, were reasonable. Both
parties kept a copy of the
agreement, with Mrs. Schmidt retaining the original.
Two days later, Mrs. Schmidt's grandson, Mitchell Schmidt, was
visiting her and saw the
purchase agreement. He told her that if he had known how much
she wanted for the
place, he would have bought it himself. They discussed the
impending sale. Mrs. Schmidt
said that she felt bad that she was letting the house out of the
family. Mitchell told her
that it was his understanding that she had three days after the
signing of the purchase
agreement in which to back out of the deal. Mrs. Schmidt said
that in that case she would
rather sell to Mitchell. They amended the original purchase
agreement by scratching out
Mr. Alt's name and inserting Mitchell's. Mrs. Schmidt then

3. initialed the change and
Mitchell gave her the same earnest money that Mr. Alt had
given her. They tore up Mr.
Alt's check, but though each thought the other would call Mr.
Alt and tell him about the
new situation, neither did.
Both Mr. Alt and Mitchell Schmidt contacted lenders who then
contacted the same title
company, Quality Title Company (Quality), to handle the
closing. Both loans were
approved, and a closing was scheduled. Both lender files were
sent to Quality for the
closing, but somehow Quality's internal procedures did not
reveal that the both closings
were for the same property. Separate closing agents were
assigned without knowledge
that both closings involved the same property. Both closing
agents thought that the
closing date referred to their file, and both buyers were
informed of the date.
Mrs. Schmidt, who had indicated that she did not want to attend
the closing, was

4. contacted by the closing agent in order to obtain her signed
deed and other documents
prior to the sale. She signed the documents, but the next day she
was asked to sign again,
by the second closing agent, which she did. She didn't
understand the closing process and
also didn't understand she was signing documents for two sales
of her house. Both
closings went through without incident. Since Mr. Alt and
Mitchell had never met, they
did not recognize each other at the closing office.
2
The next day the two men met at the property as each was trying
to move in. An
argument ensued, and the closing agents were contacted. The
agents found that in fact
there were two checks to Mrs. Schmidt for the proceeds of the
sales. Mrs. Schmidt
tendered Mr. Alt's check back to him, but he refused, stating
that he had no other home.
Mitchell also refused to back down from the sale. They both
went to the office of the

5. president of Quality for direction, but he told them that the
problem was not the title
company's.
WITNESS 1
Mrs. Schmidt, Home Seller
I was very confused by everything that happened. When the
second closing agent had me
sign papers, I just figured the closing agent from the day before
had forgotten to bring
some forms. So, what would you like to know about this
transaction?
Relevant Facts
Items:
ase agreement provided by a disinterested real
estate agent

6. Relevant Facts:
I first met Mr. Alt when he came to my door to inspect the
house. I learned of him from a
neighbor. He liked the house and made me an offer. We
discussed a price and a closing
date. We also talked about what things I would be taking with
me and what would be
staying. He then showed me a purchase agreement form that he
had gotten from a friend
of his who is a real estate agent. It looked okay to both of us, so
we filled it out and
signed it. I didn't read it all because I cannot see all that well,
and besides, he seemed
trustworthy and knowledgeable. I accepted his earnest money,
but I never thought that
the deal was completely done. I honestly didn't think you could
sell a house without a real
estate agent or an attorney or some other party aiding the
transaction. Also, he said that
he was getting married and that his fiancée would want to see
the place. I figured that if
she didn't like it, he would just walk away. Since I could do
nothing to force him to buy, I

7. figured he could not force me to sell, either.
When Mitchell came to me and said that he wanted to buy the
house, I felt sick that I had
not contacted him earlier. I had heard somewhere that a deal is
not done unless three days
have passed after the signing. Mitchell said the same thing,
though I don't know where he
got his information from or if it was true. We then changed the
purchase agreement.
When I discovered what had happened, I did everything I could
to correct the situation. I
did not take Mr. Alt's money from the closing--I told Quality to
keep that check. I guess
3
that I signed the documents for each closing but that was
because I was confused. I was
not trying to sell to two people.
Irrelevant Facts
Items:

8. close on the house
Irrelevant Facts:
I first met Mr. Alt about a month ago. He was looking for a
house, and he stopped by to
have a look at mine. We talked about what he was looking for in
a house. He said that he
was looking for a house with a big back yard because he was
getting married and hoped
to have children soon. My yard is very small. He also said that
he wanted a two story
home and a fireplace. My house is a rambler and has no
fireplace. We also talked a lot
about other things that he wanted in a house that mine did not
have, so I was surprised
when he said he was going to make an offer. It was clear that he
didn't want the place,
and if I would have guessed, I would have said that he would
not close on it.
All of these problems began because we did not have a real
estate agent or an attorney. If

9. Mr. Alt and I had hired someone to help with this deal, it would
have been different. For
one thing, I could have put some contingencies in the contract.
Something to the effect
that I would not have to sell if a family member wanted the
property or that the house
would have to be appraised before we settled on a price.
I would have also looked at the financing more closely. I could
have given a contract for
deed. I do not need all of the money right now. I could have
sold the house and taken
payments over a couple of years. That would have been very
attractive to me. As it now
stands, I will put the money in a savings account at 2 or 3
percent interest. I could be
getting 8 or 9 percent interest from a contract for deed. With
proper representation, I
could have pursued these options.
WITNESS 2
Mr. Alt, First Purchaser

10. This transaction has been a major headache. I thought it was
going to be the smoothest
thing ever--until I showed up at my new house, and someone
else was moving in. I took
some aspirin, and it has started to kick in, so I would be more
than happy to give you
some details about the transaction.
Relevant Facts
Items:
-day waiting period
4
Relevant Facts:
When I saw the house, it was everything that I was looking for
in a residence. It was big
enough for me and my fiancée and in very good condition. The

11. price was within our
budget, so I determined to buy it. When I spoke with Mrs.
Schmidt, I told her that the
house was lacking in several areas, but I only said those things
in order to keep the price
from going up. I thought this was a good negotiation tactic. I
said that I wanted a big back
yard, but in truth I have a bad back and would not choose to
care for a large lawn. I also
said that I wanted a fireplace, but those things are drafty, take
up space, and require
maintenance. In fact, the house was just what I wanted.
I have a close friend who is a real estate agent. He gave me a
purchase agreement form
and told me to present it to Mrs. Schmidt. We both signed the
form, agreed on a price,
and I even gave her some earnest money. I am sure that I did
everything right in order to
lock up the purchase of the house.
Mrs. Schmidt told me of her thoughts regarding a three-day
waiting period. I asked my
real estate agent friend about this, and he told me there was no

12. such thing. Anyway, even
if there was, no one contacted me to let me know of any change.
From my standpoint, the
three days passed without comment. I did everything I said I
would do in the purchase
agreement.
Lastly, there are obviously problems with the closing company.
My friend told me that it
was their job to see that the deal went through smoothly and
that the documents were
filed for me. He said that they have a lot of explaining to do.
Irrelevant Facts
Items:
Irrelevant Facts:
When I saw the house, it was everything that I was looking for
in a residence. It was big

13. enough for me and my fiancée and in very good condition. The
price was within my
budget, so I determined to buy it.
When I got back to my apartment and called my fiancée and told
her that I had bought a
house, she was really mad at me. She wanted to have some input
into the house purchase,
so I felt pretty bad. She told me that I should have put a
contingency in the agreement
that said that I would buy the house so long as my fiancée liked
it. That would have given
her time to get out here and look at the place. What if I bought a
house that she does not
like?
One of the issues that I did not look into, and one that I wish
that I had known about, was
the opportunity to do a contract for deed (CD) with Mrs.
Schmidt. We might be in a
5
better spot right now if I had worked directly with her and had
an attorney draft up the

14. documents. That way I would know that there was only one deal
on the house. But, more
importantly, I would have been able to save a good deal of
money. I learned that Ms.
Schmidt was in favor of a CD at a favorable rate. As it
happened, I got the same rate on
my mortgage that she was looking for from a CD. If I had done
a CD with her, I would
have saved about $3,500.00 in closing costs.
I know that CDs are not the same as mortgages. I know that a
CD is like an extended
purchase agreement, where I have possession of the house. I
would not have the house in
my name, but when the payments were completed, I'd get the
house in my name. That
would have appealed to me because I would have had an "out"
if, for whatever reason, I
wasn't happy with the house.
WITNESS 3
Mitchell Schmidt, Second Purchaser and Grandson to Seller

