RISKS AND REALITIES OF CONTRACT FOR DEEDS
While contracts for deed offer some advantages over a traditional mortgage, such as speed and simplicity, they can entail distinct risks for buyers and sellers. This article presents basic facts and features of the contract for deed and offers suggestions for minimizing those risks.
Because of recent credit tightening, some homebuyers may be less likely to qualify for mortgages than they were just a few years ago. Some financial counselors predict that borrowers with limited options may turn to alternative means of purchasing a home. One such alternative is the contract for deed.
In a contract for deed, the purchase of property is financed by the seller rather than a third-party lender such as a commercial bank or credit union. The arrangement can benefit buyers and sellers by extending credit to homebuyers who would not otherwise qualify for a loan. Indeed, public and nonprofit housing advocacy organizations have used the contract for deed as a tool to help low- and moderate-income households attain homeownership.
Nonetheless, this alternative financing mechanism lacks many of the protections afforded borrowers who have traditional mortgages. In addition, these contracts may contain provisions that leave room for abuse and can pose risks and uncertainties for both the buyer and seller. The following article presents basic facts and features of the contract for deed and offers suggestions for minimizing the risks associated with this mortgage substitute.
Facts and features
A contract for deed, also known as a “bond for deed,” “land contract,” or “installment land contract,” is a transaction in which the seller finances the sale of his or her own property. In a contract for deed sale, the buyer agrees to pay the purchase price of the property in monthly installments. The buyer immediately takes possession of the property, often paying little or nothing down, while the seller retains the legal title to the property until the contract is fulfilled. The buyer has the right of occupancy and, in states like Minnesota, the right to claim a homestead property tax exemption. The buyer finances the purchase with assistance from the seller, who retains a security in the property.
The contract for deed is a much faster and less costly transaction to execute than a traditional, purchase-money mortgage. In a typical contract for deed, there are no origination fees, formal applications, or high closing and settlement costs. Another important feature of a contract for deed is that seizure of the property in the event of a default is generally faster and less expensive than seizure in the case of a traditional mortgage. If the buyer defaults on payments in a typical contract for deed, the seller may cancel the contract, resume possession of the property, and keep previous installments paid by the buyer as liquidated damages. Under these circumstances, the seller can reclaim the property without a foreclosure sale or judicial action. However, laws governing the contract-cancellation process differ from jurisdiction to jurisdiction and the outcome may vary within any one state, depending on the contract terms and the facts of the specific case.
Because the buyer in a contract for deed does not have the same safeguards as those afforded a mortgagor in a purchase-money mortgage, the contract for deed may appear to be essentially a rent-to-own arrangement. However, in a typical contract for deed, the buyer becomes responsible for the obligations of a mortgagor in possession, such as maintaining the property and paying property taxes and casualty insurance. In addition, unless prohibited by the contract, either party may sell his or her interest in the contract.
Speed, simplicity appeal to buyers
Homebuyers may be attracted to a contract for deed purchase for several reasons. This method may be especially appealing to homebuyers who do not qualify for a mortgage, such as people who work cash jobs and are therefore unable to prove their ability to make payments. Since the contract for deed process is significantly shorter than the mortgage-approval process, it may attract buyers who face time constraints or have limited options, such as people who are losing their homes to foreclosure. First-time homebuyers who lack experience in the market or individuals who are wary of traditional financial organizations may also choose a contract for deed because of the relative simplicity of the buying process.
Contracts for deed are a more popular financing alternative among minority homebuyers, most notably Hispanics. According to figures from recent American Housing Surveys, while only 5 percent of all owner-occupied households in the U.S. had contracts for deed in 2005, 9.5 percent of Hispanic owner-occupied households and 7.1 percent of black owner-occupied households across the country used them.1/ (For more figures on the use of contracts for deed, see the table below.) Though contracts for deed are sometimes referred to as the “poor man’s mortgage,”2/ American Housing Survey results indicate that only 3.9 percent of U.S. households below the poverty line used them in 2005.
However, it is difficult to know exactly how prevalent contracts for deed are, because the nature of these arrangements allows the buyer and seller a degree of anonymity. Despite laws in some states that require the buyers or sellers in all contracts for deed to record the sale in the office of the county recorder or registrar of titles within a specified time period, the sales often go unrecorded due to a lack of financial and legal sophistication on the part of both parties involved in the agreement.
Before the rise of subprime lending in the 1990s, many buyers who were unable to qualify for traditional financing resorted to contracts for deed. Indeed, for most of the last century, the contract for deed was frequently used as an alternative to a mortgage or deed trust. Today, routine use of contracts for deed persists in some parts of the country. For example, in west central Minnesota, anecdotal information suggests that contracts for deed are a commonly used alternative to mortgages.
Still, some financial counselors and property law scholars regard the contract for deed as a “legal dinosaur”3/ or an “anomaly,”4/ and even call for its demise. They assert that the contract for deed has no place in modern property financing, offers no real benefits over the mortgage, and leaves both parties vulnerable to risk and uncertainty.
One major objection to the contract for deed is that it is closely associated with a form of predatory lending that was prevalent from the late 1980s through the 1990s. During this period, some neighborhoods?including those in North Minneapolis?experienced a predatory lending scheme known as equity stripping. In an equity-stripping scheme, an investor finds a homeowner facing foreclosure and approaches him or her with an offer to buy the home. After purchasing the home, the investor pays off the debt, sells the home back to the original owner on a contract for deed, and gains the equity from the transaction. Fortunately, these equity-stripping scams have faded from the scene in recent years?largely because homeowners facing foreclosure today have little to no equity for unscrupulous investors to strip.
Another objection to contracts for deed, apart from their association with nefarious equity-stripping scams, is that they have a reputation for offering little legal protection to buyers. Despite gaining home repair and maintenance responsibilities, buyers have limited ownership rights and control over their properties while they make payments to sellers. Buyers gain no rights of redemption through the transaction.
Until several decades ago, U.S. courts routinely enforced the forfeiture clauses of contracts for deed in the event of the buyer’s default. For example, if a homebuyer missed a single payment 15 years into a 20-year contract for deed, the seller could cancel the contract and retain the title and all the previous payments, while the buyer would suffer a substantial loss. However, such extreme cases are less common today. While a few courts enforce forfeiture provisions as written, most have become more sympathetic to complaints brought by the defaulting buyer, especially in circumstances where the buyer has already paid a significant portion of the purchase price. Courts today often view the contract for deed as analogous to the mortgage and, consequently, extend mortgagor’s protections to the buyer in cases of default.
The risks for buyers
Despite favorable changes in the legal enforcement of forfeitures, contracts for deed pose distinct risks for buyers. One major risk stems from the short time period required to cancel the contract in the event of default. For example, in Minnesota, when a buyer falls behind on payments, the seller can file a Notice of Cancellation of Contract for Deed with the county and serve the buyer with the notice. The buyer has only 60 days from the date of the filing to address the items of default and pay the allowable attorney fees to “reinstate” the contract. This is a short time span in comparison to the six months or more afforded mortgagors who face foreclosure. As a result, a defaulting contract for deed buyer has a much narrower window of time to find a new home and is likely to have limited housing options.
Another major risk for the buyer is the balloon payment. Unlike most traditional mortgages, the majority of contracts for deed are not fully amortized. Instead, the contract is most frequently structured to require monthly payments for a few years, followed by a “balloon payment” that completes payment on the house. To make this balloon payment, the buyer will almost inevitably need to obtain a traditional mortgage. If a buyer is unable to qualify for a mortgage at the time the balloon payment is due, he or she is likely to face cancellation of the contract.
Some buyers enter into contracts for deed with the hope of repairing their credit. They expect to improve their credit profile during the first part of the contract period and then qualify for a loan at the time the balloon payment is due. However, according to Dan Williams of Lutheran Social Services in Duluth, Minn., a contract for deed often does not improve the credit of the buyer because individual sellers typically do not report to credit agencies. The buyer may attempt to use a letter from the seller stating that he or she makes the contract payments on time, but unfortunately, most lenders do not honor such a letter.
Williams warns that unexpected home repair costs may also pose a risk to buyers in a contract for deed. While this risk also applies to buyers who purchase homes through conventional mortgages, it may be greater in the case of homes purchased through contracts for deed, because a seller can execute a contract for deed with limited disclosure about the condition of the property. Minneapolis-based attorney Larry Wertheim explains that in a third-party financed sale, the lender’s stringent requirements for title examination, title insurance, and appraisal provide the collateral advantage of disclosure for the buyer. Unless the buyer in a contract for deed has legal assistance or is aware of the need for appraisal and title examination, the transaction may not include these safeguards. In addition, since many homebuyers choose a contract for deed because their weak credit precludes them from obtaining a conventional mortgage, they are unlikely to qualify for loans to finance repairs. Ultimately, defects in the property could increase the chances of the buyer defaulting on payments and losing the home.
Another risk for contract for deed buyers stems from the fact that the seller retains the title to the property during the life of the contract. Since the seller retains the title, he or she may continue to encumber the property with mortgages and liens. The seller is only obligated to convey good title when the purchase price is fully paid and it is time to deliver the title. He or she does not need to have good title at the time the contract is executed nor during the life of the contract. Depending on state law and whether the contract is recorded in a timely manner, the buyer’s interest may be junior in priority to these pre- and post-contract encumbrances placed on the property by the seller.
In addition to the problems described above, no two contracts for deed are alike and, according to Cheryl Peterson of Twin Cities Habitat for Humanity, the terms of the agreement are often unclear. The contract for deed is typically a one- to five-page document that includes the amount of the purchase, the interest rate, the monthly payment, and some verbiage regarding cancellation. The documents often do not include a standard arrangement for beginning the cancellation process. This lack of clarity in contracts for deed creates difficulties for financial counselors who give advice to buyers facing forfeiture. According to Peterson, “You can’t say, ‘If you’ve seen ten contracts for deed, you’ve seen them all.’ It doesn’t make you an expert, because the next ten will all be different.”
A tool for promoting homeownership
While the contract for deed may entail a litany of problems in the private market, this alternative financing device has proven to be a promising tool for the public and nonprofit sectors. Some housing funders and developers are using contracts for deed as a means of promoting homeownership for low- to moderate-income households. In particular, Minnesota Housing’s Minnesota Urban and Rural Homesteading Program (MURL) has utilized contracts for deed as an effective tool to assist hundreds of Minnesotans in achieving sustainable homeownership while stabilizing declining neighborhoods.5/
MURL allocates funds to local administrators to rehabilitate deteriorating single-family housing. The rehabilitated homes are then sold to at-risk homebuyers on an interest-free contract for deed. The program defines at-risk homebuyers as those who are “homeless, receiving public assistance or otherwise lacking the ability to meet mortgage underwriting standards for traditional financing.”
The MURL contract for deed requires homebuyers to make a monthly payment equivalent to 25 percent or more of their gross monthly income. (This is generally a good deal, considering that recipients of Section 8 federal housing assistance pay 30 percent of gross monthly income.) The goal of MURL is to allow homebuyers to eventually refinance or pay off the contract for deed and acquire fee simple title. The affordable monthly payments under the contract for deed allow the homebuyer to repair any outstanding credit issues while reducing the principal balance. Once the balance is reduced to a reasonable level, the homebuyer can refinance into a traditional mortgage.
According to a 2008 Annual Report Summary from Minnesota Housing, the MURL portfolio includes 350 homes. Over the past year, the default rate was 7.7 percent and the refinance/contract payoff rate was 2.6 percent. In contrast to the 60-day cancellation period in the private market, MURL includes a generous forbearance policy, designed to help the at-risk homebuyer be successful over the long term. It allows flexibility in cases of unforeseen circumstances that limit the homebuyer’s short-term ability to pay (e.g., unexpected health issue, short-term loss of employment).
The Family Housing Fund’s a nonprofit Twin Cities-based organization is launching a new program that will also utilize the contract for deed as a tool to create affordable housing opportunities. The new initiative, titled The Bridge to Success Contract for Deed Program, launched in fall 2008.
Through this program, the Family Housing Fund made a $500,000 loan to Dayton’s Bluff Neighborhood Housing Services (DBNHS) and Greater Metropolitan Housing Corporation (GMHC). These two organizations have a lender commitment similar to a line of credit of up to $1 million from a private lender. DBNHS and GMHC will use the funding pools to sell properties on a contract for deed to homebuyers who may not be ready to qualify for a traditional mortgage. The funds from the Family Housing Fund will make up 20 percent of the purchase price, with a balance of 80 percent funded by lenders. This arrangement eliminates the need for private mortgage insurance. Key components of The Bridge to Success Contract for Deed Program are homeownership education and financial counseling to ensure that the buyer is mortgage-ready in three years.7/
Advice from the experts
While a contract for deed may have its appeal as an alternative financing device, given the risks involved, buyers and sellers should proceed with caution when entering such an arrangement in the private market. The following advice from the Minnesota Legal Services Coalition stresses that both parties should make an effort to be fully informed.
First and foremost, the seller must set forth the terms of the contract in a purchase agreement. It is important that both parties fully understand the provisions of the contract, because once the purchase agreement has been signed, the options available to both the seller and buyer are limited.
The buyer should know whether he or she is responsible for property tax payments and insurance and whether the contract for deed includes a balloon payment. If it does include one, the buyer should be certain that he or she would be eligible for a mortgage to cover the payment when it comes due.
The buyer should also make sure that the seller is the true owner of the house by checking with the county recorder’s office to see who is listed as the registered owner. If the seller still has a mortgage encumbering the property or is responsible for paying the taxes or insurance, the buyer should contact the seller’s mortgage company prior to signing the contract to determine whether the seller is current on his or her payments. Some “scam” sellers will retain a buyer’s payments and not apply them to the mortgage. If the seller defaults on the mortgage in this scenario and the home is foreclosed, the buyer will lose the house and all the paid installments.
The buyer should ask the seller for a Truth in Sale of Housing report to determine the condition of the house. This report is required in Minneapolis and St. Paul and some other cities. In cities where it is not required, the seller should find his or her own inspector to assess the condition of the home.
Finally, according to Wertheim, once the contract for deed is executed, the buyer should record the contract immediately with the county recorder’s office or the registrar of titles. While statutes requiring this registration are rarely enforced, recording the contract will help prove the buyer’s possession of the property and protect him or her from post-contract encumbrances placed on the property by the seller.
Ensuring a positive outcome
It is important to note that despite their risks and sometimes negative associations, contracts for deed are not intrinsically bad. When used wisely, they can be a good fit for some consumers. Contracts for deed offer a swift, streamlined option for people who do not qualify for traditional mortgages or would prefer not to deal with mortgage lenders. When administered by public agencies or nonprofit housing organizations, contracts for deed can be a tool for building credit, promoting homeownership, and stabilizing neighborhoods.
To protect their interests in contracts for deed, sellers and buyers must do their homework, so to speak, by making sure they learn and understand what specific provisions and risks the contracts entail. Buyers in private contracts for deed should take additional steps. These include assessing the condition of the property, confirming that the seller has clear title, and recording the signed contract at the appropriate government office. By being informed and prepared, the buyer and seller in a contract for deed can help ensure a positive outcome for both parties.
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- AUDIO/VIDEO ONLINE CONSULTS AVAILABLE DIRECTLY WITH A LAWYER
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- What is a Side Letter Agreement in Real Estate?
What is a Side Letter Agreement?
“A Side Letter Agreement is an agreement considered separate and apart from the underlying contract but facilitative of the underlying contract”
A side letter or side agreement or side letter arrangement is an agreement that is not part of the underlying or primary contract or agreement, and which some or all parties to the contract use to reach an agreement on issues the primary contract does not cover or for which they require clarification, or to amend the primary contract. Under the law of contracts, a side letter has the same force as the underlying or primary contract. However, the validity of side letters has been denied by some courts in specific circumstances. Side letters are often used in financial or property transactions or other commercial contracts. They are usually in the form of a letter signed by parties signatory to the primary contract but can also be an oral agreement. As part of a business organization’s governance strategy, side letters should be under similar controls to any other contractual agreement, as they can have significant financial or operational impact, or expose the organization to risks of many types.
Side letters may also be used in relation to private fund contracts, for example, a particular investor may wish to vary the terms of a limited partnership agreement with respect to that particular investor. An investor might be seeking more favorable terms under the contract or might need the side letter to enter the venture under terms to meet regulatory requirements.
- MISSOURI STATUTE ON PROPERTY FRAUD
570.095. Filing false documents, offense of, elements — penalty, enhancement — restitution, when — system to log suspected fraudulent documents, procedure. — 1. A person commits the offense of filing false documents if:
(1) With the intent to defraud, deceive, harass, alarm, or negatively impact financially, or in such a manner reasonably calculated to deceive, defraud, harass, alarm, or negatively impact financially, he or she files, causes to be filed or recorded, or attempts to file or record, creates, uses as genuine, transfers or has transferred, presents, or prepares with knowledge or belief that it will be filed, presented, recorded, or transferred to the secretary of state or the secretary’s designee, to the recorder of deeds of any county or city not within a county or the recorder’s designee, to any municipal, county, district, or state government entity, division, agency, or office, or to any credit bureau or financial institution any of the following types of documents:
(a) Common law lien;
(b) Uniform commercial code filing or record;
(c) Real property recording;
(d) Financing statement;
(f) Warranty, special, or quitclaim deed;
(g) Quiet title claim or action;
(h) Deed in lieu of foreclosure;
(i) Legal affidavit;
(j) Legal process;
(k) Legal summons;
(l) Bills and due bills;
(m) Criminal charging documents or materially false criminal charging documents;
(n) Any other document not stated in this subdivision that is related to real property; or
(o) Any state, county, district, federal, municipal, credit bureau, or financial institution form or document; and
(2) Such document listed under subdivision (1) of this subsection contains materially false information; is fraudulent; is a forgery, as defined under section 570.090; lacks the consent of all parties listed in a document that requires mutual consent; or is invalid under Missouri law.
2. Filing false documents under this section is a class D felony for the first offense except the following circumstances shall be a class C felony:
(1) The defendant has been previously found guilty or pleaded guilty to a violation of this section;
(2) The victim or named party in the matter:
(a) Is an official elected to municipal, county, district, federal, or statewide office;
(b) Is an official appointed to municipal, county, district, federal, or statewide office; or
(c) Is an employee of an official elected or appointed to municipal, county, district, federal, or statewide office;
(3) The victim or named party in the matter is a judge or magistrate of:
(a) Any court or division of the court in this or any other state or an employee thereof; or
(b) Any court system of the United States or is an employee thereof;
(4) The victim or named party in the matter is a full-time, part-time, or reserve or auxiliary peace officer, as defined under section 590.010, who is licensed in this state or any other state;
(5) The victim or named party in the matter is a full-time, part-time, or volunteer firefighter in this state or any other state;
(6) The victim or named party in the matter is an officer of federal job class 1811 who is empowered to enforce United States laws;
(7) The victim or named party in the matter is a law enforcement officer of the United States as defined under 5 U.S.C. Section 8401(17)(A) or (D);
(8) The victim or named party in the matter is an employee of any law enforcement or legal prosecution agency in this state, any other state, or the United States;
(9) The victim or named party in the matter is an employee of a federal agency that has agents or officers of job class 1811 who are empowered to enforce United States laws or is an employee of a federal agency that has law enforcement officers as defined under 5 U.S.C. Section 8401(17)(A) or (D); or
(10) The victim or named party in the matter is an officer of the railroad police as defined under section 388.600.
3. For a penalty enhancement as described under subsection 2 of this section to apply, the occupation of the victim or named party shall be material to the subject matter of the document or documents filed or the relief sought by the document or documents filed, and the occupation of the victim or named party shall be materially connected to the apparent reason that the victim has been named, victimized, or involved. For purposes of subsection 2 of this section and this subsection, a person who has retired or resigned from any agency, institution, or occupation listed under subsection 2 of this section shall be considered the same as a person who remains in employment and shall also include the following family members of a person listed under subdivisions (2) to (9) of subsection 2 of this section:
(1) Such person’s spouse;
(2) Such person or such person’s spouse’s ancestor or descendant by blood or adoption; or
(3) Such person’s stepchild while the marriage creating that relationship exists.
4. Any person who pleads guilty or is found guilty under subsections 1 to 3 of this section shall be ordered by the court to make full restitution to any person or entity that has sustained actual losses or costs as a result of the actions of the defendants. Such restitution shall not be paid in lieu of jail or prison time but rather in addition to any jail or prison time imposed by the court.
5. (1) Nothing in this section shall limit the power of the state to investigate, charge, or punish any person for any conduct that constitutes a crime by any other statute of this state or the United States.
(2) No receiving entity shall be required under this section to retain the filing or record for prosecution under this section. A filing or record being rejected by the receiving entity shall not be used as an affirmative defense.
6. (1) Any agency of the state, a county, or a city not within a county that is responsible for or receives document filings or records, including county recorders of deeds and the secretary of state’s office, shall, by January 1, 2019, impose a system in which the documents that have been submitted to the receiving agency, or those filings rejected by the secretary of state under its legal authority, are logged or noted in a ledger, spreadsheet, or similar recording method if the filing or recording officer or employee believes the filings or records appear to be fraudulent or contain suspicious language. The receiving agency shall make noted documents available for review by:
(a) The jurisdictional prosecuting or circuit attorney or such attorney’s designee;
(b) The county sheriff or the sheriff’s designee;
(c) The police chief of a county or city not within a county or such chief’s designee; or
(d) A commissioned peace officer as defined under section 590.010.
Review of such documents is permissible for the agent or agencies under this subdivision without the need of a grand jury subpoena or court order. No fees or monetary charges shall be levied on the investigative agents or agencies for review of documents noted in the ledger or spreadsheet. The ledger or spreadsheet and its contents shall be retained by the agency that controls entries into such ledger or spreadsheet for a minimum of three years from the earliest entry listed in the ledger or spreadsheet.
(2) The receiving entity shall, upon receipt of a filing or record that has been noted as a suspicious filing or record, notify the chief law enforcement officer or such officer’s designee of the county and the prosecutor or the prosecutor’s designee of the county of the filing’s or record’s existence. Such notification shall be made within two business days of the filing or record having been received. Notification may be accomplished via email or via paper memorandum.
(3) No agency receiving the filing or record shall be required under this section to notify the person conducting the filing or record that the filing or record is entered as a logged or noted filing or record.
(4) Reviews to ensure compliance with the provisions of this section shall be the responsibility of any commissioned peace officer. Findings of noncompliance shall be reported to the jurisdictional prosecuting or circuit attorney or such attorney’s designee by any commissioned peace officer who has probable cause to believe that the noncompliance has taken place purposely, knowingly, recklessly, or with criminal negligence, as described under section 562.016.
7. To petition for a judicial review of a filing or record that is believed to be fraudulent, false, misleading, forged, or contains materially false information, a petitioner may file a probable cause statement that delineates the basis for the belief that the filing or record is materially false, contains materially false information, is a forgery, is fraudulent, or is misleading. This probable cause statement shall be filed in the associate or circuit court of the county in which the original filing or record was transferred, received, or recorded.
8. A filed petition under this section shall have an initial hearing date within twenty business days of the date the petition is filed with the court. A court ruling of invalid shall be evidence that the original filing or record was not accurate, true, or correct. A court ruling of invalid shall be retained or recorded at the original receiving entity. The receiving entity shall waive all filing or recording fees associated with the filing or recording of the court ruling document in this subsection. Such ruling may be forwarded to credit bureaus or other institutions at the request of the petitioner via motion to the applicable court at no additional cost to the petitioner.
9. If a filing or record is deemed invalid, court costs and fees are the responsibility of the party who originally initiated the filing or record. If the filing or record is deemed valid, no court costs or fees, in addition to standard filing fees, shall be assessed.
- OPTIONS FOR SELLER FINANCING
Top 10 Creative Financing Techniques
Sometimes a loan from your bank isn’t going to meet your needs. Below are ten techniques to get your creative financing wheels turning!
- Interest-only loans — If you are an investor looking to purchase, rehab, and sell a property quickly, an interest-only loan may make sense. This financing allows you to make small payments at the beginning of the loan, leaving more money for renovations. When you sell the property for a profit, you can pay off the loan in full, having paid only a small amount of interest.
- Seller carry-back — Also known as owner-financing, the seller of the property agrees to finance the property outright. They transfer the title to you in exchange for a promissory note and deed of trust for the full purchase price of the property.
- Seller second mortgages — If the buyer can obtain a loan, but not for the full price of the property, sometimes a seller second mortgage is what is needed to make the transaction possible. In this case, the bank mortgage pays the seller for the bulk of the amount owed (for example 80 percent), and the seller deeds the property to the purchaser in exchange for a promissory note for the amount of the balance remaining (in this example 20 percent).
- Contract for deed — Similar to seller carry-back, a contract for deed is another method of owner- financing. The difference under a contract for deed is that the seller retains title to the property until the mortgage has been paid in full.
- Private mortgages — Private mortgages work like mortgages from a bank, but since the lender is an independent entity, they can follow different guidelines for lending. Interest rates are often higher, but this creative mortgage technique allows more borrowers to qualify for a loan.
- Assume payments — If you can find a seller who needs to sell a property quickly and has financing in place, you can assume the seller’s payments, often with little or no down payment.
- Short sales — A short sale is when a seller markets the property for less than the amount owed against it and the lien-holder agrees to accept that amount as payment in full. This is often done to avoid the credit implications and costs of foreclosure. Purchasing short sales allows you to purchase property at a discounted price. The resulting immediate equity in the property makes this a wonderful creative financing strategy!
- Lease options — A lease option allows the buyer to rent the property for a given amount of time, with a portion of their rent credited toward the purchase price of the home. At the end of the lease, the buyer has the option to purchase the property at the amount agreed upon when the lease was created.
- Retirement accounts — Most retirement accounts will allow you to borrow from yourself and repay the funds over time at a low interest rate. What a great creative financing resource!
- Loans from family and friends — Friends and family may be willing to invest in your business in the form of personal loans. Talk to the people around you, share your enthusiasm and your needs, and perhaps “Aunt Jan’s” loan will be the next option in your creative financing approach.
- INVESTMENT FIRMS MAKING IT DIFFICULT FOR FIRST TIME HOME BUYERS
INVESTMENT FIRMS MAKING IT DIFFICULT FOR FIRST TIME HOME BUYERS
Democratic lawmakers are scrutinizing whether the American dream of a suburban home and white picket fence is being seized upon by large institutional investors, costing working people a shot at property ownership.
The House Financial Services Subcommittee on Oversight and Investigations held the virtual panel Tuesday, titled “Where Have All the Houses Gone? Private Equity, Single Family Rentals, and America’s Neighborhoods,” to probe the impacts of firms engaging in what Rep. Al Green, the subcommittee’s chair, dubbed “mass predatory purchasing.”
Shad Bogany, a real estate agent and advocate who testified before the committee, also said that institutional investors are “creating a generation of renters that will miss out on the benefits of homeownership, the ability to create wealth and stabilize communities.”
“Congress, we need you to act,” Bogany said.
Corporate ownership of single-family rental homes — which comprise about a third of the nation’s rental housing stock — has risen significantly since the 2008 financial crisis, when firms swooped in to purchase foreclosed properties, according to a committee memorandum. And the third quarter of 2021 marked the fastest annual increase in corporate ownership in 16 years, the memorandum said. What’s more, as the housing market grew hotter, and prices skewed higher, the investors had the advantage of being able to purchase homes with cash, trumping first-time and lower-income buyers.
‘After an extensive investigation into this practice, we have found that private equity companies have bought up hundreds of thousands of single-family homes and placed them on the rental market.’
In the Atlanta metro area, 42.8% of for-sale homes went to institutional investors in the third quarter of 2021, while investors purchased 38.8% of homes in the Phoenix-Glendale-Scottsdale area during the same period, the committee’s memorandum said.
“After an extensive investigation into this practice, we have found that private equity companies have bought up hundreds of thousands of single-family homes and placed them on the rental market,” Green, a Democratic congressman from Georgia, said during the hearing Tuesday.
“This removes from the housing market homes that might otherwise have been purchased by individual homeowners,” he added. “These corporate buyers have tended to target lower-priced starter homes requiring limited renovation; these homes would likely have been bought by first-time buyers, low- to middle-income home-buyers, or both.”
The homes, Green said, are often located in communities with higher-than-average populations of people of color. For example, the average population of five large investors’ top 20 ZIP codes is about 40% Black, although Black people comprise just 13.4% of the overall population in the U.S. according to to survey data from Invitation Homes, INVH, +0.64% American Homes 4 Rent AMH, +0.42%, FirstKey Homes, Progress Residential, and Amherst Residential, as well as an analysis of government data, according to the committee’s memorandum.
The average population of five large investors’ top 20 ZIP codes is about 40% Black, although Black people comprise just 13.4% of the overall population in the U.S.
Republicans, however, said during the hearing that the Biden administration was to blame for rising prices and accused Democrats of scapegoating Wall Street while attempting to distract people from the worst inflation in decades.
- MISSOURI ENACTS AMENDMENTS TO THE MISSOURI MECHANDISING PRACTICES ACT
On July 2, 2020, Governor Mike Parson signed Senate Bill (SB) 591, which makes a number of reforms to the Missouri Merchandising Practices Act (MMPA) and statutes governing the standards and procedure for recovering punitive damages. The changes are intended to narrow the scope of the MMPA, constrain punitive damages and attorney’s fee awards, and make it easier for defendants to obtain early dismissal of MMPA claims brought by consumers who claim to have been misled by conduct that would not mislead a “reasonable consumer.”
The MMPA is one of the most sweeping consumer protection laws in the country, covering a wide swath of conduct and authorizing fee-shifting. An MMPA claim is thus a powerful tool in the plaintiff lawyer’s arsenal and—coupled with class-action allegations—can represent significant potential liability for businesses. Because it can be difficult to obtain dismissal of MMPA claims even when they are based on innocuous conduct unlikely to mislead or harm the average consumer, litigation costs may drive defendants to settle even weak claims.
SB 591’s amendments to the MMPA will likely give defendants facing marginal cases a greater chance of obtaining dismissal and, even if the case goes to trial, may lower the prospects of a significant attorney’s fee award where actual damages are limited or non-existent. The amendments will:
- Require both individual plaintiffs and class representatives seeking damages to prove: (1) they acted as a reasonable consumer would under the circumstances, (2) the business practice complained of would cause a reasonable person to enter into the transaction that resulted in damages, and (3) their damages can be proved with a reasonable degree of certainty using objective evidence
- Empower courts to dismiss a plaintiff’s claim as a matter of law if the plaintiff fails to plead facts demonstrating the conduct complained of would likely mislead a reasonable consumer
- Require any attorney’s fees award in a case where damages are awarded to bear a reasonable relationship to the amount of the judgment
- Exempt warranties provided by builders in connection with the sale of new residences from the scope of the MMPA so long as the warranty contains a statutory disclaimer
SB 591 also alters the standards and procedures for recovering punitive damages in all cases, including those brought under the MMPA. The changes will:
- Preclude an award of punitive damages unless a plaintiff proves by clear and convincing evidence the defendant “intentionally harmed the plaintiff without just cause or acted with deliberate and flagrant disregard for the safety of others”
- Separately preclude the award of punitive damages if the jury awards only nominal actual damages, except in certain cases involving the violation of privacy, property, or constitutional rights
- Limit the circumstances under which punitive damages can be imposed on an employer for the acts of an agent
- Bar a plaintiff from requesting punitive damages in the initial pleading and instead require a plaintiff to request punitive damages in an amended claim requiring leave of court. To obtain leave, the plaintiff must submit evidence establishing a reasonable basis for the jury to award punitive damages.
Under the amended MMPA, defendants may now be able to obtain early dismissal of a plaintiff or class representative’s claims if they can convince the court the plaintiff has not alleged conduct that would mislead a reasonable consumer. This change is likely to have the most impact in cases where a plaintiff alleges the defendant has committed a technical violation of some legal requirement that is unlikely to harm or mislead the average consumer (e.g., “slack-fill” claims).
It is questionable whether the amendments concerning attorney’s fees will have much impact. The amendments state the amount of fees awarded “shall” bear a reasonable relationship to the amount of the judgment. The obvious intent here is to lower fee awards where actual damages are minimal. Currently, the relationship between fees and the amount recovered is but one factor considered by courts in awarding fees. However, the amended statute also provides that when the judgment grants equitable relief, the fee award shall be based on the time reasonably expended. Since that is the current standard and most plaintiff lawyers seek both damages and injunctive relief, it is not clear this change will meaningfully constrain fee awards.
The most significant change to the punitive damages statutes for purposes of MMPA claims is the new procedure barring plaintiffs from requesting punitive damages without leave of court. These amendments are intended to give trial court judges a more active role in policing whether a defendant must face the threat of punitive damages. Depending on how rigorously trial courts apply this provision, defendants may gain greater leverage in settlement discussions without a punitive damages claim in the case.
One byproduct of the changes to the punitive damages statutes and MMPA attorney’s fees provisions is that some out-of-state defendants may face increased difficulty removing cases to federal court. Historically, the ready availability of significant attorney’s fee awards and punitive damages in MMPA cases has made it somewhat easy for out-of-state defendants to remove cases asserting MMPA claims. The elimination of plaintiffs’ ability to request punitive damages in an initial pleading combined with restrictions on the amount of attorneys’ fees that can be recovered may maroon a greater number of defendants in state court.
The amendments in SB 591 go into effect on August 28, 2020.
- OPEN DOOR ORDERED TO PAY $62,000,000.00 FINE FOR DECEPTIVE PRACTICES
The Federal Trade Commission today took action against online home buying firm Opendoor Labs Inc., for cheating potential home sellers by tricking them into thinking that they could make more money selling their home to Opendoor than on the open market using the traditional sales process. The FTC alleged that Opendoor pitched potential sellers using misleading and deceptive information, and in reality, most people who sold to Opendoor made thousands of dollars less than they would have made selling their homes using the traditional process. Under a proposed administrative order, Opendoor will have to pay $62 million and stop its deceptive tactics.
“Opendoor promised to revolutionize the real estate market but built its business using old-fashioned deception about how much consumers could earn from selling their homes on the platform,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “There is nothing innovative about cheating consumers.”
Opendoor, headquartered in Tempe, Arizona, operates an online real estate business that, among other things, buys homes directly from consumers as an alternative to consumers selling their homes on the open market. Advertised as an “iBuyer,” Opendoor claimed to use cutting-edge technology to save consumers money by providing “market-value” offers and reducing transaction costs compared with the traditional home sales process.
Opendoor’s marketing materials included charts comparing their consumers’ net proceeds from selling to Opendoor versus on the market. Those charts almost always showed that consumers would make thousands of dollars more by selling to Opendoor. In fact, the complaint states, the vast majority of consumers who sold to Opendoor actually lost thousands of dollars compared with selling on the traditional market, because the company’s offers have been below market value on average and its costs have been higher than what consumers typically pay when using a traditional realtor.
The agency’s investigation found that Opendoor also violated the law by misrepresenting that:
- Opendoor used projected market value prices when making offers to buy homes, when in fact those prices included downward adjustments to the market values;
- Opendoor made money from disclosed fees when in reality it made money by buying low and selling high;
- consumers likely would have paid the same amount in repair costs whether they sold their home through Opendoor or in traditional sales; and
- consumers likely would have paid less in costs by selling to Opendoor than they would pay in traditional sales.
Opendoor has agreed to a proposed order that requires the company to:
- Pay $62 million: The order requires Opendoor to pay the Commission $62 million, which is expected to be used for consumer redress.
- Stop deceiving potential home sellers: The order prohibits Opendoor from making the deceptive, false, and unsubstantiated claims it made to consumers about how much money they will receive or the costs they will have to pay to use its service.
- Stop making baseless claims: The order requires Opendoor to have competent and reliable evidence to support any representations made about the costs, savings, or financial benefits associated with using its service, and any claims about the costs associated with traditional home sales.
The Commission vote to accept the consent agreement was 5-0. The FTC will publish a description of the consent agreement package in the Federal Register soon. The agreement will be subject to public comment for 30 days, after which the Commission will decide whether to make the proposed consent order final. Instructions for filing comments appear in the published notice. Once processed, comments will be posted on Regulations.gov.
NOTE: When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of up to $46,517.
The Federal Trade Commission works to promote competition and protect and educate consumers. Learn more about consumer topics at consumer.ftc.gov, or report fraud, scams, and bad business practices at ReportFraud.ftc.gov. Follow the FTC on social media, read consumer alerts and the business blog, and sign up to get the latest FTC news and alerts.
- INVESTOR SERVICES – WE ASSIST IN BUYING AND SELLING NON-PERFORMING NOTES AND NON-PERFORMING REAL ESTATE ASSETS
Our office assists in connecting BUYERS and SELLERS of NON PERFORMING REAL ESTATE ASSETS and NON PERFORMING REAL ESTATE NOTES.
NON-PERFORMING REAL ESTATE ASSETS
Inherited Properties – You and/or your siblings have inherited a property and do not have the time to go through the sales process or do not trust turning your family property over to a real estate agent. You want to close on the house quickly but fairly and with the assurance, that your long-term interests are being professionally represented. (Commercial * Residential)
Rental Properties – Let’s face it being a landlord sometimes is not what it is cracked up to be. Taxes, Insurance, Vacancy Rates, Property Destruction, Vandalism, Municipal Violations, Clean Up Costs, and the cost to relet the property if vacant, or hire an attorney for an eviction proceeding if not vacant. In this case, we can find a buyer and get you out of the property and the expenses associated with regaining possession and rehabbing or making repairs to the property for resale. (Commercial * Residential)
NON-PERFORMING REAL ESTATE NOTES
- Promissory Note and Deed of Trust/Mortgage – You may have loaned money on an owner-financed transaction and the borrower has stopped making payments or is otherwise in default on the note. You need your money back, but do not want to pay the legal fees and costs to foreclose on the property and/or do not have the time to go through the legal process to liquidate the asset such as a Quiet Title Action or Petition for Unlawful Detainer involving significant amounts of time and money.
- ITS FINALLY HAPPENED. COURT APPOINTED ATTORNEYS TO REPRESENT TENANTS AT NO COST TO THE TENANT
I have been practicing law for 32 years and I never thought I would see the day tenants would have free legal representation at a landlord-tenant docket. Last week I was in Kansas City Jackson County Associate Court Docket and there were tenant lawyer representatives appearing and handing out flyers to tenants providing legal advice on what to do and what numbers to call for rental assistance and how to obtain continuances. The whole thrust seemed to be applying for rental assistance and making the landlord at least substantially whole – whatever that means.
My mind immediately began to spin about the implications of this for landlords. I was at a docket a week prior and the Judge was handing out automatic continuances if the renter could show THEY APPLIED for rental assistance. So months and months are going by while assistance is being obtained.
But what about all the owners who have month-to-month tenants who have now decided to sell their property or better yet move into their own property. These landlords do not want the tenant’s rent, they want the house back to sell or live in – or quit possibly the tenant has been paying under market rent for several years or decades and now with housing appreciation, the landlord wants to raise the rent, or sell the property.
I do not see how these types of services are going to make a difference. However I would strongly encourage landlords with properties in Kansas City, Missouri – ONLY DO MONTH TO MONTH LEASES, if it is a term lease the Judge is going to give the tenant an automatic right to apply for housing assistance, etc….. like reinstatement rights in a mortgage and its hard to imagine the outside boundaries of that. Evictions could take 6 months a year? ALSO, ADD SOME FORM OF RE-REINSTATEMENT FEE IF THE LEASE IS A TERM LEASE AND YOU FIND YOURSELF IN THIS VERY SITUATION. If it is not in the lease it will not be allowed. I suppose some of this is to shift the burden of housing back onto the landlords but it seems to me this is just going to make renting harder and less affordable.
- JACKSON COUNTY LANDLORDS BEWARE OF WHAT IS COMING AFTER 6/1/2022
Jackson County Tenant’s Bill of Rights and
This bill was introduced in October 2019 by Kansas City Mayor Quinton Lucas. The bill, which becomes
law on June 1, 2020, focuses heavily on implementing new policies and procedures centered around renter protections in the Kansas City area.
Here is a list of important takeaways for landlords:
The ordinance applies to leases entered into after June 1, 2020. Any leases signed before June
1, 2020 are not covered by the ordinance.
Before entering into a contract, landlords are required to provide prospective tenants:
1. Phone number for every utility provider used to service the unit. (Section 34-848.2(a)).
2. A written description of all notices of deficiencies and citations issued to the owner of the
property for the past 24-months. (Section 34-848.2(b)). Landlords can show they have complied with this requirement, by including a page at the back of the lease stating prior to signing the contract, the tenant has been provided these three requirements. There is no time frame stated in which a landlord has to provide this information to tenants.
3. Copy of the tenant’s bill of rights (Section 34-848.2(c)). The Federal Fair Housing law has not changed. Landlords cannot discriminate against potential renters based on their race, color, national origin, religion, sex, familial status, and disability. However, the new ordinance includes the prohibition of landlords discriminating against sexual orientation, gender identity, gender expression, and victims of domestic violence.
4. Landlords are now required to provide at least 24-hours’ advance notice to the tenant before
entering the property. The notice must provide the date and time, the identity of the person or persons who will be entering, and the purpose of their entrance.
5, Landlords cannot discriminate against tenants based on their lawful source of income. Spousal
support, child support, section 8, or other subsidies are considered lawful income.
6. The ordinance restricts a landlord’s ability to have a blanket policy to reject prospective
tenants based on criminal or eviction backgrounds. The ordinance requires that landlords review
all documents provided by a prospective tenant before rejecting their application.
AT A RECENT COURT DOCKET THE JUDGE EXPLAINED TO ME THAT AS OF THE EFFECTIVE DATE OF THIS ACT, PUBLIC DEFENDERS ARE GOING TO BE APPOINTED TO REPRESENT TENANTS AT NO COST TO THE TENANT. THIS WILL NO DOUBT MAKE EVICTIONS MUCH MORE EXPENSIVE AND TIME-CONSUMING AND CERTAINLY MAKE THE OUTCOME OF THE EVICTION LESS CERTAIN.
SUGGESTION – GET NEW LEASES EXECUTED PRIOR TO JUNE 1ST, 2022.
- KANSAS MARITAL PROPERTY LAW AND REAL ESTATE LAW
Kansas Marital Property Law and Real Estate Law
“Marital property” is the legal term that refers to all of the possessions and interests acquired after a couple gets married.
While a few states have enacted laws that consider all marital property as “community property,” which is equally owned by both parties and must be equally divided after a divorce. Kansas, however, has no community property law. This allows for courts and the parties to be more flexible (and also more unpredictable) when dividing marital property during a divorce.
I. Marital Property Laws in Kansas
Code Section Kansas Statutes 23-2801: Martial Property
Kansas Statutes 23-2802: Division of Property
Community Property Recognized? No Dower And Curtesy Dower and curtesy abolished
Kansas Statutes 59-505: Half of the Realty to
Marital Property and Separate Property
As noted above, the majority of the property you buy or receive while married becomes marital property. In the case of a divorce, marital property is considered jointly owned by both spouses and will get jointly divided, normally as close as possible to an even split. There are a few exceptions to the marital property rule for things like inheritance, gifts, and in some cases 401Ks, which are considered separate property. Separate property is the property that you owned before the marriage and is normally not subject to division.
Because there are no state community property laws, Kansas courts will determine a “fair” property division between divorcing parties. For the most part, courts consider each party getting about half of the jointly owned property as fair. That said, a court could decide that an unequal property split is fair, which could happen if one spouse alleges some fault on the part of the other spouse. If both spouses are able to create their own agreement regarding property division, courts will generally accept their agreement.
Kansas is an equitable distribution state, and assets acquired both during and prior to the marriage can be subject to equitable division by Judicial Order.
Unequal income or other offsetting factors may support an unequal distribution of assets.
- SELLERS SETTING BUYER BROKER REAL ESTATE COMMISSIONS MAY BECOME A THING OF THE PAST
Thousands of Midwest home sellers are eligible to join a lawsuit challenging real estate fees
A federal judge certified the case as a class action, meaning thousands of home sellers in the Midwest may be eligible to recover damages if the plaintiffs prevail.
A federal lawsuit in Kansas City challenging rules requiring home sellers to pay commissions to brokers representing home buyers has been certified as a class action, meaning thousands of home sellers in the Midwest may be eligible to recover damages if the plaintiffs prevail.
U.S. District Judge Stephen Bough on Friday ruled that the lawsuit, which was originally filed in 2019 on behalf of Missouri home sellers who had listed their homes on the Multiple Listing Services system (MLS), met the criteria for a class action, including numerosity and common questions of law or fact.
The Kansas City case, along with a nearly identical federal lawsuit in Chicago, challenges uncompetitive rules that consumer advocates have long criticized for artificially inflating real estate commissions.
The suit names the National Association of Realtors (NAR) and the nation’s four largest national real estate broker franchisors: Realogy Holdings Corp.; HomeServices of America, Inc.; RE/MAX Holdings, Inc.; and Keller Williams Realty, Inc.
The Defendants own and operate some of the largest real estate brokerages in the country. HomeServices of America, an affiliate of Berkshire Hathaway, owns and operates ReeceNichols Real Estate and Prudential Real Estate, among others. Realogy Holdings owns and operates Century 21 and Coldwell Banker, among others.
The plaintiffs allege the real estate brokerages and NAR have conspired to require home sellers to pay brokers representing home buyers inflated amounts, in violation of federal antitrust law, Missouri antitrust law, and the Missouri Merchandising Practices Act.
“The cornerstone of Defendants’ conspiracy is NAR’s adoption and implementation of a rule that requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation …when listing a property on a Multiple Listing Service …,” the lawsuit states.
As a condition of listing their homes on an MLS, a centralized database listing homes for sale, sellers are required to agree that the listing agent will split the commission with the agent representing the buyer.
Absent that requirement, the plaintiffs claim, “seller brokers would set a commission to pay themselves alone and would likely begin to engage in more vigorous competition with one another to lower their rates and/or provide additional services to justify their newly transparent rates.”
A federal judge in Chicago has allowed a similar class-action lawsuit to proceed, ruling that the home sellers had supported their allegations of a “pricing system in which the seller is essentially locked into a buyer-broker commission rate upfront that neither the buyer nor the seller has the incentive or ability to negotiate.”
NAR argues that the MLS system is efficient and beneficial to consumers. It says that it allows many first-time, low-income buyers to purchase a home they couldn’t otherwise afford because they don’t have to pay brokers directly.
In response to a request for comment, NAR emailed a statement to KCUR saying it was disappointed with Bough’s ruling, which it said it plans to appeal.