15. My family has been robbed. This house has been in the family
for years, and I plan to
keep it with the Schmidt's. I know some screwy things happened
in this deal, and I'd be
happy to help you sort it all out. What would you like to know?
Relevant Facts
Items:
Relevant Facts:
I had always wanted a house, and my Grandmother's house
would fit me perfectly. It is
the right size and in great shape in a good neighborhood. I did
not know that she was
considering selling the place until I saw the purchase
agreement. She was selling at a
really good price, so I told her that I would buy it. I had heard
of a three-day period to

16. back out of a real estate contract, so I told her that we would
use that period to change the
purchase agreement. I did not know this Mr. Alt, so I expected
that she would contact
him about backing out of the contract. I guess she didn't.
By making our agreement, my grandma and I satisfied the three
requirements for a
contract. There was an offer, acceptance, and consideration. I
offered to buy the house
from my grandmother, she accepted my offer, and I gave her the
earnest money as
consideration with the agreement that I would pay the rest at the
closing.
For the contract to be a valid one, the two parties have to have
the capacity to make the
contract, and it has to be in writing. My grandma and I have
complete capacity--there is
no question of that. Also, we are both over the age of 18, are
mentally competent, and
6
have put our agreement in writing, so we have done all we

17. needed to do to have a
contract.
To change the purchase agreement, we simply crossed over Mr.
Alt's name and inserted
mine. Grandma initialed the change--a common practice with
real estate documents.
Anyway, I closed on the sale, and the closing agent has a check
for Grandma, and she
refuses to accept Mr. Alt's check.
Irrelevant Facts
Items:
Irrelevant Facts:
I had always wanted a house, and my Grandmother's would fit
me perfectly. It is the right
size and in great shape in a good neighborhood. I did not know
that she was considering
selling the place until I saw the purchase agreement. She was
selling at a really good

18. price, so I told her that I would buy it.
My grandparents lived in that house for nearly 46 years. The
addition on the side of the
house was paid for by my dad and his siblings just before
Grandpa died. I also did some
of the work on the house to make it what it is today. Although I
did not get paid, nor did I
ask for payment, it was always my understanding that the house
would go to whichever
one of us who did the work.
By purchasing the property from my grandma, I am executing
on that intention.
Very soon after I signed the purchase agreement with my
grandma, I started to move
some of my things into the house. Everybody in the
neighborhood took visual notice that
I was taking possession, including the friend of Mr. Alt who
lives on my grandmother's
street. He easily could have told Mr. Alt of my possession. We
moved my grandma out of
the house the day before the closing, and I stayed at the house
the night before the

19. closing. I had open and obvious possession of the property.
WITNESS 4
Robert Krall, President of Quality Title Company and a lawyer
I am embarrassed. To have something like this happen right
under my nose--well, there's
no excuse. Despite my red-faced shame, I am still willing to
face you and provide you
with some information.
Relevant Facts
Items:
e as a classic case of fraud
7

20. Relevant Facts:
In this case, my company was misled by both Mrs. Schmidt and
her grandson, Mitchell.
It is clear that Mrs. Schmidt sold her home to two different
people, with each sale
satisfying all requirements for a completed transaction. On the
face of the documents,
there is no way to tell that there is any problem. I have spoken
with Mrs. Schmidt and
realized what she thought she was doing, but in reality, this is
real estate fraud in its most
obvious form. I am just glad that we did not disburse either of
the checks to Mrs.
Schmidt.
My understanding of the law at this point is that the first person
with a contract will
prevail. Also, if the second person had notice that the first
person had a deal, then the
second person cannot expect to have a real contract. Here, Mr.
Alt had the first deal.
Mitchell Schmidt had notice that the Alt deal was done when he
talked his grandmother
into changing the contract. On those two points alone, Mitchell

21. is out.
Lastly, regarding my company's culpability, my agents were
misled on the whole process,
and I wish that we had insisted that Mrs. Schmidt come to the
closing so that this problem
could have been avoided. She didn't do this, however, and she
presigned the documents
without saying a word to us about a possible conflict. Had she
notified us of the problem
and then we did nothing about it, Quality would have had a lot
of questions to answer.
Since this didn't happen, Mrs. Schmidt is to blame.
Irrelevant Facts
Items:
occurring
Irrelevant Facts:
I had two parties come to my office with completed contracts.