“The pro-competitive, pro-consumer local broker marketplaces serve the best interests of buyers and sellers,” NAR said. “Local broker marketplaces ensure equity, transparency, and market-driven pricing options for the benefit of home buyers and sellers. These marketplaces reduce transaction costs by ensuring, among other things, that a buyer broker and their client understand how much the listing broker will pay the buyer broker for procuring a buyer for the listed property.
“Local broker marketplaces also level the playing field among brokerages, allowing small brokerages to compete with large ones, and provide for unprecedented competition among brokers, including different service and pricing models.”
NAR, which is headquartered in Chicago, represents more than 1.3 million real estate agents belonging to some 1,200 local associations and boards in all 50 states, the District of Columbia, and U.S. territories.
Not long after the lawsuits in Kansas City and Chicago were filed, the U.S. Justice Department filed a civil suit against NAR alleging it had established and enforced illegal restraints on how real estate agents compete. The department later withdrew from a proposed settlement of the case, saying it was too narrow in focus and didn’t sufficiently protect its ability to pursue future claims against NAR.
“Real estate is central to the American economy and consumers pay billions of dollars in real estate commissions every year,” Acting Assistant Attorney General Richard Powers said in a statement about the department’s withdrawal from the settlement. “We cannot be bound by a settlement that prevents our ability to protect competition in a market that profoundly affects Americans’ financial well-being.”
NAR has petitioned to block the Justice Department’s withdrawal from the settlement, which was reached during former President Donald Trump’s administration. The petition is pending.
In granting the plaintiffs’ request for class certification, Bough certified three separate classes, including one consisting of all home sellers since April 29, 2015, who used a listing broker affiliated with the defendants and who paid a commission to the buyer’s broker when they sold their homes.
The plaintiffs estimate the classes include “hundreds of thousands of class members geographically dispersed throughout the state of Missouri and portions of Kansas and Illinois.”
- WHAT IS HOUSE HACKING?
WHAT IS HOUSE HACKING?
Have you been curious about getting into real estate investing but feel discouraged because you haven’t even purchased your own home yet? Are you someone who is interested in earning passive income but doesn’t know how to get started? Read on to find out how house hacking could be the answer to significantly reducing your housing expense and finally launching your investing career.
What Is House Hacking?
House hacking is a real estate investing strategy through which investors earn rental income by renting out their primary residence. House hacking originated in areas where it became too expensive to own a home and live comfortably. Homeowners found it too costly to live close to work or in desirable areas and make their monthly mortgage payments. Their problem was living in one of their multiunit properties’ spaces and leasing out the other units. This way, their expenses were offset by the income of their tenants’ rent. House hacking a single-family home is also a popular option for those who don’t want to buy a multifamily property. Renting out one or more bedrooms, “hacking” the garage into a living space, or putting a tiny home on the premises are valid examples of house hacking.
Top 4 Benefits Of House hacking
According to the CONSUMER EXPENDITURE SURVEY conducted by the U.S. Bureau of Labor Statistics, the average American household currently spends close to $20,000 (or 33%) of their annual income on housing-related costs. Imagine what you could do if you could get your housing expenses covered and increase your disposable income by a third. Here are some other benefits to consider:
- Reduce or eliminate your housing cost: When done correctly, house hacking can help reduce your housing expense or even eliminate it. Although a multi-unit property will have a higher upfront cost, renting out the other units means someone else can pay your mortgage for you.
- Gain flexibility: House hacking provides flexibility for those with an evolving lifestyle. For instance, if your company suddenly transfers you to a new city, you can rent out your unit and continue earning your rental income. You even have the option of converting the property into a single-family home for when your family grows.
- Ease into your rental property career: When living on-site and near tenants, you will learn how to be a landlord quickly. Your personal involvement in the living community will provide you with the valuable skills needed to manage properties and perform regular maintenance. Get acquainted with the various tax benefits available to rental property owners, such as depreciation benefits or business-related tax deductions.
- Grow your wealth through passive income: The extra cash flow earned through house hacking gives you the option to pay down your mortgage quickly and save up toward your next investment property. Learn more about how you can pursue both of these options using the debt snowball method.
- Mitigate Risk: According to Daniel Sperling-Horowitz, the CEO of OfferMarket, house hacking is a great way to mitigate risk. “House hacking de-risks the home purchase because you subsidize your monthly costs of homeownership (principal, interest, taxes, and insurance (aka PITI) and maintenance). This is not only a great way to build equity instead of spending money on rent, it’s also a great way to dramatically reduce your overall housing costs, which allows increased savings and investment,” according to Sperling-Horowitz.
How To House Hack
If you’re convinced that house hacking is the right strategy for you, you’ll want to know how to get started. Before thinking about finding tenants or how much you want to charge for rent, the first order of business is knowing how to find the right property. The following steps will be expanded upon in the sections below:
- Determine your funding source.
- Conduct market research to find properties.
- Always run your numbers to find the best deal.
1. Figure Out The Financing
Because of your status as an owner-occupant, not only will you have access to conventional loans, you may also have access to homebuyer-assistance programs. As long as you live in one of your property’s units, you may qualify for a loan that offers attractive terms and low down payment options.
For example, the Federal Housing Administration (FHA) loan allows multifamily properties with up to four units. It requires a down payment that is as low as 3.5 percent of the purchase price. The FHA 203K loan is great for investors who want to improve units before renting them out. Find out if you qualify for any of these twelve homeownership programs and grants.
Others may opt for the BRRR method, which stands for buy, rehab, rent, and refinance. Visit this resource on how to employ the BRRR strategy for house hacking, which involves the use of short-term funds to initially rehab and rent out your property, followed by long-term mortgage refinancing.
2. Find The Best Property
When purchasing a multifamily property, you’ll want to have a rental property business owner’s mindset. This means that location is a critically important factor to consider, as it will determine your purchase price, rent price, and desirability. In addition, population growth, job growth, and the availability of local amenities are all factors that help indicate the stability and growth of a rental market. As a beginner, work with a real estate agent who specializes in multi-unit properties and can give you an idea of purchase prices and rental rates in each market.
There are other aspects of a property you can look out for on your search for a house hacking opportunity. In addition to multifamily properties, also take note of the following features:
- Finished basements: Some single-family homes have finished basements that have been converted into living spaces. It is common for homeowners to even include kitchenettes, bedrooms, and even full bathrooms. This allows the homeowner to live in this added space while renting out the main portion of the property. The owner can have “free” housing while paying off their mortgage and building equity.
- Additional dwelling units: ADUs are usually separated, permitted structures added to the property. These additions usually have electricity, plumbing, and other necessities for living. ADUs are commonly referred to as guest houses or in-law units. If these spaces are permitted to be rented, the property will be a great investment opportunity.
- Multiple bedrooms: If you can’t find a multifamily property, single-family homes with multiple bedrooms also present worthwhile house hacking opportunities. The more bedrooms a property has, the more spaces can be rented out. While a property may be large in square footage, what matters most is the number of bedrooms.
- Easily converted areas: Even if a property doesn’t have multiple bedrooms at first, convertible areas you can make into bedrooms is the next best thing. Lofts, dining rooms, and bonus rooms can all be converted into bedrooms. Adding bedrooms will not only add value to the property, but it will allow for more rentable space.
- Properties near public transportation: While multiple, rentable spaces is important, it is not the only factor you should consider. You may have space, but you will run into problems if you’re in an area undesirable to renters. Try and find properties in the most desirable parts of the area first, then select the best property for your needs.
- Areas without restrictions: It is common for HOA’s to not allow non-owner occupancy. Similarly, several areas do not allow for short-term rentals, like VRBO or Airbnb.
- Comfortable living spaces: While bedrooms are important, you will also want living spaces where your tenants can live comfortably. This includes family rooms, living rooms, dining rooms, and lofts. More areas for your tenants means additional rent and the likelihood your tenants will stay for a longer period.
3. Run The Numbers
Once you’ve identified one or more properties that fit your criteria, the next step is running a deal analysis to determine whether an investment is worthwhile. To run your analysis, you will need to make some calculations. First, estimate your rental income and property expenses to arrive at your Net Operating Income (NOI). Here are some example line items to include in your calculation:
- Rental income
- Property taxes
- Maintenance & repairs
- Operating expenses
- Vacancy reserve
Next, calculate your monthly mortgage payment, which will require the purchase price and estimated down payment amount. Mortgage Calculator makes it very easy to calculate your mortgage payments online. Your monthly payment is then subtracted from the NOI to arrive at your monthly cash flow. This number indicates how much rental income you have left over after paying all property expenses—including your mortgage.
A positive cash flow means that you live at your property for free, with some income left over. On the other hand, if you have a negative cash flow, it can still mean that your personal living expense has been reduced significantly.
Riley Adams offers his own story of qualifying for a loan for his multifamily unit: “When purchasing the home, since we would be owner-occupants, we were allowed to use a traditional 30-year mortgage to purchase and finance the property. We needed to meet standard credit requirements, income needs, and other applicable standards for receiving a loan. However, we also were able to include the expected rental income in our income total used to qualify for the loan. Doing this helped to some extent offer favorable terms on our loan.”
At the end of the day, you’ll want to make sure that the numbers work for you and your financial goals. Running an accurate deal analysis is paramount in making sure you make the best investment decision possible. Be sure to check out this additional resource on deal analysis basics for first-time investors.
House Hacking Mistakes To Avoid
Once you’ve identified and purchased a great property following the steps above, you’ll want to safeguard your investment. You will want to avoid some major pitfalls at all costs. Here are some common mistakes that your house hacking predecessors have made and how to avoid them:
- Picking an undesirable neighborhood: By picking the right neighborhood, you can charge profitable rental rates and attract quality tenants. If you wouldn’t want to live there, most likely, your tenants wouldn’t want to either.
- Ignoring local ordinances: If you plan to make changes or additions to existing property (such as house hacking a duplex to add a third unit), be sure to check your local zoning ordinances. Not following the law can result in legal action and impact your property value.
- Forgetting to budget for repairs: Experienced landlords will tell you that the best way to safeguard your investment is to set aside a budget for repairs and other capital expenditures. If you are not financially prepared when the roof collapses or multiple appliances break at once, you can easily derail your finances. A great way to protect yourself is to set aside a percentage of your rental income each month to spread out the cost of repairs, emergencies, and vacancies.
- Not taking landlord duties seriously: You may develop close relationships with your tenants when you live near them, but you should always take landlording seriously. This includes responsibilities such as screening and evicting tenants, collecting rent, and responding to maintenance issues. Not taking your duties seriously could result in a detrimental financial impact and legal action.
- Not setting tenant boundaries: Living on the same property as your tenants also calls for setting clear, enforceable boundaries early on. If you don’t want tenants to knock on your door in the middle of the night, you should communicate your expectations and correct actions when necessary.
When done correctly, house hacking is a great way to quickly pay off your mortgage, allowing you to reinvest your cash flow and expand your portfolio. Using the method purely as a means to reduce your housing costs is also perfectly reasonable. However, you may come to realize that earning passive income is an incredibly effective method for growing your wealth, serving as your pathway to financial freedom.
- WHY RENTERS CANNOT GET AHEAD
- EVERYTHING YOU NEED TO KNOW ABOUT REAL ESTATE CONTRACTS
EVERYTHING YOU NEED TO KNOW ABOUT REAL ESTATE CONTRACTS
A real estate contract is a contract between parties for the purchase and sale, exchange, or other conveyance of real estate. The sale of land is governed by the laws and practices of the jurisdiction in which the land is located. Real estate called a leasehold estate is actually a rental of real property such as an apartment, and leases (rental contracts) cover such rentals since they typically do not result in recordable deeds. Freehold (“More permanent”) conveyances of real estate are covered by real estate contracts, including conveying fee simple title, life estates, remainder estates, and freehold easement. Real estate contracts are typically bilateral contracts (i. e., agreed to by two parties) and should have the legal requirements specified by contract law in general and should also be in writing to be enforceable.
Details explained in the contract
It is a legal requirement in all jurisdictions that contracts for the sale of land be in writing to be enforceable. The various Statutes of Frauds require contracts for the sale of land to be in writing. In South Africa, the Alienation of Land Act specifies that any agreement of sale of immovable property must be in writing. In Italy, each transfer of real estate must be registered in front of a notary public in writing.
The common practice is for an “exchange of contracts” to take place. This involves two copies of the contract of sale being signed, one copy of which is retained by each party. When the parties are together, both would usually sign both copies, one copy of which would be retained by each party, sometimes with a formal handing over of a copy from one party to the other. However, it is usually sufficient that only the copy retained by each party be signed by the other party only. This rule enables contracts to be “exchanged” by mail. Both copies of the contract of sale become binding only after each party is in possession of a copy of the contract signed by the other party—ie., the exchange is said to be “complete”. An exchange by electronic means is generally insufficient for exchange unless the laws of the jurisdiction expressly validate such signatures.
A contract for the sale of land must:
- Identify the parties: The full name of the parties must be on the contract. In a sales contract, the parties are the seller(s) and buyer(s) of the real estate, who are often called the principles to distinguish them from a real estate agent who are effectively their intermediaries and representatives in the negotiation of the price. If there are any real estate agents brokering the sale, they are typically listed also as the real estate brokers/agents who would earn the commission from the sale.
- Identify the real estate (property): At least the address, but preferably the legal description must be on the contract.
- Identify the purchase price: The amount of the sales price or a reasonably ascertainable figure (an appraisal to be completed at a future date) must be on the contract.
- Include signatures: A real estate contract must be entered into voluntarily (not by force) and must be signed by the parties.
- Have a legal purpose: The contract is void if it calls for illegal action.
- Involve Competent parties: Mentally impaired, drugged persons, etc. cannot enter into a contract. Contracts in which at least one of the parties is a minor are voidable by the minor.
- Reflect a meeting of the minds: Each side must be clear and agree as to the essential details, rights, and obligations of the contract.
- Include Consideration: Consideration is something of value bargained for in exchange for the real estate. Money is the most common form of consideration, but other consideration of value, such as other property in exchange, or a promise to perform (i.e. a promise to pay) is also satisfactory.
Notarization by a notary public is normally not required for a real estate contract, but many recording offices require that a seller’s or conveyor’s signature on a deed be notarized to record the deed. The real estate contract is typically not recorded with the government, although statements or declarations of the price paid are commonly required to be submitted to the recorder’s office.
Sometimes real estate contracts will provide for a lawyer review period of several days after the signing by the parties to check the provisions of the contract and counter propose any that are unsuitable.
If there are any real estate brokers/agents brokering the sale, the buyer’s agent will often fill in the blanks on a standard contract form for the buyer(s) and the seller(s) to sign. The broker commonly gets such contract forms from a real estate association he/she belongs to. When both buyer and seller have agreed to the contract by signing it, the broker provides copies of the signed contract to the buyer and seller.
Offer and acceptance
As may be the case with other contracts, real estate contracts may be formed by one party making an offer and another party accepting the offer. To be enforceable, the offers and acceptances must be in writing (Statute of Frauds Common Law)and signed by the parties agreeing to the contract. Often, the party making the offer prepares a written real estate contract, signs it, and transmits it to the other party who would accept the offer by signing the contract. As with all other types of legal offers, the other party may accept the offer, reject it (in which case the offer is terminated), make a counteroffer (in which case the original offer is terminated), or not respond to the offer (in which case the offer terminates by the expiration date in it). Before the offer (or counteroffer) is accepted, the offering (or countering) party can withdraw it. A counteroffer may be countered with yet another offer, and a counteroffering process may go on indefinitely between the parties.
To be enforceable, a real estate contract must possess original signatures by the parties and any alterations to the contract must be initialed by all the parties involved. If the original offer is marked up and initialed by the party receiving it, then signed, this is not an offer and acceptance but a counter-offer.
A real estate contract typically does not convey or transfer ownership of real estate by itself. A different document called a deed is used to convey real estate. In a real estate contract, the type of deed to be used to convey the real estate may be specified, such as a warranty deed or a quitclaim deed. If a deed type is not specifically mentioned, “marketable title” may be specified, implying a warranty deed should be provided. Lenders will insist on a warranty deed. Any liens or other encumbrances on the title to the real estate should be mentioned up front in the real estate contract, so the presence of these deficiencies would not be a reason for voiding the contract at or before the closing If the liens are not cleared before by the time of the closing, then the deed should specifically have an exception(s) listed for the lien(s) not cleared.
The buyer(s) signing the real estate contract are liable (legally responsible) for providing the promised consideration for the real estate, which is typically money in the amount of the purchase price. However, the details about the type of ownership may not be specified in the contract. Sometimes, signing buyer(s) may direct a lawyer preparing the deed separately on what type of ownership to list on the deed and may decide to add a joint owner(s), such as a spouse, to the deed. For example, types of joint ownership (title) may include tenancy in common, joint tenancy with right of survivorship, or joint tenancy by the entireties. Another possibility is ownership in trust instead of direct ownership.
Contingencies are conditions that must be met if a contract is to be performed.
Contingencies that suspend the contract until certain events occur are known as “suspensive conditions”. Contingencies that cancel the contract if a certain event occurs are known as “resolutive conditions”.
Most contracts of sale contain contingencies of some kind or another because few people can afford to enter into a real estate purchase without them. But it is possible for a real estate contract not to have any contingencies.
Some types of contingencies which can appear in a real estate contract include:
- Mortgage contingency – Performance of the contract (purchase of the real estate) is contingent upon or subject to the buyer getting a mortgage loan for the purchase. Usually, such a contingency calls for a buyer to apply for a loan within a certain period of time after the contract is signed. Since most people who buy a house require financing to complete their purchase, mortgage contingencies are one of the most common types of contingencies in real property If the financing is not secured, the buyer may unilaterally cancel the contract by stating that his or her condition has not or will not be satisfied or allow the contract to expire by declining to waive the condition within the specified time period.
- Inspection contingency – Another buyer’s condition. Purchase of the real estate is contingent upon a satisfactory inspection of the real property revealing no significant defects. Contingencies could also be made on the satisfactory repair of a certain item associated with the real estate.
- another sale contingency – Purchase or sale of the real estate is contingent on a successful sale or purchase of another piece of real estate. The successful sale of another house may be needed to finance the purchase of a new one.
- appraisal contingency – Purchase of the real estate is contingent upon the contract price being at or below a fair market value determined by an appraisal. Lenders will often not lend more than a certain percentage (fraction) of the appraised value, so such a contingency may be useful for a buyer.
- 72-hour kick out contingency- Seller contingency, in which the seller accepts a contract from a buyer with a contingency (typically a home sale or rent contingency where the buyer conditions the sale on their ability to find a buyer or renter for their current property prior to settlement). The seller retains the right to sell the property to another party if he so chooses after giving the buyer 72 hours’ notice to remove their contingency. The buyer will then either remove their contingency and provide proof that they can consummate the sale or will release the seller from their contract and allow the seller to move forward with the new contract.
Date of closing and possession
A typical real estate contract specifies a date by which the closing must occur. The closing is the event in which the money (or other consideration) for the real estate is paid for and the title (ownership) of the real estate is conveyed from the seller(s) to the buyer(s). The conveyance is done by the seller(s) signing a deed for the buyer(s) or their attorneys or other agents to record the transfer of ownership. Often other paperwork is necessary at the closing.
The date of the closing is normally also the date when possession of the real estate is transferred from the seller(s) to the buyer(s). However, the real estate contract can specify a different date when possession changes hands. Transfer of possession of a house, condominium, or building is usually accomplished by handing over the key(s) to it. The contract may have provisions in case the seller(s) hold over possession beyond the agreed date.
The contract can also specify which party pays for what closing cost(s). If the contract does not specify, then there are certain customary defaults depending on the law, common law (judicial precedents), location, and other orders or agreements, regarding who pays for which closing costs.
Condition of property
A real estate contract may specify in what condition the property should be when conveying the title or transferring possession. For example, the contract may say that the property is sold as-is, especially if demolition is intended. Alternatively, there may be a representation or a warranty (guarantee) regarding the condition of the house, building, or some part of it such as affixed appliances, HVAC system, etc. Sometimes a separate disclosure form specified by a government entity is also used. The contract could also specify any personal property (non-real property) items which are to be included with the deal, such as the washer and dryer which are normally detachable from the house. Utility meters, electrical wiring systems, fuse or circuit breaker boxes, plumbing, furnaces, water heaters, sinks, toilets, cabinets, ceiling fans, door handles, plumbing fixtures, and most central air conditioning systems are normally considered to be attached to a house or building and would normally be included with the real property by default.
Riders (or addenda) are special attachments (separate sheets) that become part of the contract in certain situations.
Earnest money deposit
Although money is the most common consideration, it is not a required element to have a valid real estate contract. An earnest money deposit from the buyer(s) customarily accompanies an offer to buy real estate and the deposit is held by a third party, like a title company, attorney, or sometimes the seller. The amount, a small fraction of the total price, is listed in the contract, with the remainder of the cost to be paid at the closing. In some rare cases, other instruments of value, like notes and/or stock or other negotiable instruments can be used for consideration. Other hard assets, like gold, silver, and anything of value can also be used or in other cases, love (where it can be shown to have existed between the parties). However, the earnest money deposit represents a credit towards the final sales price, which is usually the main or only consideration.
Financial qualifications of the buyer(s)
The better the financial qualification of the buyer(s) is, the more likely the closing will be successfully completed, which is typically the goal of the seller. Any documentation demonstrating the financial qualifications of the buyer(s), such as mortgage loan pre-approval or pre-qualification, may accompany a real estate offer to buy along with an earnest money check. When there are competing offers or when a lower offer is presented, the seller may be more likely to accept an offer from a buyer demonstrating evidence of being well qualified than from a buyer without such evidence.
- LAND TRUST – THE ULTIMATE ASSET PROTECTION
A land trust is a private agreement, where one party, the trustee, agrees to hold title to property for the benefit of another party or parties, the beneficiary(ies). The one who establishes the trust is the settlor or grantor. The settlor is usually the titleholder to the property before transfer into the trust. The settlor is often the beneficiary of the trust for his/her lifetime. Alternatively, for income property, the beneficiary may transfer beneficial interest in the trust to a limited liability company (LLC).
Thus, the trustee holds the title to the property. If so drafted, the trustee must follow the instructions of the beneficiary. The beneficiary typically has the absolute right to direct and control the trustee and receive all income from the trust. The trust agreement, at the creation of the trust, governs the relationship between the trustee and beneficiary. Thus, the trustee often has no more power than the settlor gives him. Plus he or she has no function other than to do as the trust deed instructs.
Land trusts are most often revocable. Therefore, the trustor may change, modify, or terminate them while he is or she is still alive. The beneficiaries may remove an uncooperative trustee. Since the trustee holds title as a fiduciary, they incur no personal liability for merely being on the title. Nor can the trustee lose the property to his or her personal creditors.
Land Trust Pros and Cons
Land Trust Benefits
There are many land trust benefits. Here are some of the biggest advantages:
- Privacy of ownership
- Ease of transfer (by assigning beneficial interest in the trust to another party)
- Privacy of transfer (assigning beneficial interest is typically not public)
- Liability protection (a contingent fee attorney may not accept a case if he/she cannot find assets)
- Can use in any US state (not all states have land trust laws, but can use in all states)
- Helps to avoid due-on-sale clause (for one to four dwelling units)
- Keeps sales price secret
- Helps prevent property liens
- Can eliminate or minimize probate fees
Land Trust Disadvantages
Whereas land trust have many benefits, there are also some small disadvantages, as follows:
- Obtaining financing (may need to place property in personal name to obtain financing and transfer back into the trust afterwards)
- Does not protect property from lawsuits (need to include an LLC, for example, as the beneficiary)
How Land Trusts Protect Privacy
The land trust is comprised of two legal documents.
- There is a trust agreement between the trustor and the trustee. This document establishes the rights, powers, duties, and obligations of the parties; and
- A deed from the trustor to the trustee.
First, you execute the trust agreement. Then, you record the trustee deed. Once completed, the land titles office will no longer reveal to the world that you are owner of the property. In addition, the trust agreement remains private (in your file cabinet at home). Thus, no one need ever know that you retain an interest in the property. That is, the public records will not reveal this information.
Litigators generally have not interest in suing people who have no assets. One of the easiest ways to determine whether or not someone has deep pockets is to search the public records for real estate holdings. For the successful real estate investor, the results of this search could paint a big fat bull’s eye on their backs.
LLC + Land Trust for Asset Protection
First, remember, a land trust is a privacy device, and not a corporate entity. Accordingly, land trusts do not enjoy the liability protections that corporations or limited liability companies may enjoy. If someone slips and falls on the property, the beneficiary can be held liable. That is why we establish a corporation, LLC or limited partnership to serve as beneficiary.
Second, one can usually transfer property into a land trust free from taxation. The internal revenue code addresses this. The federal government will treat the property as if it was owned outright by the beneficiary. See I.R.C. §§ 671- 678. In addition, in many states, the transfer of property by a beneficiary to a revocable trust does not require the payment of any transfer or recording taxes.
Finally, many investors may ask around and find that the attorneys and accountants with whom they come in contact have no idea what a land trust is, or how it works. While this can certainly be frustrating, there is an upside. Think about it. This means that many of the litigators in your community will be unfamiliar with land trusts. A significant number will stop their search for deep pockets at the end of the public records trail – the county recorder’s office.
Benefits of a Land Trust
There are many advantages to owning real estate through a Land Trust:
- Privacy of Ownership – Under a Land Trust arrangement, your identity as the legal owner of the real estate is not disclosed to the public or to any third party, except in cases of subpoena or court order.
- Ease of Transferability – The beneficiary (or “owner”) of a land trust may be changed without recording a change in the public records.
- Avoids Probate – Probate is usually necessary regardless of whether or not one has a will. A Land Trust arrangement, however, allows you to designate succession of ownership. You can do this exactly as you wish, thereby avoiding probate and costly, time-consuming proceedings relating to the property.
- Facilitates Multiple Ownership – Where there are multiple owners of a parcel of real estate, a Land Trust can be structured to provide for clear and easy legal division.
- You Retain Tax Advantage – You are still eligible for the homeowner’s and senior citizen’s real estate tax exemptions.
Keep in mind, a land trust provides privacy of ownership, not true asset protection. There are tools that can provide true real estate asset protection So, you can use land trust for lawsuit prevention. That is, you so a contingent fee attorney does not readily see that you have “deep pockets” the land trust conceals our ownership. For liquid assets, on the other hand offshore trusts provide the most powerful asset protection. Here are some offshore asset protection examples that you may very well want to know about.
- INTEREST RATES VS. PROPERTY VALUE
Interest rates, especially the rates on interbank exchanges and Treasury bills, have as profound an effect on the value of income-producing real estate as on any investment vehicle. Because the influence of interest rates on an individual’s ability to purchase residential properties (by increasing or decreasing the cost of mortgage capital) is so profound, many people incorrectly assume that the only deciding factor in real estate valuation is the mortgage rate. However, mortgage rates are only one interest-related factor influencing property values. Because interest rates also affect capital flows, the supply and demand for capital, and investors’ required rates of return on investment, interest rates will drive property prices in a variety of ways.
To understand how government-influenced interest rates, capital flows, and financing rates affect property values, you should have a basic understanding of the income approach to real estate values. Although real estate values are influenced by the supply and demand for properties in a given locale and the replacement cost of developing new properties, the income approach is the most common valuation technique for investors. The income approach provided by appraisers of commercial properties and by underwriters and investors of real estate-backed investments is very similar to the discounted cash flow analysis conducted on equity and bond investments.
In simple terms, the valuation starts by forecasting property income, which takes the form of anticipated lease payments or, in the case of hotels, anticipated hotel occupancy multiplied by the average cost per room. Then, by taking all property-level costs, including the financing cost, the analyst arrives at the net operating income (NOI), or cash flow remaining, after all, operating expenses.
By subtracting all capital costs, as well as any investment capital to maintain or repair the property and other non-property-specific expenses from NOI, the result is the net cash flow (NCF). Because properties don’t usually retain cash or have a stated dividend policy, NCF equals cash available to investors and is the same as cash from dividends, which is used for valuing equity or fixed-income investments. By capitalizing dividends or by discounting the cash flow stream (including any residual value) for a given investment period, the property value is determined.
Interest rates can significantly affect the cost of financing and mortgage rates, which in turn affects property-level costs and thus influences values. However, supply and demand for capital and competing investments have the greatest impact on required rates of return (RROR) and investment values. As the Federal Reserve Board has moved the focus away from monetary policy and more toward managing interest rates as a way to stimulate the economy or stave off inflation, its policy has had a direct effect on the value of all investments.
As interbank exchange rates decrease, the cost of funds is reduced and funds flow into the system; conversely, when rates rise, the availability of funds decreases. As for real estate, the changes in interbank lending rates either add or reduce the amount of capital available for investment. The amount of capital and the cost of capital affect demand but also supply, capital available for real estate purchases and development. For example, when capital availability is tight, capital providers tend to lend less as a percentage of intrinsic value, or not as far up the “capital stack.” This means that loans are made at lower loan-to-value ratios, thus reducing leveraged cash flows and property values.
These changes in capital flows can also have a direct impact on the supply and demand dynamics for a property. The cost of capital and capital availability affect supply by providing additional capital for property development and also affect the population of potential purchasers seeking deals. These two factors work together to determine property values.
The most evident impact of interest rates on real estate values can be seen in the derivation of discount or capitalization rates. The capitalization rate can be viewed as an investor’s required dividend rate, while a discount rate equals an investor’s total return requirements. K usually denotes RROR, while the capitalization rate equals (K-g), where g is the expected growth in income or the increase in capital appreciation.
Each of these rates is influenced by prevailing interest rates because they are equal to the risk-free rate plus a risk premium. For most investors, the risk-free rate is the rate on U.S. Treasuries; these are guaranteed by U.S. government credit, so they are considered risk-free because the probability of default is so low. Because higher-risk investments must achieve a commensurably higher return to compensate for the additional risk borne, when determining discount rates and capitalization rates, investors add a risk premium to the risk-free rate to determine the risk-adjusted returns necessary on each investment considered.
Because K (discount rate) is equal to the risk-free rate plus a risk premium, the capitalization rate is equal to the risk-free rate plus a risk premium, less the anticipated growth (g) in income. Although risk premiums vary as a result of supply and demand and other risk factors in the market, discount rates will vary due to changes in the interest rates that make them up. When the required returns on competing or substitute investments rise, real estate values fall; conversely when interest rates fall, real estate prices increase.
Most retail investors, especially homeowners, focus on changing mortgage rates because they have a direct influence on real estate prices. However, interest rates also affect the availability of capital and the demand for investment. These capital flows influence the supply and demand for property and, as a result, they affect property prices. In addition, interest rates also affect returns on substitute investments, and prices change to stay in line with the inherent risk in real estate investments. These changes in required rates of return for real estate also vary during destabilization periods in the credit markets. As investors foresee increased variability in future rates or an increase in risk, risk premiums widen, putting increased downward pressure on property prices.
- RENTABLE SQUARE FEET VS USABLE SQUARE FEET
One of the first steps in evaluating a commercial property is determining the total rentable square feet. While this might seem like a straightforward calculation, it, unfortunately, doesn’t always end up being so simple. This is particularly true for multi-tenant buildings. In this article, we’ll go over how to calculate rentable square feet (RSF), usable square feet (USF), and the load factor, then we’ll tie it all together with a clear example.
Usable Square Feet
In a nutshell, usable square footage is the actual space you occupy from wall to wall. Usable square footage does not include common areas of a building such as lobbies, restrooms, stairwells, storage rooms, and shared hallways. For tenants leasing an entire floor or several floors, the usable square footage would include the hallways and restrooms exclusively serving their floor(s).
Rentable Square Feet
Rentable square footage is your usable square footage PLUS a portion of the building’s shared space. As mentioned above, shared space can be anything that is outside of your occupied space and is of benefit to you (lobbies, restrooms, hallways, etc). As a tenant in a commercial space, you pay for a portion of the shared space and thus your monthly rent is always calculated on RSF.
The increase in the rentable square footage above your usable square footage is referred to variously as the “load factor,” “common area factor,” or “add-on factor.” This is generally in the 10-15% range and can be higher in some buildings. When evaluating commercial real estate space options, you’ll want to be aware of this factor so you know exactly what you’re getting and what you’re paying for.
How to Calculate Load Factor
Calculating the load factor is pretty straightforward. First, find out how much total floor area a building has. Then, subtract the shared square footage to determine the usable square footage. The owner or owner’s agent should be able to give you these numbers. Then divide the total floor space by the USF to get the load factor.
Example: A 100,000 square foot building has 15,000 square feet of shared space. The usable square footage is 85,000 square feet. The load factor would be 1.176 (100,000 / 85,000). That would also be the same as saying the building has a load factor of 17.6%.
Rentable Square Feet vs Usable Square Feet Example
Let’s look at a quick scenario when comparing load factors and rentable square footage to see why it’s useful.
A tenant is looking at two different office spaces, both with 5,000 square feet of usable space and the exact same rental rates, but differing load factors.
The first suite has 5,000 usable square feet and has a 20% building load factor for an additional 1,000 sf (5000 x 20%) of rentable space. Thus, the rentable square feet is 6,000 square feet.
The second office has 5,000 usable square feet and a 15% load factor. The rentable square footage is 5,750 sf (5,000 x .15 = 750). Option B has less rentable square footage and thus would cost less per month for the same amount of usable space!
With the same rental rate, the tenant would pay more per month on his lease for Option A at 6,000 rentable square feet. However, one factor to consider is with higher load factors, are you getting better-shared amenities that justify the cost? In some cases, a fancier lobby and shared kitchen area could be enough of a draw to justify the higher cost for the same amount of usable square footage.
As shown above, rentable square feet are not always so simple. To make matters worse, sometimes landlords will even fudge the load factor and USF numbers to the point where it becomes part of the negotiation process itself. As with all commercial real estate leases, always read the fine print so you understand exactly what you’re paying for and exactly what you’re getting in return.
- PRE-QUALIFICATION VS. PRE-APPROVAL
As you prepare to finance a new home, chances are you’ve come across mortgage pre-approval, mortgage pre-qualification, or possibly even both. So what does it mean to get pre-approved vs. get pre-qualified for a mortgage, and what’s the difference between the two? Let’s take a look.
The Similarities of Pre-Approval and Pre-Qualification
Mortgage pre-approval and mortgage pre-qualification have the same great benefits for anyone considering purchasing a home with a mortgage:
- Both can help estimate the loan amount that you will likely qualify for. This can help you save time by starting your home search by looking only at homes that you know will fit in your budget. And it will also prevent the frustration of finding out that the house you wanted to buy is actually out of your budget.
- Regardless of whether you have a pre-approval letter or a pre-qualification letter, both can help show sellers that you’re a serious contender when submitting your offer. For a seller to confidently accept your offer, they’ll want to know that you’ll be approved for a mortgage and the home sale will close. A pre-approval letter or a pre-qualification letter can help demonstrate that you have a good chance of being approved for a mortgage for the amount that you’ve offered on the home.
- Many sellers will require a pre-approval or pre-qualification letter if you’re planning to get a mortgage. If it’s not required, a pre-approval letter or pre-qualification letter may help your offer stand out. This can be especially helpful in competitive real estate markets.
In addition to the benefits mentioned above, it’s important to remember that neither pre-approval nor pre-qualification is a guarantee that you’ll receive a loan from the lender. You are also not obligated to get a mortgage from the lender who pre-approved or pre-qualified you. While many home shoppers opt to apply for a mortgage with the lender who pre-qualified or pre-approved them, you should always shop around before applying for a mortgage.
The Differences between Pre-Approval and Pre-Qualification
According to the Consumer Finance Protection Bureau, there is often not a lot of difference between pre-approval and pre-qualification. Sometimes, lenders use the terms “pre-qualification” and “pre-approval” interchangeably. And different lenders might have different definitions for each. But generally, here’s how the two may differ.
Pre-qualification is often seen as the first step in the mortgage process, and pre-approval is the next step. With pre-qualification, you’ll supply an overview of your financial history to the lender, including income, assets, debts, and credit score. The lender will review this information to give you an estimate of what you would qualify for. Mortgage pre-qualification doesn’t always require documentation of your financial history; it can often be self-reported. Mortgage pre-approval is very similar, but it usually requires documentation and verification of your income, assets, and debts. And it will often require a credit check, which will result in a hard inquiry on your credit report.
Which One Should You Get?
Since the terms “mortgage pre-approval” and “mortgage pre-qualification” are often used interchangeably, it can be hard to know which one you need. It really depends on how your lender defines the service if you want a credit check or not, and what real estate market you are in. Be sure to ask your lender exactly how he or she defines “pre-approval” or “pre-qualification” (and if it requires a credit check). Then find out from your real estate agent which version has more credibility in your market. That way, when it comes time to make an offer, you’ll have what you need to give sellers confidence that you’ll be approved for a loan.
- HOMEOWNER’S ASSOCIATIONS AND RESTRICTIONS ON SHORT TERM RENTALS
Short-Term Rental Restrictions and Home Owners Associations
If the Association’s declaration prohibits rentals (short-term or long), then the HOA can likely enforce the prohibition unless there is some other reason why the restriction is unenforceable.
At first blush, short-term rentals seem like a win-win situation. You can find a nice place to stay for a few nights, and it is frequently cheaper than booking a hotel. Just as importantly, vacation houses and condos rented out through Airbnb or VRBO are often more interesting places to stay, with the individual character and idiosyncrasies you do not get from a cookie-cutter hotel room. It can be a great deal for property owners, too.
In the right location, a property rented for short-term stays can bring in significantly more revenue than with a traditional year-to-year lease. That extra cash can be put toward improving the property, making it into a more attractive destination that can command higher rates. Or, it can just provide supplemental income. Either way, the property owner is coming out ahead.
So far, short-term rentals sound like a great deal for all involved parties. Yet, there has been a growing trend to prohibit them in HOA communities. Is it just a case of power-tripping HOA boards lording their authority over members by banning a potentially lucrative source of secondary income? Actually, no. As is so often the case, there is more to it than that.
For all their virtues, Airbnb, VRBO, and similar services can have genuine downsides for a homeowners’ association. On a smaller scale, it is analogous to the so-called “Lemon Socialism,” where profits are privatized, and risks are socialized. In this case, the advantages of short-term rentals (i.e., increased income) are reaped by individual property owners, while the potential downsides (when they are present, which is not always the case) are borne by the community as a whole.
Why Do HOAs Prohibit Short-Term Rentals?
When an HOA imposes a restriction on homeowners’ use of their properties, it needs to have some justification (or at least a feasible pretense). With short-term rental restrictions, the purpose is generally to protect other members and preserve the character of the community. A quiet, sleepy neighborhood that all-the-sudden has vacationers coming and going on a regular basis stands a good chance of losing its quiet, sleepy nature.
Vacation renters tend to be messier and noisier, especially at night, than permanent residents. The commotion can become a nuisance for people who reside in the community year-round—specifically, other homeowners and their families. Short-term renters also tend to ignore HOA rules or simply not know what the rules are. In a community with common areas and facilities, vacationers can overtax the commons, preventing full-time residents from enjoying the benefits for which their assessments pay. Vacationers do not pay HOA fees and are less vested in the long-term condition of the community.
From a practical standpoint, short-term renters can increase a neighborhood’s traffic and parking problems. And, if travelers regularly use common facilities like a pool or recreation center, the HOA’s insurance rates are likely to increase, as additional use of the facilities by more people inevitably leads to more damage and risk of premises liability claims.
With that said, a lot depends on the nature of an individual community. If the impact from short-term rentals will be minimal—or if the community is in a vacation hotspot where a large percentage of owners like the idea of renting through Airbnb or VRBO—a rental restriction might not make sense for that community.
Authority to Restrict Short-Term Rentals.
Even if a community has a valid reason to restrict short-term rentals, it still needs legal and/or contractual authority to support the restriction. Typically, the authority comes from an HOA’s declaration, from state law, or a combination of the two.
A declaration is a contract among property owners in a community. The owners jointly agree to accept certain obligations and restrictions on how properties in the community can be used. If everyone complies, the community as a whole will benefit—or at least that is the idea.
Throughout the country, courts generally assume HOA restrictions are enforceable as long as a restriction promotes a legitimate purpose and is not forbidden by statute. See, e.g., Saunders v. Thorn Woode Partnership, L.P. 265 Ga. 703, 462 S.E.2d 135 (Ga., 1995); Laguna Royale Owners Assn. v. Darger, 119 Cal.App.3d 670, 174 Cal. Rptr. 136 (Cal. Ct. App. 1981). Even broad restrictions against all rentals have been upheld in some jurisdictions if the restriction is in the HOA’s declaration, and the board can offer a legitimate justification for it. See, Four Brothers Homes at Heartland Condominium II, et al., v. Gerbino, 262 A.D.2d 279, 691 N.Y.S.2d 114 (N.Y. App. Div. 1999).
So, the starting point when deciding if an individual HOA has the authority to ban short-term rentals is to look at the community’s declaration. If the declaration prohibits rentals (short-term or long), then the HOA can likely enforce the prohibition unless there is some other reason why the restriction is unenforceable. Armstrong v. Ledges Homeowners’ Assoc., Inc., 633 S.E.2d 78 (N.C. 2006).
Limitations on Rental Restrictions.
Though state HOA laws can vary considerably from state to state, multiple state legislatures have recognized that the right to rent out a property is valuable enough for homeowners to warrant some statutory protection. In general, state-law limitations on rental restrictions do not say that rental restrictions are per se unenforceable. Instead, the laws seek to protect property owners’ due process rights and avoid a scenario in which an owner is deprived of a valuable property right without adequate notice.
In Arizona, for instance, an HOA cannot enforce a rental restriction against an owner unless the restriction was already in the community’s declaration when the owner acquired title to the property. A.R.S. §33-1260.01A. HOA declarations are public records recorded within county land records, so owners are assumed to have notice of restrictions and covenants in the declaration when accepting the deed to a property. The Arizona law protects owners from being deprived of a right they reasonably anticipated having when deciding to purchase the property.
California law gives potential purchasers of homes in HOA communities the right to receive a written statement of any rental restrictions in a community before title to a property is transferred. Cal. Civ. Code §4525(a)(9). The law recognizes that, while a recorded declaration serves as formal notice to purchasers, buyers do not always read them thoroughly before agreeing to a purchase.
Contractual & Statutory Protections.
The most common state-law approach for protecting owners’ vested property rights is through “grandfather” laws. A grandfathering provision lets an HOA enforce a newly adopted restriction prospectively but protects owners who previously relied on the restriction’s absence.
Grandfathering statutes relating to rental restrictions recognize that a substantial portion of a property’s value can consist of the owner’s ability to generate revenue by renting it out. As such, owners who previously enjoyed that right should not be deprived of it in the future without their consent. In a nutshell, it is unfair to enforce a rental restriction against an owner who purchased a property when the restriction was not in place.
Florida and California laws prevent the enforcement of rental restrictions against owners if the restriction was not already in effect at the time of purchase, and the owner did not vote to adopt the restriction. Fla. Stat. §718.110(13), Cal. Civ. Code §4740(a), (b). Similarly, Arizona’s law will not let an HOA enforce a rental restriction against an owner who purchased a property before the restriction’s enactment unless the restriction was approved by a unanimous member vote. A.R.S. §33-1227.
So far, this all seems straightforward enough, but there is a curveball coming. Under California’s HOA law, existing owners are generally protected against later-adopted HOA rental restrictions. However, HOAs can enforce “reasonable” limitations, if not outright prohibitions. Laguna Royale Owners Assn. v. Darger, 119 Cal.App.3d 670, 174 Cal. Rptr. 136 (Cal. Ct. App. 1981). What that practically means is that an owner protected against rental restrictions, in general, might nonetheless be prevented from engaging in short-term rentals.
California courts have recognized that short-term rentals can negatively affect a community beyond what results from ordinary, long-term rentals. With that in mind, the courts reasoned that a minimum lease period (or similar rule preventing short-term rentals) does not offend California’s grandfathering law because the owner still has the right to rent the property. The right has been limited, but the owner can still rent to a long-term tenant. Watts v. Oak Shores Community Assn., 235 Cal.App.4th 466 (2015), Mission Shores Assn. v. Pheil, 166 Cal.App.4th 789, 83 Cal. Rptr. 3d 108 (Cal. Ct. App. 2008)
But that raises a question: what is so different about short-term rentals compared to long-term rentals?
Residential vs. Commercial Use.
Residential use restrictions are one of the most common restrictions included in HOA declarations, and they have been consistently upheld by reviewing courts throughout the country. Essentially, a declaration says that properties in the community are intended to be used as homes, not as businesses or farms. And, by accepting a deed to a property subject to the HOA, owners covenant that they will not use their properties for commercial (i.e., business-related) purposes.
It is similar to a single-family residential zoning ordinance—just adopted by an HOA instead of a local government. Some HOAs have tried to prohibit short-term rentals, relying on commercial-use restrictions. The argument is that if you are using your property as a short-term rental, you are effectively using it for a commercial purpose.
Before looking at this question further, it is worth emphasizing two points. First, state courts are not consistent in how they have interpreted the issue. Second, a short-term rental prohibition based on a residential-use covenant is distinct from an ordinary rental restriction. If an association can rely on an enforceable restriction prohibiting rentals, it does not need to argue that short-term rentals are a commercial use. The argument generally comes up when an HOA wants to prevent short-term rentals but does not have a rental restriction—or it has a rental restriction that it cannot enforce against a specific homeowner due to (for example) a grandfathering clause.
When considering this issue, an appeals court in Michigan held that an HOA that prohibited short-term rentals based on a commercial-use restriction did not exceed its authority. Eager v. Peasley, 911 N.W.2d 470, (Mich. Ct. App. 2017). Noting that “provid[ing] temporary housing” to vacationers is a “profit-making enterprise,” the court concluded that “the act of renting property to another for short-term use is a commercial use, even if the activity is residential in nature.”
Thus, under the Eager Court’s reasoning, a Michigan HOA with a commercial-use restriction could adopt and enforce a policy against short-term rentals, even if the HOA did not have an express rental restriction in its declaration.
On the other hand, states that afford greater deference to individual homeowners’ property rights have come down the other way. In North Carolina, for example, courts typically interpret unclear restrictions in favor of homeowners. Based on that principle, a North Carolina court held that a generalized restriction against non-residential use by itself was insufficient authority for an HOA to prohibit short-term rentals. Wise v. Harrington Grove Cmty. Ass’n, 584 S.E.2d 731 (2003).
Unsurprisingly, the Texas Supreme Court likewise came down in favor of the property owner in Tarr v. Timberwood Park Owners Ass’n, 61 Tex. Sup. Ct. J. 1174 (2018). In that case, the HOA relied on a restriction that only allowed properties in the community to be used as single-family residences. According to the Tarr Court, the provision did not plainly forbid short-term rentals because, as long as renters used the home for residential purposes, the covenant was satisfied.