22. They both had lenders who
had approved the mortgages for the property. My office
followed our regular procedure
and closed both sales for the lenders and the buyers. We got
signatures on the deeds from
Mrs. Schmidt. From a legal standpoint, it is up to the parties to
settle the matter either by
them or in court and for the court to let us know how to
proceed.
From a personal standpoint, I frown on this type of deal. No one
should ever buy or sell a
home without the aid of an attorney or a real estate agent.
Clearly, these professionals are
knowledgeable in the area of real estate and can solve these
types of problems before
they start. I am not sure that anyone could have foreseen that
Ms. Schmidt and her
grandson would have made this attempt to void an existing
contract, but the professionals
would have let the parties know that the deal was done.

23. 8
HANDLING THE CASE
(Answer the following 10 problems and provide comments)
1. Mrs. Schmidt relied on her three-day right to revoke the
purchase agreement when she
sold to Mitchell. With respect to that three-day right to revoke,
A. it does not become effective unless the other party is
informed within the three
days.
B. it is effective, and it is incumbent on the buyer to assure that
the deal is still
available after the three-day period.
C. there is no such thing as a three-day revocation period.
D. a seller cannot enter into another contract during the three-
day period so the
contract to Mitchell is also invalid.
2. Mrs. Schmidt changed the purchase agreement by scratching
out Mr. Alt's name and
putting in Mitchell's name. That change was then initialed by

24. Mrs. Schmidt. That
change was the pivotal point in the transaction,
A. yet it was fully valid since it was done on the original
document by a party to that
original document and was initialed.
B. but it would only become valid if it were initialed by Mr. Alt
and Mitchell
Schmidt.
C. and since it was unknown to the title company, who closed
the transactions in
good faith, they would not be held responsible.
D. and it required Mitchell's signature to be completely valid.
3. The purchase agreement with Mr. Alt was complete, with the
possible exception that
A. the form that the parties used was a real estate agent's form
and therefore invalid
for use by parties who are not represented by real estate agents.
B. neither party was represented by an attorney.
C. the value put on the home was insufficient because the house
had not been
appraised, and the parties had used a generally unreliable tax

25. value for the
purchase price.
D. There are no obvious signs that the purchase agreement is
incorrect.
4. The purchase agreement is a contract which is entered into by
two or more parties. The
three parts of a contract are
A. offer, acceptance, and consideration
B. offer, closing, and transfer of property
C. consideration, closing, and transfer of property
D. offer, acceptance, and closing
5. Mrs. Schmidt and Mr. Alt entered into a purchase agreement,
which was a writing that
listed the terms of their agreement. Both parties may have had
different intentions with
respect to the purchase, intentions that could change before the
closing. If either party's
intentions change after the signing of the document, they can
change the document

26. 9
A. by declaring their intentions to the other party within
sufficient time to avoid
causing losses to the other party
B. by indicating their change in intentions on the written
document, original or copy,
and providing a copy of the change to the other party
C. with the consent of the other party to the contract
D. by choosing not to close on the sale or by refusing to pay the
contract amount
6. If Mr. Alt thought that he was wronged, he should be able to
take some kind of action.
Which of the following actions are not available to Mr. Alt?
A. Mr. Alt could walk away from the deal by canceling his
mortgage and taking back
his earnest money.
B. He could move into the house with Mitchell, and they could
own the property
together.
C. He could assign his mortgage obligation and the right to
possession to Mitchell,

27. presumably for a fee, and find another house.
D. He could sue to enforce his contract and get the house since
he was the first in line
with his purchase agreement.
7. The title company closed both of the loans on Mrs. Schmidt's
house sale. What is their
respective position in the transaction?
A. The title company is in serious trouble because they have a
contract, by
appearances that require them to see that the mortgage company
is placed in a
secure position, and the title company now knows that it can
only put one party in
a secure position.
B. The title company is in serious trouble because they have not
disbursed the money
to Mrs. Schmidt.
C. The title company acted in good faith concerning a problem
that was not of their
making, they misled no one, and have followed all written
instructions.
D. Since the title company has not disbursed the funds, they can