Unfortunately, the question as to whether a residential use provision provides adequate grounds to prohibit short-term rentals is inconsistent from state to state. Accordingly, the most sure-fire way for HOAs to prevent short-term rental of properties within the community is to amend their declarations to unambiguously forbid short-term rentals.
Adopting and Enforcing Short-Term Rental Restrictions.
As we have seen, an HOA cannot just decide one day that it wants to prohibit short-term rentals. The prohibition must be grounded in some authority derived from the community declaration. For the most part, a community with an existing rental restriction in its declaration will have the right to enforce the restriction.
If it doesn’t, the HOA will need to amend its declaration following the amendment process provided under state law and the declaration itself. Usually, the amendment requires the approval of at least a majority of homeowners in the community.
When proposing language for a rental restriction, an HOA board should clearly define what rentals will be prohibited. A common approach is to establish a minimum lease period (such as 30 days), with any rental period below that threshold forbidden. If there will be any exceptions to the general prohibition, they need to be spelled out, too.
To avoid challenges from existing homeowners, it can be a good idea to include a grandfathering clause within a proposed amendment restricting rentals. Remember, multiple states have laws that prohibit enforcement of a rental restriction against a homeowner if the restriction was not in place when they acquired the property—unless the owner consents to the restriction. Even in states without these statutory protections, affected owners can argue that a newly adopted restriction deprives them of a vested property right.
A “grandfather” clause might let an owner currently engaged in short-term rentals continue doing so. Or an amendment could establish a cap on the number of homes in the community that can be used as short-term rentals. Rental restrictions should include an enforcement mechanism that can be used against non-compliant owners. For example, fines might be imposed on violative owners, or access to common facilities could be limited for so long as a violation continues. State HOA laws vary with regard to permissible penalties, so an HOA needs to make sure its enforcement mechanism is statutorily compliant.
When all else fails, an HOA can seek recourse via civil litigation. In that case, the board (on behalf of the HOA) files suit against the non-compliant owner and requests an order from a judge directing the owner to cease short-term rentals. Of course, litigation is often expensive and time-consuming, so it is usually better to resolve things out of court if possible.
Importantly, an HOA should consult with an experienced attorney when attempting to amend its declaration. An attorney familiar with HOA law can help create an enforceable policy that complies with state law and ensures the amendment process is properly observed—mitigating the risk of future challenges to the policy.
As a general matter, an HOA’s enforcement of rental restrictions (or any other restrictions, for that matter) needs to be “procedurally fair and reasonable.” Enforcement should be consistent and proportional and never “arbitrary and capricious.” Saunders v. Thorn Woode Partnership, L.P., 265 Ga. 703, 462 S.E.2d 135 (Ga., 1995). Inconsistent or arbitrary enforcement can provide homeowners with a defense against enforcement actions. White Egret Condo., Inc. v. Franklin, 379 So.2d 346 (Fla. 1979).
In many jurisdictions, courts have found that an association that attempts to enforce a restriction that it has not previously enforced consistently or enforced against some owners but not others—has effectively abandoned or waived its right to enforce the restriction. Liebler v. Point Loma Tennis Club, 40 Cal. App. 4th 1600, 1610-11 (4th Dist. 1995); Prisco v. Forest Villas Condominium Apartments, Inc., 847 So 2d 1012 (Fla.App. Dist.4, 2003).
Similarly, enforcement aimed only at homeowners that fall within certain groups is subject to challenge by the singled-out homeowners. See, e.g., Bloch v. Frischholz, 533 F.3d 562 (7th Cir. 2008).
- WHAT IS A PETITION FOR PARTITION AND WHEN IS IT USED?
WHAT IS A PETITION FOR PARTITION AND WHEN IS IT USED?
What can be done when a piece of real estate has two or more owners and one owner wants to sell and the others don’t? This happens frequently in families when real estate is left in a will to heirs, but it also happens when a couple divorces. How do you divide the property? What steps should be taken?
A Petition to Partition may be the answer — once you’ve become familiar with the legal device.
The number of cohabitants in America has been increasing and this has driven the petition to partition to become more common as a remedy to split real estate and personal property.
There are three ways in which property can be owned by more than one individual:
- Joint tenants
- Tenants in common
- Tenants by the entirety (not an option in all states)
The decision of which category to be placed in is made when the property is purchased. With all three types, each owner has the right to occupy the whole. That means that one person is not allowed to choose some rooms and make them off limits to others living there. Every spot in the property is fully available to everyone who owns the property.
Petition to Partition
Petitioning to partition is a legal right and the process starts with filing a petition with the Clerk of Court. Petition rules vary from state to state. The idea though can be generalized according to the type of existing deed to the property. The owners of Tenants in Common (TIC) and Joint Tenants with Rights of Survivorship (JTWROS) can file.
When dividing up a JTWROS property, all proceeds are divided, equally, among the co-owners. JTWROS deeds give each owner equal stakes — or shares — in the property. No credit is given to either party for any excessive contribution to the purchase price. Credits may be given though for utilities and maintenance costs. Improvements which result in a higher property value may be eligible for credits as well.
When a TIC deed is partitioned, owner shares are reviewed. If a property is owned by three people A, B, and C as tenants in common and A owns 50 percent while B and C each split the other 50 percent down the middle, then a sale of the property for $200,000 would mean A gets $100k and B and C each get $50k. The judge may look at other contributions by the property owners. If A made reasonable renovations and was never reimbursed, the judge may decide to give A a few extra dollars from the award which is given to B and C.
A few states give one tenant the legal option to buy out the other tenant(s) to forestall a forced sale. Other states also allow multiple tenants to merge their shares, forming a majority ownership, which could prevent a forced sale.
When Property Owners Can’t Agree
When someone owns real estate with another individual, or several individuals own property together, a disagreement can come up at selling time. This frequently happens when an individual dies leaving their real estate to several owners.
Utilizing a “Petition to Partition” may solve the standoff to solve this situation. When the process is started, a notification is delivered from the court and given to all owners of the property in addition to anyone who may have a legal interest such as lien or mortgage holders.
The process can be expensive and consume a lot of time. Many owners will retain their own lawyer as anyone who doesn’t want the petition to move forward can file with the probate court seeking to stop the process. Usually, objects are overturned as the other owners till maintain the right to force a sale.
When a family can’t agree on the terms of the sale itself, the petition to partition can force the co-owners to sit and negotiate. This makes a petition to partition the last resort when there is no cooperation among co-owners. Everyone involved must understand that there will be unnecessary time and delay and the final sale price may be considerably lower.
One option many co-owners are turning to is mediation. Working with a disinterested third party, the co-owners sit and try to reach a compromise that is acceptable to everyone. Normally less costly, a mediation will have the full force of law behind it once a decision is reached and the documents are filed with the Clerk of Court.
As with many life events where the courts are called to become involved, there can be an upside — as well as a downside.
Pros and Cons of Petition to Partition
- Beneficial when the co-owners can’t agree to terms
- Possibility of recovering unreimbursed costs of major renovations conducted by one of the owners
- Potentially expensive
- Property is normally lost through re-sale and the proceeds are split
- MISSOURI STATUTE ON PSYCHOLOGICALLY IMPACTED PROPERTY
2020 Missouri Revised Statutes
Title XXIX – Ownership and Conveyance of Property
Chapter 442 – Titles and Conveyance of Real Estate
Section 442.600 Psychologically impacted real property, defined — disclosure to buyer not mandatory — no cause of action for failure to disclose.Universal Citation: MO Rev Stat § 442.600 (2020)
Effective – 28 Aug 1991, 2 histories
442.600. Psychologically impacted real property, defined — disclosure to buyer not mandatory — no cause of action for failure to disclose. — 1. The fact that a parcel of real property, or any building or structure thereon, may be a psychologically impacted real property, or may be in close proximity to a psychologically impacted real property shall not be a material or substantial fact that is required to be disclosed in a sale, exchange or other transfer of real estate.
2. “Psychologically impacted real property” is defined to include:
(1) Real property in which an occupant is, or was at any time, infected with human immunodeficiency virus or diagnosed with acquired immune deficiency syndrome, or with any other disease which has been determined by medical evidence to be highly unlikely to be transmitted through the occupancy of a dwelling place; or
(2) Real property which was the site of a homicide or other felony, or of a suicide.
3. No cause of action shall arise nor may any action be brought against any real estate agent or broker for the failure to disclose to a buyer or other transferee of real estate that the transferred real property was a psychologically impacted real property.
- 10 WAYS BUYERS LOOSE EARNEST MONEY DEPOSIT
Before your buyers write that earnest money check, find out the purpose of an Earnest Money Deposit (EMD), how to avoid costly mistakes on the home purchase and ways to lose earnest money.
They’ve found the home of their dreams and you’re working with your buyers to put together a winning offer. Part of that involves writing a fairly hefty check for the Earnest Money Deposit or EMD. You may take the EMD for granted as just part of the process — until a deal falls through, you’re losing earnest money, and those thousands of dollars are in jeopardy. The unexpected can happen prior to closing so it’s vital to explain to your buyers what’s at stake, ensuring that they are not blindsided by the loss of an Earnest Money Deposit.
How can you lose your earnest money deposit? Whether it involves a change of heart or a change in circumstances, here are ten scenarios where you can lose earnest money deposits– and ways to protect your clients.
1. Failing to Meet Deadlines
When your buyers sign a purchase contract, they also agree to a timeline for home inspections, contingencies, and closing. If these major milestones along the road to the closing table don’t happen, the transaction could be put into jeopardy — and that would be the buyer’s fault. If they are unable to fulfill the terms of the contract, the sellers would be justified in working to find another buyer — and keeping the EMD. Make sure you are keeping your buyers moving forward with effective transaction coordination so that they are able to meet their contractual obligations on time.
2. Getting Caught Up In a Bidding War
We’ve all experienced low-inventory markets with multiple offers and bidding wars on every new home that comes on the MLS. In that kind of heated atmosphere, buyers can get scared and desperate — causing them to jump the gun and offer on anything that becomes available. In addition, they may include higher than normal EMD’s to sweeten their offer. If they then realize the house is not for them, they could find themselves losing thousands when they back out of the contract. Make sure you help clients stay steady in the midst of a high-pressure market so that they can avoid this type of mistake.
3. Agreeing to a Non-Refundable Earnest Money Deposit
In some purchase scenarios, especially those involving bank-owned properties or investment properties, a non-refundable EMD may be required in order to show that the buyers are serious about seeing the transaction through. If your clients are confident that their financing and other contract requirements are on track, this may be worth it to them. However, make sure that they have a clear understanding of this part of the contract before they sign that earnest money check and sign away their rights to an earnest money deposit refund.
4. Waiving Contingencies Prematurely
When you are putting together an offer in a multiple offer situation, you may be nervous about asking for too much from the sellers. In that case, you may add fewer contingencies to the sales contract. Alternatively, once you’re under contract, you may mistakenly assume that some of its requirements have been fulfilled and release those contingencies prematurely. In either case, a lack of adequate contingency protection can lead to a canceled contract or a canceled earnest money check– and a lost EMD.
5. Failing to Do Due Diligence
If your client is an investor or just a bargain-hunter, he or she may find a great deal and be eager to act on it, going under contract without a home inspection or other due diligence. In fact, part of the value-add many investors offer is an inspection-free process and fast closing. If the client then finds out that the home has some costly problems, he or she may need to sacrifice that EMD in order to get out of the contract.
6. Failing to Understand “As-Is” Buying
Many ask “when does a buys lost earnest money?” Well, some buyers are eager to take advantage of the money-saving opportunities offered by an As-Is property, assuming that they are handy enough to tackle a fixer-upper. However, major structural damage, termite damage, or other systems failure could result in more than they bargained for. In this case, it is important to have a home inspection contingency with the stipulation that no repairs will be requested. Otherwise, your buyers could find themselves losing their earnest money deposit to back out of the contract.
7. Voiding a Contract Without a Refund
In the case of a mutual decision to void a sales contract, it is important that the full earnest money refund is stipulated clearly in order to ensure that the seller isn’t planning to keep some or all of it. Once the contract is void, the buyer has given up any possible leverage they would have in order to compel the seller to release their deposit.
8. Deciding the Home Isn’t “The One”
Do you get earnest money back? Do you lose earnest money if you back out? For many people, buying a home is a very personal and emotional decision. For this reason, some buyers may decide on second or third viewing that the home just isn’t the right one for them. Since there is no contingency for a change of heart, it is important that buyers know that canceling the contract without cause may result in the loss of the EMD.
9. Developing FOMO Over Another Home
Just like falling in love, some buyers may enjoy the pursuit more than the capture — falling in love with one home until they go under contract, then worrying that the right one is still out there somewhere. Here too, this emotion-based reason for canceling a contract will generally be punished with the loss of the EMD — in part because of the loss in value anticipated by the sellers when they have to put their home back on the market.
10. Bailing on a Transaction for Personal Reasons
Finally, a big reason that contracts fall through — other than a home condition or financing issues — stems from personal issues on the buyer side. An illness, a broken engagement, an unforeseen divorce, a job loss or change — any of these can result in a fundamental shift in planning for the buyer and a genuine inability to see the contract through to closing. In these cases, the sellers are justified in keeping the EMD. In cases of hardship, you may make an appeal on the buyer’s behalf, however, the sellers are under no obligation to return the deposit.
- CONTRACT REVIEW
One of the most important steps in the contracting process can be hiring a contract lawyer to review your written agreements, as the wording and format often have to be very specific to be legally binding. Working with a contract attorney will ensure that your agreements are legal, admissible in court, and are free of loopholes.
Understanding exactly what you need a contract review lawyer to do when they review your contract will help you make the decision whether or not you want to make the investment in hiring an attorney.
How much do legal fees cost for a lawyer to review a contract and give legal advice? First off, you are not required to seek legal help from a law firm – you can definitely draft an agreement by yourself, especially if you need something simple. Hiring an attorney that went to law school to look over your agreement before you sign can be quite expensive, but in the long run this decision might save you a bundle. When you hire a lawyer to review a contract, you are doing more than getting a second set of eyes – you are purchasing years of experience, knowledge, and training to guide you.
Just like with any question related to a lawyer’s services, the fee you will pay for a legal professional to look over your contract depends on the lawyer’s hourly rate and the contract’s complexity. Here are some factors it can depend upon:
The length of the contract
What does the attorney need to look for?
If you need just a review or help with drafting services
Rules and regulations in your industry
The amount of money at stake
The duration of the contract
How much risk are you willing to take on?
The number of signing parties involved
Your lawyer’s experience and current workload
Different Types of Contract Reviews
When you decide to hire an attorney to review your contract, you need to understand what they will do in that process, so you can better protect your financial interests.
ISSUE-Specific Contract Review
An issue-specific contract review is the most economical option if spending money is the most important factor for you. If you are mostly happy with the contract, but not quite clear on some of the specific terms or issues, or need a specific clause of the contract explained, the lawyer will just look over those specific areas of concern. A lawyer can help decipher the legalese and explain those terms in common English so you can figure out if they work for you. You don’t want to sign things you don’t understand, so if you’re on a tight budget, but still need the peace of mind, this is a good way to feel more confident before signing the agreement.
In short, if you can limit the extent of the contract review, the attorney fees will not hurt your pocket as much. But you need to understand that there is always a quid-pro-quo, and you will have to accept the fact that your attorney will not review any other aspects of the contract except the ones you circled. If something goes wrong down the line, the attorney will not be responsible, and you’ll be on your own.
Basic Contract Review
This option is more intense in comparison to the issue-specific review we just discussed, but it is still very limited in scope. If you decide to choose the basic contract review, your lawyer will look over your agreement on the surface level and answer any questions that you may have about it and inform you if you need to pay special attention to an issue. In basic contract review you might want your attorney’s opinion on a particular issue, rather than just an explanation of terms.
This type of review lacks the personal touch you might want as most basic reviews take place over the phone or through an email giving the client several bullet points to think about.
These types of questions will require your attorney to get to know more about you, your preferences, and your business dealings. They may require some research or revisions to the contract.
Basic Contract Review Plus Edits
This type of contract review will definitely be more costly than the basic level, but you will get much deeper involvement from your attorney. Instead of having your lawyer just review your document, point out what needs to be fixed in your contract, and answer your questions, they will provide you with a version of your contract that you can submit to the other party for review, edit your agreement, and review those edits with you. In the legal world, this is known as “redlining a contract”, which can really help the whole process move along more smoothly. In other words, you don’t have to discuss the changes in your agreement with the other party, as they will receive the contract already finished with the option to accept or deny.
Contract Review Plus Negotiation
In serious contracts negotiating between the parties can be extremely difficult. When you opt to hire an attorney for this level of reviewing, they will not only review and edit your agreement, but they will submit a “redlined” document to the other signatory party and negotiate all the changes on your behalf. If you are not confident in tackling your complex contract, you should definitely choose this option. When you do, your attorney will handle everything for you, including reviewing, editing, redlining, and negotiating the contract.
This most involved, “handle-this” contract review will be most costly, but you’ll be able to sleep at night knowing that all the back-and-forth is going to be avoided, as the attorney will take the helm and facilitate the process – and the emotions – on your behalf.
How Contract Review Pricing Works
Each lawyer sets his or her own prices depending on their own level of expertise and the fees they charge can vary greatly from one attorney to the next. Most of the time, however, lawyers use either flat-fee pricing or hourly pricing when they get hired to review a business contract.
In recent times, flat-fee pricing or fixed fee pricing is becoming more and more common when paying for legal services. As a customer, you pay a single set fee for contract review regardless of how much time your attorney spends on working on the project. Most respectable lawyers will determine the flat fee only after they take a good look at the contract and assess the amount of time it will take to do the work. Be wary of the lawyers who will offer you a set rate without setting their eyes on your paperwork – in so many cases a single-page condensed legal document contract could be more complex and convoluted than a 50-page fee agreement. A good and respectable contract lawyer will always ask to see an agreement before quoting a price.
The more traditional pricing model is charging by hour. Most attorneys will collect an upfront retainer and subtract their hourly fees from this retainer until either their work is completed or more money needs to be paid for the retainer. The hourly prices can vary depending on your lawyer‘s expertise and the level of service you’ve selected.
It is not required by law to consult an attorney when you are drafting a business contract. There is nothing necessarily wrong with signing a contract you don’t understand. People have been signing contracts they haven’t read and have gone on to live very happy lives. But you have to be willing to accept the risks associated with not reading a contract. How much does it cost for a lawyer to review a contract? It depends on your budget, your confidence level, the complexity of the agreement, and your willingness to risk or avoid risk. Yes, it might be expensive, but that investment can bring you a peace of mind and save you from headaches down the road.
And pay attention to new services available to the small business owner, where for a low monthly membership fee for working with a dedicated attorney, a set number of contract reviews come included every month. These attorneys are also capable of giving fixed, upfront costs instead of billing by the hour – so you, and they, know exactly what to expect.
- OUR LAWFIRM OFFERS ONLINE VIRTUAL MEETINGS
SPEAK DIRECTLY WITH AN ATTORNEY NOW !!
Our office offers online legal video/audio consultations directly with Real Estate Lawyer and Broker Mark Roy.
You pick the day and time – the lawyer contacts you directly.
$99.50 for a 1/2 hour legal video/audio consultation (not including document review) * Residential
$195.00 for a 1 hour legal video/audio consultation (includes document review) * Residential
*Commercial contracts, or other non residential services must be booked for those specific services
BOOK CONSULTATION ONLINE TODAY AT AT THE “BOOK HERE” BUTTON ON OUR HOMEPAGE
- IS A CONTRACT VALID IF NO EARNEST MONEY IS EXCHANGED?
IS A CONTRACT VALID IF NO EARNEST MONEY IS EXCHANGED?
A real estate contract is valid whether there is an earnest money deposit or not. While a contract, to be valid, must have consideration, the earnest money is not consideration. Earnest money is a good faith deposit and is not necessary to have a valid contract.
- VOID VS VOIDABLE CONTRACTS
A contract is an agreement enforceable by law. A void agreement is one that cannot be enforced by law. Sometimes an agreement that is enforceable by law, i.e, a contract, can become void. Void agreements are different from voidable contracts, which are contracts that may be nullified. However, when a contract is being written and signed, there is no automatic mechanism available in every situation that can be utilized to detect the validity or enforceability of that contract. Practically, a contract can be declared to be void by a court of law.
An agreement to carry out an illegal act is an example of a void agreement. For example, an agreement between drug dealers and buyers is a void agreement simply because the terms of the contract are illegal. In such a case, neither party can go to court to enforce the contract. A void agreement is void ab initio, i.e. from the beginning while a voidable contract can be voidable by one or all of the parties. A voidable contract is not void ab initio, rather, it becomes void later due to some changes in condition. In sum, there is no scope of any discretion on the part of the contracting parties in a void agreement. The contracting parties do not have the power to make a void agreement enforceable.
A contract can also be void due to the impossibility of its performance. For instance, if a contract is formed between two parties A & B but during the performance of the contract, the object of the contract becomes impossible to achieve (due to action by someone or something other than the contracting parties), then the contract cannot be enforced in the court of law and is thus void. A void contract can be one in which any of the prerequisites of a valid contract is/are absent for example if there is no contractual capacity, the contract can be deemed as void. In fact, void means that a contract does not exist at all. The law can not enforce any legal obligation to either party especially the disappointed party because they are not entitled to any protective laws as far as contracts are concerned.
An agreement may be void for any of the following reasons:
Made by incompetent parties (e.g., under the age of consent, incapacitated)
Has a material bilateral mistake
Has unlawful consideration (e.g., the promise of sex)
Concerns an unlawful object (e.g., heroin)
Has no consideration on one side
Restricts a person from marrying or remarrying
Restricts legal proceedings
Has material uncertain terms
Incorporates a wager, gamble, or bet
Contingent upon the happening of an impossible event
Requires the performance of an impossible act
- WHAT IS A TITLE COMMITMENT?
If you’re the buyer in a real estate transaction, you’ll receive a copy of the title commitment before closing and have several days to review it. Here’s why that document is so important and what it means to your property.
What is a Title Commitment?
A title commitment is a document that iterates the details surrounding the property. It lists the various requirements, exclusions, and exceptions behind issuing title insurance on the property. It’s also a promise to issue title insurance as long as all stipulations in Section B are met. Without a title commitment, the buyer knows little about the property’s possible peculiarities such as a third-party ruling body like a condo association or any right-of-way existing on the property.
Understand a Title Commitment
The title commitment is divided into several sections. Depending on the state in which the property is located, the title commitment could vary slightly but they always contain the following parts.
Schedule A contains the commitment date; the policies to be issued, the amounts, and proposed insured; the interest in the land and the owner; and the description of the property.
Schedule B contains the requirements, exceptions, and exclusions. Schedule B is the most important part of the title commitment. Buyers should pay close attention to it.
Requirements: this section lists the things that must be completed/adhered to in order for title insurance to be issued. If one of the requirements cannot be met, this will affect escrow, so the buyer should inform the escrow officer immediately. Requirements can include things like:
Recording the new deed
Recording loan documents
Release of liens
Proof of identity
Exceptions: this section lists what is not covered under title insurance. You’ll usually find generic wording contained in this section about mineral rights as well. In order for a buyer to fully understand the coverage of the title insurance on the property, the exceptions section should be read carefully.
If any of the exceptions are unacceptable to the buyer, it might be possible for the title company to remove them, insure over it (with the use of an endorsement), or discard it with a release or affidavit. Contact the escrow officer or an attorney if there’s anything that strikes you as unusual in this section. It’s better for you to understand the stipulations and gain clarification now than find out later you left yourself exposed by not fully reviewing the document.
Exclusions: this section discloses things that the title company will not cover. Common exclusions include:
Governmental regulations relating to the use of the property
Rights of eminent domain
Claims arising from bankruptcy
A title commitment is one of the most important documents in closing because it details what is covered and not covered in the title insurance policy. Without one it’s impossible to understand the stipulations and exclusions of the title insurance. You may be leaving yourself open to future legal challenges if you don’t examine it carefully.
You have a choice when it comes to title agencies. Selecting a title company that helps you understand the process and works with you is wise.
- WHAT ARE CLOSING COSTS IN A REAL ESTATE TRANSACTION?
Getting a mortgage isn’t free. Before you get those house keys, you’ll go to the closing table to sign loan documents and paperwork that transfer home ownership from the seller to you.
Throughout your home purchase, third parties—such as your real estate attorney and your mortgage lender—have performed services. Closing costs include the fees these professionals (as well as others) charge for these services to finalize the real estate transaction and your home loan.
What Are Typical Closing Costs?
Closing costs typically range from 3%–6% of the home’s purchase price. Thus, if you buy a $200,000 house, your closing costs could range from $6,000 to $12,000. Closing fees vary depending on your state, loan type, and mortgage lender, so it’s important to pay close attention to these fees.
Home buyers in the U.S. pay, on average, $5,749 for closing costs (including taxes), according to a 2019 survey from Closing Corp, a real estate closing cost data firm. The survey found the highest average closing costs in parts of the Northeast, including the District of Columbia ($25,800), Delaware ($13,273), New York ($12,847), Maryland ($11,876), and Pennsylvania ($10,076). Average closing costs in Washington State ($12,406) were also among the highest. The states with the lowest average closing costs included Indiana ($1,909), Montana ($2,063), South Dakota ($2,159), Iowa ($2,194), and Kentucky ($2,276).
A lender is required by law to provide you with a loan estimate within three business days after receiving your mortgage application. This key document outlines the estimated closing costs and other loan details. Though these figures might fluctuate by closing day, there shouldn’t be any big surprises.
Three business days prior to your closing, a lender must provide you with a closing disclosure form. You’ll see a column showing the original estimated closing costs and final closing costs, along with another column indicating the difference if costs rose. If you see new fees that were not on the original loan estimate or notice that your closing costs are significantly higher, immediately seek clarification with your lender and/or real estate agent.
Why Are Closing Costs Necessary?
You’re probably already paying a down payment, not to mention an earnest money deposit to show good faith and a sizable mortgage payment for the foreseeable future. Why do you also have to pay closing costs?
A real estate transaction is a somewhat complex process with many players involved and numerous moving parts. Some states (and some loan products) require certain inspections beyond the basic inspection for which you directly pay a home inspector of your choice. Then there are property and transfer taxes, as well as insurance coverage and various additional fees, addressed below.
Types of Fees With Closing Costs
All of the closing costs will be itemized on your loan estimate and closing disclosure. Here are some of the standard fees you can expect to see (in alphabetical order).
A loan application fee may be charged by the lender to process your mortgage application. Ask the lender for details before applying for a mortgage.
A fee charged by a real estate attorney to prepare and review home purchase agreements and contracts.6 Not all states require an attorney to handle a real estate transaction.
Also known as an escrow fee, this is paid to the party who handles the closing, which could be the title company, an escrow company, or an attorney, depending on state law.
If you’re signing paper documents, this fee helps expedite their transportation. If the closing is handled digitally, you might not pay this fee.
Credit report fee
This is a charge ($15–$30) from a lender to pull your credit reports from the three main reporting bureaus. Some lenders might not charge this fee because they get a discount from the reporting agencies.
Some lenders require you to deposit two months of property tax and mortgage insurance payments at closing into an escrow account.
FHA mortgage insurance premium
FHA loans require an upfront mortgage insurance premium (UPMIP) of 1.75% of the base loan amount to be paid at closing (or it can be rolled into your mortgage). There’s also an annual MIP payment paid monthly that can range from 0.45%–1.05%, depending on your loan’s term and base amount.
Flood determination and monitoring fee
This is a fee charged to a certified flood inspector to determine whether the property is in a flood zone, which requires flood insurance (separate from your homeowners insurance policy). Part of the fee includes ongoing observation to monitor changes in the property’s flood status.
Homeowners association transfer fee
If you buy a condominium, townhouse, or property in a planned development, you must join that community’s homeowners association (HOA). This is the transfer fee that covers the costs of switching ownership, such as document costs. Whether the seller or buyer pays the fee may or may not be in the contract; you should check in advance.
The seller should provide documentation showing HOA dues amounts and a copy of the HOA’s financial statements, notices, and minutes. Ask to see these documents, as well as the covenants, conditions, and restrictions (or CC&Rs), bylaws, and rules of the HOA before you buy the property to ensure it’s in good financial standing and a place you want to live.
A lender usually requires prepayment of the first year’s homeowners insurance premium at closing.
Lender’s title insurance
This is an upfront, one-time fee paid to the title company that protects a lender if an ownership dispute or lien arises that was not found in the title search.
Lead-based paint inspection
You can pay a certified inspector to determine if the property has hazardous, lead-based paint, which is possible in homes built before 1979.
Points (or discount points) refer to an optional, upfront payment to the lender to reduce the interest rate on your loan and thereby lower your monthly payment. One point equals 1% of the loan amount. In a low-rate environment, this might not save you much money.
When interest rates are low, paying for discount points to reduce your interest rate may not be worth it.
Owner’s title insurance
A title insurance policy protects you in the event someone challenges your ownership of the home. It is usually optional but highly recommended by legal experts. It usually costs 0.5%–1% of the purchase price.
The origination charge covers the lender’s administrative costs to process your fee and is typically 1% of the loan amount.11 Some lenders do not charge origination fees, but if they don’t, they usually charge a higher interest rate to cover costs.
This is a fee that covers the cost of a professional pest inspection for termites, dry rot, or other pest-related damage. Some states and some government-insured loans require the inspection. It usually costs about $100.9
Prepaid daily interest charges
A payment to cover any pro rata interest on your mortgage that will accrue from the date of closing until the date of your first mortgage payment.
Private mortgage insurance (PMI)
If your down payment is less than 20%, your lender could require PMI, and you may have to make the first month’s PMI payment at closing.
Property appraisal fee
This is a required fee paid to a professional home appraisal company to assess the home’s fair market value used to determine your loan-to-value (LTV) ratio. It is usually between $300 and $500.9
At closing, expect to pay any pro rata property taxes that are due from the date of closing to the end of the tax year.
Rate lock fee
This is a fee charged by the lender for guaranteeing you a certain interest rate (locking in) for a limited period of time, typically from the time you receive a pre-approval until closing. It can run from 0.25%–0.5% of your loan value, though some lenders offer a rate lock for free.9 A mortgage calculator can show you the impact of different rates on your monthly payment.
Calculate Your Monthly Payment
Your monthly mortgage payment will depend on your home price, down payment, loan term, property taxes, homeowners insurance, and interest rate on the loan (which is highly dependent on your credit score).
Here is another big fee: real estate commissions. Buyers typically don’t pay this fee, though; sellers do. The commission charged by a broker is often 5%–6% of the home’s gross purchase price, which is then split evenly between the seller’s agent and the buyer’s agent. These fees can, however, be negotiated at times to make a deal happen.
A recording fee may be charged by your local recording office, usually a city or county clerk’s office, for the official processing of public land records. It is usually about $125.9
This is a fee charged by a surveying company to check property lines and shared fences to confirm a property’s boundaries. It is generally between $300 and $500, though it can be higher if the property is large or has unusual boundaries.
Tax monitoring and tax status research fees
This third-party fee is to keep tabs on your property tax payments and to notify your lender of any issues with your property tax payments, such as late or failed payments. The cost changes depending on where you live and the company your lender employs.
Title search fee
This is a fee charged by the title company to analyze public property records for any ownership discrepancies. The title company searches deed records and ensures that no outstanding ownership disputes or liens exist on the property. It generally runs between $200 and $400.9
A transfer tax may be levied, depending on the jurisdiction, when the title is handed over from the seller to the buyer. The cost varies geographically.
Underwriting fees are charged by the lender for the work that goes into evaluating your application and approving your loan. Underwriting is the research process of verifying your financial, income, employment, and credit information for final loan approval. It can cost as much as nearly $800.9
VA funding fee
If you’re a VA borrower, this fee, charged as a percentage of the loan amount, helps offset the loan program’s costs to U.S. taxpayers. The amount of the funding fee depends on your military service classification and loan amount. It can be paid at closing or rolled into your mortgage. Some military members are exempt from paying the fee.
How to Reduce Closing Costs
It might feel like you can’t afford all of these fees on top of the down payment, moving expenses, and repairs to your new home. However, there are ways to negotiate these fees.
This applies to lenders and third-party services, such as homeowners insurance policies and title companies. Many home buyers don’t realize they can save significant money on closing costs if they compare fees from lender to lender. Also, you don’t have to use the title company, pest inspector, or homeowners insurance agent your lender suggests. Do your homework and you could save some serious cash on those fees.
Schedule the closing at the end of the month
A closing date near or at the end of the month helps cut down on prepaid daily interest charges. A lender can run this scenario for you to figure out how much you might save.
Appeal to the seller for help
You might be able to get a seller to either lower the purchase price or cover a portion (or all, if you’re really lucky) of your closing costs. This is more likely if the seller is motivated and the home has been on the market for a long time with few offers. In many hot housing markets, though, conditions favor sellers, so you might get pushback or a flat-out “no” if you ask for a seller’s help. But it doesn’t hurt to ask.
Compare the loan estimate and closing disclosure forms
When you get your initial loan estimate, review it with a fine-tooth comb. If you’re unsure about what a fee entails or why it’s being charged, ask the lender to clarify. A lender who can’t explain a fee or pushes back when queried should be a red flag.
Likewise, if you notice new fees or see noticeable increases in certain closing fees, ask your lender to walk you through the details. It’s not uncommon for closing costs to fluctuate from pre approval to closing, but big jumps or surprising additions could impact your ability to close.
Be wary of a lender adding on unnecessary “junk” fees that duplicate existing ones or that haven’t been disclosed in advance.
Negotiate loan-specific fees
If you suspect a lender is adding on unnecessary fees (known as “junk” fees) to your loan, speak up. Ask the lender to remove or reduce fees if you notice duplication. Comparison shopping can be your ally in reducing closing costs, as well as finding competitive terms and rates. Be especially wary of excessive processing and documentation fees in the following areas:
Rate lock fee
Loan processing fee
Roll closing costs into your mortgage
In some instances, lenders will offer to pay your closing costs or roll them into your loan. However, you’re not off the hook; lenders tend to charge higher interest rates to pay themselves for absorbing your closing fees, which means you ultimately end up paying interest on those closing costs, as well as higher interest on your mortgage. Do this only as a last resort.
The Bottom Line
Closing costs are unavoidable when you buy a home. If you take proactive steps to shop around and closely analyze your loan estimate with your closing disclosure, you could save big bucks on those fees. As you start saving up for a down payment, set aside enough money for closing costs as well.
Remember that some areas of the country have higher closing costs than others. Above all, be your own best advocate. As you shop around, ask lenders to outline the fees they charge and try negotiating them down whenever possible.
- WHAT DOES IT MEAN TO BUY A PROPERTY WITH SELLER FINANCING?
Seller financing is when you get a mortgage to buy a home from the home’s seller instead of a bank. Let’s review when this approach is suitable, as well as pros and cons for buyers and sellers.
When to Use Seller Financing
Seller financing is rare overall, especially in a hot real estate market where sellers have their pick of buyers.
Seller financing becomes more common in tough real estate markets when bank lending tightens up and/or buyers have been hit by hard economic times that make it difficult to qualify for a traditional bank loan.
To do seller financing, sellers must own their home outright, or have enough equity in their home for the sale transaction to pay off their existing loan.
For example, if someone was selling their home for $300,000 and only owed $30,000 on their existing loan, they could require a 10-percent down payment from a buyer to do seller financing. That 10-percent down payment would pay off their $30,000 loan, and they could do seller financing for the remaining $270,000.
If, on the other hand, they owed $150,000 on their existing loan, the buyer’s 10-percent down payment would only pay their loan down to $120,000, so they’d need their lender’s permission to offer seller financing for as long as it took them to pay off the $120,000 — and it’s extremely rare for a traditional lender to grant this permission.
As for when buyers should use seller financing, the most common reason is that a buyer might not qualify for a traditional bank loan.
This could be because of challenges in a buyer’s credit, income or asset profile. Or it could be because the property needs repairs that a traditional lender requires to be completed before they fund the loan.
In both cases, seller financing is a way to buy a home without being subject to these traditional lender requirements.
Pros of Seller Financing
Key benefits for buyers using seller financing include:
Less stringent loan approvals. Even the most sophisticated sellers are unlikely to subject a borrower to the same rigorous federally-required loan approval procedures and documentation banks use.
No mortgage insurance for low-down-payment deals. Most bank loans with less than 20 percent down require mortgage insurance ranging from about 0.45 percent to 1.05 percent of a loan amount. On the $270,000 loan example above, this translates to $101 to $236 per month in extra financing costs.
Key benefits for sellers using seller financing include:
Control over timing of closing. In bank-financed deals, sellers are subject to timing and viability of bank financing coming through. With seller financing, they can close faster because they’re the lender.
Good source of income. Seller financing creates a monthly income stream the seller can rely on in lieu of a lump sum payment at closing. This income includes a rate of return (the interest rate they charge the buyer) on top of eventually getting their equity in the property back when the loan is paid off.
Key benefits for both buyers and sellers include:
Lower closing costs. Seller financing avoids bank fees, which makes the transaction cheaper for all parties.
Property can close “as is”. As noted above, seller financing means a seller won’t be subject to a bank requiring certain repairs be made to the property before the loan can close.
Reliable way to sell to tenants. If the buyer is a tenant who wants to buy the home, the buyer gets the home they’re already living in, and the seller already knows about payment history and creditworthiness of the buyer.
- WHAT IS AN ATTORNEY REVIEW PERIOD IN A REAL ESTATE CONTRACT?
What is the Attorney Review Period in a Real Estate Contract?
Many states have statutes that provide for an attorney review period. Kansas and Missouri are not one of those states. In order to have an attorney review period in Kansas or Missouri it must be stated and agreed to in the real estate contract. An attorney review period is highly suggested insofar as this is an opportunity to have a 3rd party not involved in the transaction to review the specific terms of the contract that each party to the contract will be held to. It is better to address these issues early in the transaction rather than to try to negotiate certain terms throughout the duration of the real estate purchase. Many real estate deals that blow up are over terms that could have originally been modified or changed so as to meet the particular needs of the buyer or seller.
When there is an attorney review period clause in a real estate contract, the initial contract that you sign will only be conditional. In most cases, you are only signing to confirm the agreed-upon price and that there will be an attorney review period. The typical attorney review period is 5 business days after signing the initial contract. During the 5-day period, your attorney will need to decide whether to:
Approve the contract;
Reject the contract; or
Entering into negotiations to modify the contract.
The attorney review period allows either the buyer or the seller to modify the contract to meet their particular needs. Your attorney will review the contract and suggest modifications to the contract that would be in your best interest. If the contract is not expressly rejecting or approved, your attorney will make an initial request for modification of the original contract terms within the 5-days allowed for attorney review. Maybe you want to add real estate tax provisions to the contract. You might also want to make the contract contingent on certain terms as well. The attorney review period is the time to make sure all of these terms are added to the contract.
The other party has the right to accept or reject the proposed changes. The other party may also want to counter the proposed changes and make additional proposals. During these negotiations, either party may walk away from the transaction without penalty if there is a failure to agree upon mutually acceptable terms.
If the 5-day attorney review period passes without anyone making proposed changes, then no changes will be made to the initial contract terms. Both parties will be bound by the terms of the initial contract.
- 2022 PREDICTIONS FOR REAL ESTATE
The housing market may not reach the incredible heights of 2021, but Zillow economists predict it will be anything but slow next year. Expect the strong sellers market to persist, the Sun Belt to maintain its top spot as the most in-demand region, and flexible work options to continue to shape housing decisions in new ways in 2022.
Zillow’s housing predictions for 2022:
2022 will fall just short of record-breaking
2021 marked the hottest housing market in U.S. history by some measures, including Zillow’s Home Value Index. While we may not see those records broken in 2022, Zillow economists expect incredibly strong price growth and sales volume to continue.
Zillow’s forecast calls for 11% home value growth in 2022. That’s down from a projected 19.5% in 2021, a record year-end pace of home value appreciation, but would rank among the strongest years Zillow has tracked. Existing home sales are predicted to total 6.35 million, compared to an estimated 6.12 million this year. That would be the highest number of home sales in any year since 2006.
Sellers keep the upper hand
The usual seasonal cool down in the housing market is reappearing this fall after a hiatus in 2020. Fewer homes are selling above list price, homes are staying on the market a few days longer than they did during the summer, and more sellers are cutting their price.
Zillow economists expect these metrics to trend slightly cooler in 2022, but don’t mistake that for a buyers market. The market forces that have given sellers the upper hand over the past two years or so — tight supply after years of under building, and elevated demand due to remote work, U.S. demographics and low mortgage rates — will persist next year as well. Expect to see bidding wars on many homes, especially as the market heats up during the spring and summer shopping season.
Large rentals will be in high demand
Rising home values will impact the rental market as well. After a slowdown in the early months of the pandemic, rent prices came roaring back, especially in what were previously some of the most affordable markets. As rising costs make it harder to save for a down payment, expect demand for larger rentals to increase, including for single-family homes, as families stay in the rental market longer.
The ‘Sun Belt surge’ will extend to secondary markets
2021 was in many ways the year of the Sun Belt. Zillow predicted Austin would be the hottest market of 2021 as part of a “Sun Belt surge,” which proved to be the case — no metro has seen home values grow more than Austin so far this year, and all of the top destinations for long-distance movers were in the Sun Belt.
Zillow predicts this surge will extend to smaller Sun Belt cities in 2022 as price hikes in this year’s star markets make more-affordable nearby markets more attractive. From April to August, Austin held the top spot in quarter-over-quarter home value growth, which is a good indicator of current housing demand. As of October, the smaller Florida metros of Fort Myers and Sarasota held the top spots, and 24 of the top 25 markets were in sunny states – a sign of things to come in 2022.
More Gen Xers and millennials will buy a ‘second home’ before a primary residence
Americans are taking advantage of remote work flexibility to move to larger homes in more-affordable markets, but many will not want to commit to a new location full-time. This is often true for younger people who are attracted to the amenities of living in a city, where expensive housing is more likely to put home ownership out of reach.
With these factors in play, there may be more people buying what’s traditionally a second home — either a part-time vacation home or an investment property — before they buy a home as a primary residence.
Young people today are savvy watchers of the housing market, in part because of time spent Zillow surfing. Purchasing a “second” home in a market more affordable than the one they live in is a way to break into the market and start building equity while mortgage rates are low, possibly teaming up with friends or family to lessen the financial burden. Virtual home shopping tools available today, such as Zillow 3D Home® tours, make buying a home in a far-flung location easier.
No end in sight for the renovation boom
In the race to buy a home in the ultra competitive pandemic housing market, many buyers have had to make one or more compromises (81%). As prices and mortgage rates rise, expect many homeowners to upgrade their existing home rather than try to wade back into the market to trade up.
A Zillow survey of homeowners found nearly three-quarters would consider at least one home improvement project in the next year. The top projects on their to-do list are renovating a bathroom (52%) or kitchen (46%), adding or improving a home office space (31%), finishing a basement or attic (23%), adding a room (23%) or adding a separate dwelling unit (21%).
Work will play a key role in moving decisions
The rise of flexible work options has changed how heavily a short commute factors into where Americans live. Home buyers used to pay handsomely to live near downtown and reap the benefits of a quick trip to and from the workplace each day, but that dynamic flipped in much of the country last year as buyers prioritized affordability and extra space. In 2022, hybrid and fully remote work will continue to reshape which areas are most in demand as the pandemic winds down and more workers receive permanent guidance on their flexible work options.
Zillow economists expect fully remote workers to continue to seek affordable markets, like those in the Sun Belt and other nontraditional housing hot spots where they can afford to buy their first home or trade up for a bigger one. And amid the “Great Resignation” and a generally aging population, traditional retirement markets are likely to see elevated demand.
New construction gains will only be a drop in the bucket despite best efforts of builders
The reason home prices are rising so quickly is economics 101: high demand and low supply. Zillow research shows that in the 35 largest housing markets alone, there has been a shortfall of 1.35 million new homes since 2008 because of a construction slowdown following the housing crash. Home builder confidence is sky-high, and builders are doing all they can to get houses up, but supply chain snags and labor shortages are limiting progress. The gap shrunk in 2021 and will likely shrink again in 2022, but the housing shortage will be a defining feature of the market once again next year.
- CAN A SELLER REQUIRE A BUYER TO USE A PARTICULAR TITLE COMPANY?
CAN A SELLER REQUIRE A BUYER TO USE A PARTICULAR TITLE COMPANY? YES AND NO
Section 9 of the Real Estate Settlement Procedures Act (RESPA) prohibits a seller from requiring a home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance. However, a seller can offer certain incentives for the use of a particular title company but the seller cannot require that a particular title insurance company be used by the buyer as a condition of the sale unless the seller pays 100% of all title insurance and related title costs. The CFPB has issued guidance stating that if the seller requires the buyer to use a title company (without offering an incentive), unless the seller pays 100% of the title-related costs then the seller has violated RESPA. Even if the seller offers to purchase the owner’s title insurance policy for the buyer, there can still be a violation of RESPA if the buyer must purchase the lender’s title insurance policy.
- PRE AND POST CLOSING POSSESSION AGREEMENTS IN REAL ESTATE CONTRACTS
POSSESSION IS NINE-TENTHS OF THE LAW
Possession is a key issue in real estate transactions and possession does not always transfer at the time of closing. Standard real estate contracts generally provide separate provisions for the date of closing and the date of possession. Most attorneys shudder at the thought of turning over or holding possession of real estate without a formal agreement of the parties which provides adequate protection to the client. In almost all cases, once beyond the attorney review and inspection period, the party in possession of the property holds a severe advantage over the other party. This is because possession is the seller’s bargaining chip. Buyers trade money for possession.
There are two types of possession to be traded and both may be agreed upon contractually. First, pre-closing possession occurs when a purchaser takes possession of a property sometime before the real estate closing. Post-closing possession occurs when a seller retains possession of the property for some period of time after closing. There can be many reasons to justify pre and post-closing possession for the parties. Although a pre or post-closing transfer of possession is not the “ideal” situation, an attorney can provide additional contractual protections for sellers and buyers.
When a buyer and seller agree to a pre or post-closing possession, one parties’ attorney will negotiate with the lawyer for the opposite side of the transaction to create an agreement that best protects the parties.
When a buyer is taking possession of the property prior to a closing, the seller’s attorney will have three main concerns.
First, the purchaser will be asked to accept the property in the condition it was delivered as of the possession date. Because possession of the property is out of the seller’s control, the seller does not want to be liable for acts done by the purchaser to damage the property. In addition, during the purchaser’s pre-possession, the purchaser may discover some “defect” or unacceptable condition, such as an item needing repair or even that the local traffic is too noisy, that was not raised during the inspection period and attempt to back out of the deal. Some purchasers might rather forfeit their earnest money than proceed with closing after discovering an unacceptable condition.