28. destroy the
conflicting documents, including the checks, and inform the
mortgage companies
that the closing did not go through and will not go through until
further notice.
8. Suppose Mr. Krall, the president of Quality, had stated that it
was his legal opinion that
the rights of the respective parties is governed by the law of
"first in time is first in
right," meaning that the first person to file his deed at the
county would have title.
Suppose then that both Mr. Altand Mr. Schmidt raced to Quality
to pick up their deeds
and rushed down to the county to be the first to file. What is
wrong with Mr. Krall's
statements and actions?
A. After the first deed was released from his office, he should
have refused to release
the second deed since that party was too late.
B. His legal opinions mean nothing since he is not getting paid
for his legal work.
C. He has a deal with the mortgage companies to file the deeds,
so he should not

29. release them to anyone but the county itself.
D. He should see that both deeds are filed, thereby satisfying
his contracts with the
lenders, and then let the parties determine the true owner,
possibly through trial.
10
9. Suppose that before Mr. Alt could get to the property,
Mitchell has started to move in
and had the locks changed. He could effectively exclude Mr. Alt
from the property.
Also, suppose Mr. Krall gave Mr. Alt his check back. Then, in
this case, is it correct
to say that "possession is nineteenths of the law"?
A. Yes. Since Mitchell has a completed purchase agreement, a
closing, and a deed, as
well as possession, he has a stronger legal right to the property.
B. Yes. Although it was only for a short time, Mr. Alt's delay in
taking possession of
the house constitutes abandonment in light of the situation,
causing a weakening

30. of his legal position.
C. No. Possession is only one of the many elements of real
estate ownership and does
not, by itself, constitute ownership or a superior right to
property.
D. No. The correct rule is "possession is three-quarters of the
law." The rule,
however, is offset because Mr. Alt and Mitchell both have a
completed purchase
agreement, the deed, and the closing, which constitute three-
quarters of the
transaction. Possession is then reduced to only one quarter.
10. The correct outcome in this case would be that
A. both transactions are cancelled by the title company, and the
parties are required to
start over so that a true meeting of the minds can take place.
B. the parties seek legal counsel; find that Mitchell has
interfered with a contract, and
that he should back out of the deal, which he does.
C. Quality should contact the lenders and explain the situation,
then offer each lender

31. an opportunity to back out. Whichever mortgage company backs
out first is
released, along with that prospective purchaser, and the
property is awarded to the
remaining buyer.
D. Mitchell should back out, but should receive his loan
proceeds since he signed all
the documents for the loan at the closing but is not getting the
house.
CASE CONCLUSION
(Choose one witness role and make a concluding remark)
In studying the elements of a contract for the sale of real
property, a student should notice
the bare necessities for the contract. The "who, what, where"
questions should be
answered. This can be done in less than a piece of note paper,
and if it contains the basic
necessities, it will constitute a complete contract. Purchase
agreements only become long
because they try to eliminate as many issues as possible at the

32. early stages.
It should also be noted that real property can be sold without a
purchase agreement. If the
buyer and seller verbally agree on a deal and a time to have a
closing and both parties
appear at the closing, the seller with a deed and the buyer with
the money, a sale can be
completed. The purchase agreement is only used to tie down the
parties prior to the
closing. A verbal agreement to sell a property cannot be
enforced, so the parties would
have to voluntarily appear for the closing.
11
In this case, Mrs. Schmidt was wrong in her actions as were the
actions of her grandson
and Quality, the title company. There is plenty of blame to
spread around. The only party
free of any blame is the buyer, Mr. Alt, who will ultimately end
up having his contract
enforced so that he gets the house. Although he has done
nothing wrong, notice the

33. difficulties he is about to face in order to get his house. For that
reason alone, he may
chose to avoid confrontation and may offer to walk away from
the deal.
Lastly, Quality has a lot of work to do to assure its customers
that it is a reliable business.
In the real estate industry, title companies are relied upon to be
the clearinghouses for
these types of deals. They are expected to weed out the
problems and solve them before
closing. Here, Quality not only failed to find the problem in its
own office but also stood
in a position to make the problems worse. Significant internal
restructuring is in order at
Quality.