Second, the purchaser will generally be asked to pay some amount of daily rental for use, occupancy, and expenses. This amount is usually one-thirtieth of the seller’s monthly mortgage and assessment payments. Normally, utilities, services, and proratable items, including real estate taxes, are prorated as of the possession date.
Finally, the purchaser will be required to provide some financial protection to the seller in the form of insurance on the property. The purchaser will be required to provide the seller with a copy of a paid and in-force insurance policy covering the value of the property and listing the seller as an “additional insured” on the policy.
When a seller is holding possession beyond the closing date, the buyer’s attorney will have two main concerns.
First, the seller will be asked to pay a daily rate for use and occupancy of the property in the amount of the daily rate of the purchaser’s new mortgage payment plus taxes and insurance.
Second, the seller will be required to post a “possession escrow” or a certain amount of dollars to guarantee that the seller will actually move out. A common amount to be posted is two percent of the sale price. Many contracts call for a possession escrow which is used to pay the daily rental. This is generally not a good idea as there is no recourse against the seller once the escrow is exhausted. A better provision would be to specify that the escrow is to be used as a penalty which is forfeited in full if the seller fails to deliver possession and which is paid in addition to the daily rental amount.
- WHAT IS A PARTIAL RELEASE?
What Is a Partial Release?
The term partial release refers to a mortgage provision allowing some of the pledged collateral to be released after there is partial satisfaction of the mortgage contract. When a partial release is put into effect, the lender agrees to release some of the collateral from the contract when the borrower pays off a certain amount on the mortgage. Borrowers must contact their lender to see if they qualify and begin the process for a partial release. Lenders generally complete the paperwork that outlines the segments of property released.
- A partial release is a mortgage provision that allows some of the collateral to be released from a mortgage after the borrower pays a certain amount of the loan.
- Lenders require proof of payment, a survey map, appraisal, and a letter outlining the reason for the partial release.
- Borrowers may need to pay fees to the lender and to the county recorder’s office.
- A mortgagor may request a partial release when they wish to sell a portion of the land on their property.
Understanding Partial Releases may have a release schedule that outlines how much of the mortgage must be paid off before a partial release is possible. Since it isn’t automatically guaranteed or applied, borrowers must check with their lenders to apply for the provision. Keep in mind, not all lenders permit partial releases, so it’s important for borrowers to check before they apply.
The partial release isn’t an industry standard, so it’s important to check with lenders to see if they accommodate this provision.
Qualifying for a partial release may require the borrower to retain proof of payment on the mortgage. There is usually a minimum period of time that a borrower must pay before lenders will consider an application for partial release—usually 12 months. Many lenders won’t consider applications from borrowers who have recently defaulted on payments, even if the mortgage is brought up to date.
The application process may also require submitting a survey map to show which part of the property is to be released and what will remain under the title with the lender as the mortgage continues to be paid. This means getting an appraisal that outlines the current value of the property retained by the lender. The borrower may also need to include a reason for the request for partial release. For instance, the borrower may want to obtain a release for unimproved land that they don’t intend to make use of and another party wishes to acquire for their development or other purposes.
There may be nonrefundable fees payable to the lender to apply for a partial release. Additional fees may be required by the county recorder’s office to make changes with a mortgage. The approval process for a partial release may take several weeks.
If the borrower has a deal to sell part of the property, this may be enough to convince the lender to all a partial release. It may still be necessary to offer some incentive to the lender, such as supplemental compensation to secure the partial release. Throughout the transaction, the lender will want to preserve their loan to value ration of the collateral. Part of the requirement for such an agreement could be to pay down the outstanding principal on the mortgage.
When drafting the sale of a portion of a property, the seller must also furnish documentation to allow for the partitioning of the land. That can include conducting a title search to show any and all liens on the property, as well as other records and statements that show the remaining mortgaged property is still occupied.
- REALTOR DANGER SIGNS FOR HOME SELLERS
REALTOR DANGER SIGNS FOR HOME SELLERS
Real estate agents are people, and as with all industries, there are some who you prefer to work with, and some you don’t. When it comes to selling a home, some real estate agents will deceive their clients to benefit themselves.
Not all agents are like this, but it is worth knowing the strategies such real estate agents use, so you can spot them and steer clear of those agents who are not worth your commission.
Keep in mind all of these things are legal, but that doesn’t make them suitable for you! In fact, it is quite the opposite.
There is a significant percentage of agents who will go out of their way to do “the right thing.” Others are more concerned about their income than what’s best for their clients.
These are the bad eggs you need to stay away from. If you are going to be selling a home shortly, you need to know the ways real estate agents will fool you.
Below I will separate myth from facts in the real world. You will see why some of these standard real estate practices do more for an agent’s benefit than a home seller.
1. Dual Agency
Dual agency is probably one of the worst things a Realtor can do for a client who wants to sell their home. With Duel agency the Real Estate agent attempts to represent you, the seller, and the buyer, all at the same time, which is technically impossible. You cannot serve the best interests of both a buyer and a seller involved in the same transaction.
The seller wants to sell for as much as possible, while the buyer wants to buy for as little as possible. Yet, some agents will attempt to offer such a deal to clients because they can get a double commission from the sale.
No seller would ever go for dual agency if they knew the actual facts. But any Real Estate agent willing to try and play dual agent is probably going to be willing to paint it as a prettier picture than it is.
These types of Realtors may use the same salesmanship skills to convince you otherwise, implying that the agent can serve the needs of both the seller and the buyer. Be warned – THEY CAN’T.
In fact, in many states, laws require that a Realtor serving as a dual agent do nothing to jeopardize the interests of his or her client – which means the agent can say nothing on behalf of either party. So you end up paying commission for an agent that does nothing essentially.
Imagine for a moment that you are selling your home. The real estate agent gets a phone call from the pretty internet advertisement they are running. Mr. & Mrs. Jones want to see your home. If you allow dual agency, the agent YOU hired will no longer be representing your best interests.
What does this mean in the real world? Try the following:
- When the buyer makes an offer and asks the agent you hired what you should counteroffer, they cannot answer. Remember, they don’t represent you anymore. They can’t by law give you any advice.
- When the home inspection happens, and the buyer wants you to fix X, Y, and Z, your agent also will no longer be able to help you with guidance.
- Throughout the whole transaction, the agent cannot offer you any real estate advice.
Sounds lovely, doesn’t it? You are paying a real estate agent thousands of dollars, if not tens of thousands. Didn’t you hire the agent for their real estate expertise?
Keep this in mind – your agent does not have to become a dual agent. They can work with the buyer and remain as a seller’s agent. What this means is they represent you and only you.
Additionally, if the buyer wants their own agent, they can be referred to another agent who can help them.
Trust me. There are a lot of agents that would never consider doing a referral. Why? Simple – it would be taking money out of their pocket. You don’t need this kind of agent.
Understanding Dual agency in your state is critical. Don’t make the same mistake so many people have made before you. A significant amount of real estate agents get sued every year because of dual agency.
Dual agency is akin to an attorney trying to represent both the plaintiff and defendant in a lawsuit. Sounds silly, doesn’t it! There is a reason why some states have been smart enough to ban dual agency!
2. Open Houses
Some real estate agents just love to express to their clients how fantastic open houses are as a marketing activity. This is, in fact, the #1-way real estate agents fool their seller clients.
What they fail to tell the seller is the benefit for the agent. Some unscrupulous agents will go so far as suggesting to their client’s open houses are necessary to sell a home.
Folks, serious buyers always schedule showings. This is a fact, not fiction.
With an open house, you invite many strangers into your home with no idea if they really want to buy or not. Nosy neighbors, others selling homes that want to compare, window shoppers, and the unqualified.
Worse yet, sometimes even potential burglars are scoping out your home – these are the types of people who come to open houses.
Tons of real estate agents never mention the potential downsides of holding your home open to a bunch of deadbeats.
Open houses can be a magnet for crime!
So why do Realtors push open houses so much? Open houses can potentially be great for prospecting new buyers and sellers.
Those other sellers looking to compare may need a Realtor to represent them. Agents can get business from open houses. Unfortunately, that business rarely includes actual buyers for YOUR home.
Statistically speaking, around 2 percent of all sales come from an open house. Yes, you read that correctly a lousy 2 percent.
You don’t need an open house to sell your home. More importantly, you don’t need an agent who makes an open house the focus of their marketing efforts.
3. Misleading on Price
This is the oldest trick in the book. Every seller wants to think that their home is worth more than it is – it’s just human nature.
While a good agent will give you an honest price and be willing to explain why the price is less than you hoped it would be, a shady real estate agent will happily tell you your home is worth more than any other on the block.
Unfortunately, once it comes time to sell the home, no one will buy it at that unreasonable price. But now the agent has your listing and knows it is only a matter of time before you are willing to drop the price.
The most significant problem in such a situation is that you will probably get less for your home by overpricing it than you would have by pricing it competitively in the first place. An overpriced home sits on the market, gaining a stigma and leading buyers to assume something is wrong with it.
When you finally do drop the price to what it first should have been, no one bites. They only come in after you reduce it again – when it looks like too good a deal to pass up.
History shows us repeatedly that homes correctly priced from day one sell for the most money. In fact, in a strong seller’s market, you may wind up getting multiple offers that end up over the asking price. If you overprice your home, you probably won’t see any bids.
Do yourself a favor and look at the comparable sales presented by multiple agents carefully. The comps never lie; people do! If one real estate agent is giving you pie in the sky figures, you can bet your bottom dollar they are lying to you.
4. Saying Attendance at a Home Inspection Isn’t Necessary
Exceptional real estate agents go out of their way to do their best for a client. A good agent needs to be ready and willing to represent you at all the correct times, including during the home inspection.
Your listing agent should be at the inspection representing YOU! Unfortunately, it is common for listing agents to skip out on the buyer’s home inspection.
In some areas of the country, this is prevalent. Here in Massachusetts, I see the listing agent at the home inspection about 60-70 percent of the time. That is 30-40 percent of the time; the seller is not getting proper representation.
Your Realtor is not there to argue with the home inspector or tell the inspector how to do their job. Instead, your agent should sit quietly and listen to all aspects of the inspection to gain accurate information on the state of your home.
Buyers will often over-inflate problems with the home. Sometimes home inspectors will do the same. But because your agent was there, he or she can give you a real-world perspective on the state of your home.
Over the years, I have seen far too many times where minor problems were made into much more significant issues by buyers. In fact, I have seen buyers exaggerate enough where you would call it a lie.
Not long ago, while I was selling a home and the home inspector told the buyer there were 3-5 years left in the life of the roof. I was there to hear this from the horse’s mouth.
After the inspection, the buyer asked for a concession for a new roof. If I was not there to hear the inspector say the roof had years of life left, the seller might have been out of pocket thousands of dollars.
This is just one example. I see home inspection problems being blown out of proportion all the time. The buyer’s agent is almost always at the home inspection. It would be best if you insisted on your agent being there too.
Be prepared to hear an excuse from a real estate agent who doesn’t attend, like “there is too much liability for me to be present.” An attorney advised me not to go. Liability is never created by real estate agents who are there to listen. Liability is established when a real estate agent tries to be a second home inspector.
5. Over Promising and Under Delivering
Even the worst agents can still be helpful salespeople – capable of spinning a yarn about what they will do for you, the results they will get, and how smart it is to hire them. But a bad agent will tend to fall short of those promises.
Failures on the part of a bad real estate agent often include things like:
- Poor communication. Your agent should be busy selling your home, which means he or she may not be available every time you call. However, a bad agent may rarely return your calls in a timely fashion, fail to tell you about important issues with your sale, and just be bad at communication.
- Promising marketing but failing to produce it. It takes more than a for-sale sign and a listing to sell a home. A bad Realtor may promise comprehensive real estate marketing – including a website, social media, video tours, professional photography, brochures, etc. – but then only pursue a few of those channels.
- Terrible photos and videos. Today’s buyers expect clear, flattering images and often professional-quality video tours. The agent may say he or she will deliver these things, but then you find that the listing includes shoddy pictures and poor-quality video.
- Unfamiliar with your market. You want an agent who knows how to sell homes in your area.
These are the things a good realtor will do for a seller. If you are selling your home, make sure you look for an agent with all of these qualities. Put them on your checklist and insist the agent is on board.
Above all else, don’t be deceived by a sneaky real estate agent that cares more about what comes in and out of their wallet. The best real estate agents always put the client first!
What to Do
When selling a home, the agent you pick is critical to your success. It would help if you were focusing on working with someone who always puts your best interests first. Excellent communication throughout the sales process is paramount.
The best real estate agents understand this and always go the extra mile. Avoid a Realtor who will deceive you by remembering these things:
- Never accept dual agency.
- Don’t pick an agent whose marketing is focused on holding open houses.
- Never pick a real estate agent based on the price they can sell your home for.
- Always insist on having your real estate agent represent you at the home inspection.
- Look for a local agent who has an outstanding reputation and a track record of success.
By following these home selling tips, you will put yourself in a better position for success.
- WHAT IS A PROPERTY SURVEY AND WHY WOULD I NEED ONE?
What Is A Property Survey?
A property survey confirms a property’s boundary lines and legal description. It also determines other restrictions or easements included in the property. While you can technically get your property surveyed at any time, confirming the boundaries of your land is an important part of the home buying process.
Depending on your mortgage company and where you live, a property line survey may or may not be needed to get a mortgage or otherwise legally required. However, getting a property survey done lets you know in no uncertain terms what land you’re responsible for and where you can build, while empowering you and your mortgage lender or title company to set the most accurate terms of your agreements.
There are different types of property surveys, but they all determine important characteristics and features of the land based on what the property owner needs. Here are a few examples:
This one may sound obvious, but the legal boundaries of your property, a precise understanding of your property lines can either make or break your homeowning experience. By eliminating any confusion or gray areas, you can build or expand your home with confidence and avoid encroachments– property disagreements with your neighbors.
In real estate terms, an encroachment happens when a neighbor builds something that invades another neighbor’s property. This type of conflict can easily turn into a legal issue, as there is a lot on the line (no pun intended) when it comes to land ownership and building rights.
For example, it’s important to consider what could happen as a result of a new structure on your property, like injury or damage you could be liable for in the eyes of the law, higher insurance premiums, and lower resale value down the line. It’s not unheard of for potential buyers to offer less money for a property with poorly defined property lines, or to even pass on purchasing altogether.
A property survey will reveal any easements on the property you want to purchase. An easement is a situation in which you may have to share access to some part of your property. For example, a utility company could have the right to install electrical wires on your land, or you may be required to share a private road or beach with your neighbors. There are many different types of easements and they don’t always result in negative situations or experiences; however, you can avoid being caught by surprise by conducting a thorough property survey as a part of your home buying process.
Elevation matters! Topographical surveys are surveys that go deeper into the contours, elevation, and features of the property. This type of survey will include your property’s exact elevation, building type, and flood map location in order to determine the proper flood insurance premium rates.
This information is important to know for architects and building contractors and can impact the design and cost of any new structure you decide to build. Paying for a topographical survey and a flood certificate now could end up saving you hundreds of dollars per year.
The fieldwork a property surveyor does on the property results in a better understanding of the land you want to live or build on – including potential problems and hazard areas. This is especially important if you plan to build new structures on your land. A thorough survey from an accredited professional can help you avoid costly mistakes, like trying to build your new home only to find out your lot has a water table near the surface, or incurring future damages from land erosion, landslides or earth collapse.
How To Get A Property Survey
Now that you understand the benefits of property surveys, you’re probably wondering how you can get the most precise idea of your property’s legal boundaries. There are several ways to go about getting a property survey.
Hire A Land Surveyor
Luckily for grazing deer and hungry rabbits, not every plot of land is clearly defined and enclosed by a white picket fence. As land shifts over time, some initial property line markers may no longer exist. If you have any questions about property lines, the safest thing to do is hire a land surveyor.
A professional land surveyor is an expert in defining property lines. They use their skills, education, and specialized field equipment to create legally binding property surveys. They can even serve as expert witnesses in court cases about land disputes (Remember when we talked about encroachments earlier?)
During the property survey, a land surveyor will compare historical records and data with any existing markers to accurately define your property lines – and their findings are legally binding. This process takes time, effort, and boots-on-the-ground legwork, so hiring a well-respected and well-reviewed land surveyor before purchasing land or beginning any new home expansions is your best bet to avoid any legal issues in the future. Call around for quotes before you decide, and be wary of any too-good-to-be-true low estimates.
Check The Property Deed
Several different types of deeds are used in real estate. A property deed is a written legal document that transfers ownership of a property from the grantor to the grantee. (Not to be confused with a title, which is the actual document that states who legally owns the property.) This type of deed will have several pieces of important information about the property: accurate owner names, exact address, tax map number, legal description, restrictions, and other information like conditions of the transfer and reservations of rights by a prior owner. While some deeds only reference a lot or block number, many include detailed measurements in the form of – yep, you guessed it – a property survey done by a land surveyor.
Search Property Survey Records
While there is no national archive of real estate records, many states require property surveys to be filed with the local government. You can search for property surveys by visiting the courthouse, property, or assessor’s office where your new land is located. You will need to manually check transfers, requirements, and restrictions on the property. This avenue can be time-consuming, but it’s a free to low-cost way to empower yourself with the knowledge and history of your new property’s legal boundaries.
Find A Property Survey Online
Can’t make it to the courthouse? No worries, many local governments keep property records online. To search for your piece of land, you’ll need specific details about the property you want to look up. Gather as much information as you can, like the street address, boundary descriptions, and date of the last survey, and search the official county or assessor’s website where the property is located.
The more information you have, the easier it will be for you to find the survey you need. Not all records will be digitized, but the results of your search may help you narrow down the exact office where your survey is located. You can then call the office and ask if they can mail you a copy of the survey.
Geographical Information System (GIS) maps and property search sites are a better option if you have limited information on your property. However, these sites often charge a fee or require a subscription.
Contact The Previous Surveyor
Land surveyors keep copies of the property surveys they complete. (Legally, the survey belongs to them.) If you know the name and contact information of the previous land surveyor, try reaching out. It’s very likely that, for a fee, they can send you a copy. Land surveys usually last 5 to 10 years after they are completed, so if the previous survey was done a long time ago, it’s probably a good idea to get a new one done even if you locate the official document.
- BORROWERS SHOULD NOT REFINANCE AND REMODEL AT THE SAME TIME
“I applied to refinance my jumbo mortgage and was almost through the process when the loan officer asked if there had been any remodeling done. I am in the process of replacing a bay window and am just now applying for the required town building permit which can take a couple of months. Will that hold up the refinance?”
It might. On the face of it, the lender should not be concerned about improvements in the property that increase its value, since that makes the loan a safer investment. But in fact the lender is concerned that in the process of making an “improvement”, the owner may have violated local building codes, which could make the property unsalable in the future. This danger is greatest when the owner does the work himself and doesn’t want to be bothered with (or doesn’t know about) the local building codes.
If a loan officer asks about improvements, it is because he is following the instructions of the underwriter, who wants to make sure that work on the house has been done legally and is in compliance with building codes. The underwriter will want this verified by the local government entity that enforces the codes.
Since you have improvements in process, don’t be surprised if the loan officer tells you to come back after they have been completed and document that they are in compliance with the codes.
Bottom line: Borrowers should not refinance and remodel at the same time.
- MULTIPLE STRUCTURES ON ONE PARCEL A PROBLEM FOR SELLERS
MULTIPLE STRUCTURES ON ONE PARCEL A PROBLEM FOR SELLERS
“We have a beautiful home with 5 acres, and there is a second smaller structure on the property. We have been trying to sell since 2008 with no bites until recently, when a buyer appeared. We lost the sale, however, because the bank refused to finance two structures on one parcel… Any suggestions?”
Yes, split your parcel into two parcels, each with a structure, and sell them separately.
Two structures on one parcel is a big problem for the owner trying to sell it because potential buyers will have difficulties getting financed. If the second structure is a habitable unit, the question arises of whether the buyer will rent it out. Under the rules, such a buyer is an investor rather than a permanent occupant. Investors are subject to more strict underwriting rules than permanent occupants, and pay more for their mortgage.
If the second structure is some kind of an appendage to the main house, such as a barn or recreation facility, a potential purchaser will face a different problem. An appraisal of the property will be based on the assumption that the second structure has no value, which means that the loan amount will be smaller and the required down payment will be larger.
Home appraisals are based primarily on “comparables”. These are recent sale prices of homes that are similar to the property being valued. But a parcel with two structures will not have any comparables, forcing the appraiser to ignore the second structure. The appraisal will therefore undervalue the property as a whole.
The problem posed by two structures on one parcel will seldom arise in connection with very expensive homes, because the margin of error in appraisals is very large even without the complication posed by multiple structures, and eligible buyers will not need much if any financing. But the lower the price range within which the property falls, the more are potential buyers dependent on financing a major portion of the price, and the greater is the penalty posed by multiple structures.
- 2021 HOUSING MARKET FORECAST AND PREDICTIONS
2021 National Housing Market Forecast and Predictions
To say 2020 was a year of surprises is an extreme understatement. What started off as a bright year for the housing market and the economy was soon derailed by a global pandemic and severe economic recession. As detailed by my colleague, George Ratiu, the economic rebound has been sharp, but is by no means complete and created distinct winners and losers among sectors in the economy. Read more detailed thoughts on the overall economic context and outlook, here. One of the big winners has been the housing market, which saw home sales and prices hit decade-plus highs following decade lows in the span of just a few months. We expect housing’s winning streak to continue in 2021 as seasonal trends normalize and some of the frenzied momentum fades thanks to fresh affordability challenges. Below you’ll find our forecast and housing market predictions on key trends that will shape the year ahead.
Realtor.com 2021 Forecast for Key Housing Indicators
Housing Indicator Realtor.com 2021 Forecast Mortgage Rates Average 3.2% throughout the year, 3.4% by end of year Existing Home Median Sales Price Appreciation Up 5.7% Existing Home Sales Up 7.0% Single-Family Home Housing Starts Up 9% Homeownership Rate 65.9%
Seasonality and 2020 Context: The Baseline
In 2020, the seasonal pattern for home sales and other metrics was thrown out of whack by the timing of the coronavirus arrival as well as the shelter-at-home orders and other measures that were rolled out to arrest the spread of the virus. These measures were implemented just before what’s normally the best time of year for sellers to list a home for sale, and housing inventory never fully made up the gap as buyers returned in earnest before sellers. This uneven return of buyers and sellers created a housing market frenzy that pushed the number of sales to decade highs while time on the market dropped to new lows. This trend persisted well into the fall, a time when normal seasonal trends typically favor home buyers over sellers, thus buyers hoping for the usual break in 2020 were likely disappointed. Understanding this backdrop will be key to evaluating the data as it comes in for 2021 as we expect the housing market to settle into a much more normal pattern than the wild swings we saw in 2020. Year over year trends will need to be understood in the context of the unusual 2020 base year.
After whipsawing in tremendous fashion in early 2020, the housing market more than regained its early-year momentum to finish at new highs for home sales in the fall. For the year, we expect 2020 home sales to register slightly higher (0.9%) than the 2019 total thanks to the strong, if delayed, buying season. Going into 2021, we expect home sales activity to slow from those frenzied levels which represented underlying housing demand as well as make-up buying for a spring season many buyers missed out on plus a sense of urgency brought on by record-low mortgage rates. As sub-3 percent mortgage rates start to feel less exceptional, buyers may not react with the same immediacy to take advantage of them, initially, though as rates start to rise in the second half of 2021, buyers may feel the need to hurry purchases along to lock in a low rate. Additionally, as make-up buying from the disruption of spring 2020 fades, home purchases will be propelled by underlying demand in 2021. This demand will come from a healthy share of Millennial and Gen-Z first-time buyers as well as trade-up buyers from the Millennial and older generations.
We expect home sales in 2021 to come in 7.0% above 2020 levels, following a more normal seasonal trend and building momentum through the spring, and sustaining the pace in the second half of the year. While home sales are expected to lose some momentum over the last months of 2020, the shallower than normal seasonal slowdown creates a higher base of activity leading into 2021 that is roughly maintained for the first half of the year. As vaccines for the coronavirus become broadly available to the public, and economic growth reflects the resumption of more normal patterns of consumer spending, home sales gain even more in the second half of the year.
With the already limited inventory of homes for sale relative to buyers pushed further out of balance by the pandemic that brought out buyers in mass and kept many sellers pondering their options, home prices skyrocketed surging up more than 10 percent over year-ago levels by the late fall. We expect the momentum of home price growth to slow as more sellers come to market and mortgage rates settle into a sideways pattern and eventually begin to turn higher. A large number of buyers in the market, including many Gen-Zers looking to buy their first-home and Millennials who are both first-time and trade-up buyers, will keep upward pressure on home prices, but rising numbers of home sellers will provide a better relief valve for that pressure.
We expect home prices in 2020 to end 7.6% above 2019, after a seeing near-record high boost in the summer and early fall, but beginning to decelerate into the holidays. From there, we expect price gains to ease somewhat in 2021 and end 5.7% above 2020 levels, decelerating steadily through the spring and summer, and then gradually reaccelerating toward the end of the year.
Although the housing market is healing and by many measures doing better than before the pandemic, inventory remains housing’s long haul symptom. There was an insufficient number of homes for sale going into 2020 in large part due to an estimated shortfall of nearly 4 million newly constructed homes. Much to the surprise of many, the coronavirus and recession did not lead to a distressed seller-driven inventory surge as we saw in the previous recession, but further reduced the number of homes available for sale. Starting in fall 2020 the housing market saw more than half a million fewer homes available for sale than the prior year. We expect to see an improvement in the pace of inventory declines starting just before the end of 2020 that will continue into Spring 2021 so that while the number of for-sale homes will be lower than one year ago, the size of those declines will drop. We expect a more normal seasonal pattern to emerge which will contrast with the unusual 2020 base and lead to odd year over year trends, but taken as a whole we expect inventories to improve and, by the end of 2021, we may see inventories finally register an increase for the first time since 2019.
While total inventories will remain relatively low thanks to strong buyer demand, the number of new homes available for sale and existing home sellers, what we call newly listed homes,” will be more numerous which will help power the expected increases in home sales.
Key Housing Trends
2021 TRENDS: Millennials & Gen Z
The largest generation in history, millennials will continue to shape the housing market as they become an even larger player. The oldest millennials will turn 40 in 2021 while the younger end of the generation will turn 25. Older millennials will be trade-up buyers with many having owned their first homes long enough to see substantial equity gains, while the larger, younger segment of the generation age into key years for first-time homebuying. At the same time, Gen Z buyers, who are 24 and younger in 2021, will continue their early foray into the housing market.
In early 2020, younger generations, including Millennials and Gen Z, were putting down smaller down payments and taking on larger debts to take advantage of low mortgage rates despite rising home prices. In fact, only a quarter of respondents to a summer survey reported lowering their monthly mortgage budget or not changing their home search criteria in response to lower mortgage rates. The other three-quarters said low rates would enable them to make a change to their home search, and the most commonly cited change was buying a larger home in a nicer neighborhood.
We expect these trends to persist as rising home prices require larger upfront down payments as well as a bigger ongoing monthly payment due to the end of mortgage rate declines. Early in the pandemic period, there was concern that temporary income losses could prove to be particularly disruptive to younger generations’ plans for homeownership, as these were the groups expected to face income disruptions that might require dipping into savings which would otherwise be used for a down payment. Thus far, these disruptions have not had an effect on overall home sales, and some home shoppers report an ability to save more money for a downpayment as a result of sheltering at home, but we are still not completely through the pandemic-related economic disruption.
2021 TRENDS: Remote Work
As we discussed in early 2020, the ability to work from home is not new. In fact, as long ago as 2018, roughly one-quarter of workers worked at home, up from just 15 percent in 2001. More recently, a scan of real estate listings on realtor.com in early 2020 showed that in the ten metro markets where they are most common, as many as 1-in-5 to 1-in-3 home listings mentioned an “office.” Remote working was already more common among home shoppers than the general working population, with more than one-third of home shoppers reporting that they worked remotely even before the coronavirus. Additionally, remote working has gained unprecedented prominence in response to stay-at-home orders and continued measures to quell the spread of the coronavirus. Another 37 percent of home shoppers reported working remotely as a result of the coronavirus. While a majority of home shoppers reported a preference for working remotely, three-quarters of workers expect to return to the office at least part-time at some point in the future. However, the ability to work remotely was a factor prompting a majority of respondents to buy a home in 2020. This was the case even when most expected to return to offices sometime in 2020. As remote work extends into 2021 and in some cases employers grant employees the flexibility to continue remote work indefinitely, expect home listings to showcase features that support remote work such as home offices, zoom rooms, high-speed internet connections, quiet yards that facilitate outdoor office work, and proximity to coffee shops and other businesses that offer back-up internet and a break from being at home, which can feel monotonous to some, to become more prevalent
2021 TRENDS: Suburban Migration
With remote work becoming much more common, home shopping in suburban areas had a stronger post-COVID lockdown bounceback than shopping in urban areas, starting in the spring and continuing through the summer. These trends, which have been visible in rental data as well, suggest that city-dwellers—freed from the daily tether of a commute to the office and looking for affordable space to shelter, work, learn, and live—were finding the answer in the suburbs. In fact, a summer survey of home shoppers showed that while a majority of respondents reported no change in their willingness to commute, among those who did report a change, three of every four reported an increased willingness to commute or live further from the office.
Even before the pandemic, homebuyers looking for affordability were finding it in areas outside of urban cores. The pandemic has merely accelerated this previous trend by giving homebuyers additional reasons to move farther from downtown.
Housing Market Perspectives
What will 2021 be like for buyers?
The housing market in 2021 will be much more hospitable for buyers as an increased number of existing sellers and ramp up in new construction restore some bargaining power for buyers, especially in the second half of the year. Still-low mortgage rates help buyers afford home price increases that will be much more manageable than the price increases seen in 2020. With companies continuing to allow workers more flexibility, we see the inner as well as outer suburbs and smaller towns continuing to entice home buyers and builders. Areas that can ramp up affordable housing supply will benefit and see an influx of buyers.
While buyers will be able to visit homes in person, a strong preference for most shopping to buy, they will take advantage of the industry’s acceleration toward technology to check out homes, explore neighborhoods, and research the purchase online, saving time and energy to focus on a more selectively curated list of homes to view in person.
Although the pace will slow from late 2020’s frenzy, fast sales will remain the norm in many parts of the country which will be a challenge felt particularly for first-time buyers learning the ins and outs of making a major decision in a fast-moving environment. Buyers who prepare by honing in on the neighborhood and home characteristics that are must-haves vs. nice-to-haves and lining up financing including a pre-approval will have an edge.
What will 2021 be like for sellers?
Sellers will be in a good position in 2021. Home prices will hit new highs, even though the pace of growth slows. Buyers will remain plentiful and low mortgage rates keep purchasing power healthy, but monthly mortgage costs will rise as mortgage rates steady and home prices continue to rise. Sellers hoping to see further double-digit price gains will likely be disappointed, but those setting reasonable expectations can expect to see a timely sale and will want to focus on their next move.
Housing Market Predictions 2021 – Metro Area Breakdown
- TITLE THEFT
“Title theft” was a term unknown just a generation ago. Now advertisers bombard us daily with warnings about it.
They say that thieves can “steal” our homes by forging our names on deeds, then resell the property or take out mortgage loans to drain its equity. They pocket the proceeds and “stick” us with any mortgage payments.
But can a thief really “steal” your house through forgery, and are you really obligated to pay off a thief’s mortgage loan?
No. A forged deed conveys nothing. And, having acquired nothing, the forger has nothing to resell to a third party or to ‘mortgage’ to a lender.
Although title theft isn’t real, a forged deed or mortgage can have a very real — often devastating — impact on the owner. Since the forger’s name will appear on the land records, the forger can sometimes deceive a third party into “buying” the property or a lender to take a “mortgage” of the nonexistent title.
The owner cannot simply ignore the forgery unless the defrauded buyer or lender accepts the owner’s account and disclaims any interest in the property. That rarely happens. Usually, owners must file a lawsuit to clear title. Most owners need a lawyer to do that, and few lawyers are willing to handle such matters for free. The litigation can be lengthy, involving expert testimony as to the validity of the signatures, and prohibitively expensive.
Although the owner has no legal obligation to repay the forger’s loan, the owner may ultimately feel constrained to do so as a practical matter. Some owners don’t learn of the forged mortgage until the lender moves to foreclose the mortgage, or even after the foreclosure process is complete and title has passed again. Bringing legal action at that late stage can be particularly expensive.
Why do the advertisements for “protection” against so-called title theft say that a forger who subsequently “mortgages” the property to a lender can “stick the owner with the payments”?
Either the advertisers don’t understand the law, or their statements are intentionally ambiguous. The advertisements speak of ‘putting a shield’ around your title, ‘monitoring’ it, and issuing ‘alerts.’ If you inquire further, here is what you are likely to learn: The provider will regularly check the land records to see whether your name has appeared on any deed or other instruments. The provider will alert you of any such instruments it finds. If you respond that an instrument was forged, the provider will prepare and file in the land records document to alert further buyers or lenders that the instrument was forged.
Owners can check the land records on their own, but there’s value to the convenience of having someone regularly check the land records for them. There’s also a value to having a ‘red flag’ affidavit prepared and recorded as to any forged deed that is discovered — but only if the recording is accomplished before the forger succeeds in finding another victim to ‘buy’ or take a ’mortgage’ on the property.
Will a provider of “title theft” protection also pay for a lawyer to represent an owner in seeking to clear title after a forgery?
If the provider’s terms include its payment of the legal fees necessary to clear title of any forged instrument that it discovers, the service could prove to be extremely valuable. PLEASE READ THE FINE PRINT.
I’m not aware of any providers of ‘title theft’ protection who do cover their customers’ legal fees in litigation to clear title. And if such providers do exist, their service would almost certainly cost much more than the dime-a-day rates advertised widely.
- ACCELERATED AMORTIZATION
What Is Accelerated Amortization?
Accelerated amortization is a process by which a mortgagor makes extra payments toward the mortgage principal. With accelerated amortization, the loan borrower is allowed to add extra payments to their mortgage bill to pay off a mortgage before the loan settlement date.
The benefit of accelerated amortization is that it reduces the overall interest payments paid by the borrower over the life of the loan. And, of course, it retires the debt sooner.
Accelerated amortization should not be confused with accelerated depreciation, an accounting method for recognizing the decline in value of a piece of property or equipment over its useful life.
- Accelerated amortization is when a borrower makes extra payments toward their mortgage principal beyond the stated amount due.
- There are different ways that a borrower can make accelerated payments, including increasing the size of each payment or making more frequent payments.
- Borrowers use an accelerated amortization strategy to save money on interest and pay off their mortgage faster.
- Accelerated amortization does have drawbacks: It can deprive the borrower of a tax deduction, and some lenders charge prepayment penalties.
How Accelerated Amortization Works
A home mortgage is a type of amortized loan, which means that the borrower repays the loan in regular installments (usually monthly) over a period of time. These payments consist of both principal and interest.
Initially, most of the borrower’s payments will go toward paying the loan’s accrued interest, with a smaller portion of each payment going toward paying down the principal. This ratio will be reversed over time, and a larger portion of the borrower’s payment will go toward paying off the principal and a smaller portion will go toward interest.
When a loan is taken out, the home mortgage lender provides the borrower with an amortization schedule This table shows how much of the borrower’s payment each month will be applied to the principal and how much to interest until the loan is paid off.
With accelerated amortization, the borrower will make additional mortgage payments beyond what is listed in the amortization schedule. A borrower can accelerate the amortization of their loan by increasing either the amount of each payment or the frequency of payments (bi-weekly mortgage payments are a common example). The extra accelerated payments go directly toward reducing the loan’s principal, which in turn lowers the outstanding balance and the amount owed on future interest payments.
Example of Accelerated Amortization
Let’s say Amy has a mortgage with an original loan amount of $200,000 at 4.5% fixed-rate interest for 30 years. Consisting of principal and interest, the monthly payment amounts to $1,013.37. Increasing the payment by $100 per month will result in a loan payoff period of 25 years instead of the original 30 years, saving Amy five years’ worth of interest.
Advantages of Accelerated Amortization
Adopting an accelerated amortization strategy has several pluses for borrowers.
The obvious one is that it shortens the life of the loan—meaning you get out of debt sooner. More specifically, paying a mortgage in an accelerated manner decreases the loan principal faster, which means your equity (ownership stake) in the home increases faster as well. This increases your net worth and often strengthens your credit score.
Also, accelerated amortization diminishes the overall amount of additional interest that the borrower incurs. Generally, the longer a loan lasts, the more interest you pay. Although the interest rate itself doesn’t change, by reducing the principal, you reduce the total interest charged on that principal—saving money in the long run.
Limitations of Accelerated Amortization
There are also reasons why it might not make sense to pay down mortgage debt early. The most important reason is that interest in mortgage debt is tax-deductible according to the U.S. tax code. Anyone who takes out a mortgage from Dec. 15, 2017, to Dec. 31, 2025, can deduct interest on a mortgage of up to $750,000, or $375,000 for married taxpayers filing separately.1 While fewer American homeowners are opting to claim the deduction than in the past, it provides significant tax savings for some homeowners. By paying down a mortgage early, these homeowners could these homeowners could be losing out on a tax-savings strategy.
In such a scenario, it may make sense for homeowners to use the funds that they would have used for accelerated amortization to invest in a retirement or college fund. Such a fund would earn a return while maintaining the tax advantage of a mortgage interest deduction. However, very affluent buyers, who already have sufficient retirement funds and sufficient capital to make other investments, may want to pay down their mortgages early.
Some lenders include a prepayment penalty in their mortgage contracts. This is a clause that assesses a penalty to the borrower if they significantly pay down or pay off their mortgage during a specified time (usually within the first five years of the mortgage origination).
Homeowners in the United States typically take out a 30-year fixed interest rate mortgage, secured by the property itself. The length of the loan, and the fact that the interest rate is not variable, mean that borrowers in the United States typically pay a higher interest rate on their loans than borrowers in other countries, like Canada, where the interest rate on a mortgage is typically reset every five years.
- MISSOURI CHARGING ORDER ON LLC
MISSOURI CHARGING ORDER ON LLC
A charging order can be an effective way to collect on a judgment. A person who obtains a judgment is commonly called a “judgment creditor”. A person against whom a judgment is entered is commonly called a “judgment debtor”. A charging order requires an LLC or partnership to pay to a judgment creditor the distributions from the LLC or partnership that the judgment debtor would have been entitled to receive.
CHARGING ORDER AGAINST AN LLC
Missouri charging orders against LLCs are governed by section 347.119 RSMo. Under this statute, if a judgment debtor is a member of an LLC, the judgment creditor can ask a court to enter a charging order against the LLC. Unlike a garnishment or execution on property, this procedure requires a hearing. Both the judgment debtor and the LLC must be given notice of the hearing and an opportunity to present evidence at the hearing. The judgment creditor must generally establish at the hearing that the judgment is a valid and final judgment, that the judgment was entered against the judgment creditor, the amount of the judgment that is unpaid, that the LLC exists as a legal entity, and that the judgment debtor is a member of the LLC. If the judgment creditor has presented sufficient evidence of these facts, the court will typically order the LLC to pay to the judgment creditor the portion of any distribution that the judgment debtor would have been entitled to receive.
A charging order cannot force a distribution, nor can it attach or seize any asset owned by the LLC. The order can only provide that if and when the LLC makes a distribution, the portion of the distribution the judgment debtor is entitled to receive must be paid to the judgment creditor. The order will typically require the LLC to pay such funds to the court, which will then pay them to the judgment creditor.
CHARGING ORDER AGAINST A PARTNERSHIP
Missouri charging orders against partnerships are governed by two statutes. Section 359.421 RSMo. applies to limited partnerships, and section 358.280 RSMo. applies to all other forms of partnerships. As with an LLC, a court can order a partnership to pay to a judgment creditor distributions that a judgment debtor would have been entitled to receive. Also as with an LLC, the order cannot force a distribution, nor can it attach or seize any asset owned by the partnership. Unlike an LLC, a court can order the sale of a judgment debtor’s partnership interest. However, the purchaser does not acquire the judgment debtor’s non-economic rights in the partnership, such as the right to vote, to manage partnership property, to inspect partnership books, or to demand an accounting.
Finally, the court has the discretion pursuant to a partnership charging order to “make all other orders, directions, accounts, and inquiries which the debtor partner might have made, or which the circumstances of the case may require.” The statute even allows the court to appoint a receiver as to the distributions owed by a partnership to the judgment debtor. Unlike with an LLC, the partnership charging order statutes give the court powerful tools to look into the economics of a partnership and to even perhaps control the economics to the benefit of the judgment creditor.
CHARGING ORDERS IN SUMMARY
In summary, a charging order against an LLC is pretty simple. A court can only order an LLC to pay to a judgment creditor the portion of a distribution that the judgment debtor would be entitled to receive. However, the court cannot force a distribution or seize any LLC asset.
On the other hand, a charging order against a partnership can be complex. While a court cannot force a distribution from a partnership or seize any partnership asset pursuant to a charging order, a court can appoint a receiver as to the interest of a judgment debtor in a partnership, and it can even order a foreclosure sale of the judgment debtor’s partnership interest. As such, an LLC provides much better asset protection to a member, as to charging orders, than does a partnership.
Finally, the natural inclination, when faced with a charging order, is to transfer LLC or partnership assets to another entity or to find ways to avoid making any distributions. Members and partners contemplating such transfers or workarounds should consider whether such strategies might be seen by the court as a fraudulent transfer. Partners of a partnership should also bear in mind the ability of the court to look into the economics of the partnership and to enter orders “which the circumstances of the case may require.” This language gives a judge a lot of discretion to address situations that the judge might not like.
- CURRENT STATE OF THE KANSAS CITY REAL ESTATE MARKET
The Kansas City housing market is intense, with soaring prices and limited availability challenging the city’s reputation for affordability. Nationwide, record-low interest rates and rising demand are met with a depleted inventory. The result is dramatic price jumps and homes selling in days.
According to the Kansas City Regional Association of Realtors, the median price in May 2021 for an existing home in the KC area was $255,000, about a nineteen percent increase from the same time last year. The number of available properties has dropped by fifty-three percent compared with 2020.
How did we get here? And if you’re thinking about entering the market, what should you know?
Covid didn’t start the crisis, but it did worsen it. “It’s always been a seller’s market,” says Sarah Montgomery, lead buyer specialist at Dani Beyer Real Estate. “However, it’s definitely intensified.” As people spent more time at home during the pandemic, they’ve recognized the need for more space and a comfortable home, says Sharon Barry, associate broker at Reece Nichols. And since the Federal Reserve cut interest rates to near-zero in the first days of the pandemic, there’s been a stronger incentive for prospective owners to enter now.
It’s not ending soon, but it’s probably not a bubble. Despite the worrisome rise in prices, national experts don’t expect a crash. As prices continue to soar due to low inventory, demand should slow. But this won’t happen overnight. “I don’t foresee the buyer’s side changing much over the next two years,” says Trent Gallagher, a realtor at Compass Realty Group.
Don’t expect a huge increase in inventory. Steep lumber prices shouldn’t slow down construction, Montgomery says, but it’s one of the reasons new housing is so expensive. The median new house price in the KC metro has jumped nearly twenty-one percent from last year to $439,425. In 2021, the metro has already issued nearly twice as many new building permits as last year, but it takes time to build.
More existing homes might enter the market when the federal moratorium expires July 31 and foreclosures spike. But Gallagher doesn’t expect it to have a strong impact. “With buyer demand so high, they’d all be picked up, and we’d still be back where we are right now,” Gallagher says.
It might be best to stay in the market. It sounds risky, but the future could be riskier. Interest rates won’t stay low forever. “I perceive the market’s going to continue to appreciate, and it’s a great time to buy,” Gallagher says.
There are limited ways for buyers to have leverage. Cash buyers typically move to the front of the list, Barry says, but that isn’t a realistic option for many people. She believes having good credit and placing a large down payment can help. Some people are rolling the dice by waiving inspections, but Montgomery recommends against it “unless they have a solid pre-inspector report from a reputable inspector,” she says.
Montgomery thinks the best advantage is finding the perfect agent. “Don’t hesitate to shop for agents and make sure you have a good fit,” she says. It can be a stressful process but having someone friendly and knowledgeable can help you push through it.
- KEY STEPS FOR A SUCCESSFUL 1031 EXCHANGE
With recent appreciation in real estate, we are seeing more clients interested in 1031 exchanges. These exchanges (often called “like-kind” exchanges) can be complex. But as long as you follow the rules, it is a great way to defer capital gains on real estate with substantial appreciation.
1031 Exchange1031 Exchange
First of all, most real estate investors understand that a big tax bill can follow the sale of appreciated real estate held for investment purposes. When appreciated real property is sold, the profits from this sale—termed capital gain—are taxed as ordinary income (a tax rate of up to 39.6%) if the property is held for less than one year, or taxed at a more favorable rate of 15% (subject to certain exclusions) if held for a period of time longer than a year. However, Section 1031 of the Internal Revenue Code (“IRC”) allows for the deferral of capital gains tax if the proceeds of the sale are used to acquire a new property (or properties).
There are certain criteria that must be met in order for the taxes to be deferred:
The investor must obtain a “like-kind” replacement property. The definition of “like-kind” property provided by the IRC is very broad. Essentially all real property is like-kind (when applied to investment and exchange), allowing for the exchange of land with a commercial building, apartment buildings being exchanged with a single rental property, etc. The key is that they are held for investment purposes. This includes all real property within the United States; any purchase of property outside of the U.S. is not considered “like-kind”.
The investor must not receive cash. Any cash received by the investor will be considered taxable boot. In addition, anything received in exchange for the property that is not considered “like-kind” is labeled boot. This includes private use property including cash, securities, debt relief, notes, etc.
It is important to note that if the real estate investor receives a debt reduction, this amount will be considered “boot” and will be taxable to the investor. In order to avoid any taxable event, the investor must buy a replacement property that is of equal or greater value than the relinquished property. They also must invest all of the net proceeds from the sale of the original property and obtain debt that is equal or greater on the new investment property.
Qualified Intermediary or Accommodator
Before going into descriptions of the types of exchanges, there is an important term that should be understood in the exchange process. A Qualified Intermediary is often used in the process of these exchanges and acts as sort of a “middle man.” The real estate investor typically will enter into a 1031 exchange agreement with the qualified intermediary.
During the sales process, the intermediary will basically acquire the property from the investor (or seller) and transfer it to the new buyer. The proceeds from the disposition of the relinquished property will go directly to the qualified intermediary and not the seller. The real estate investor will then identify the replacement property and the qualified intermediary will acquire the property and transfer it to the investor. This is the standard role of the qualified intermediary.
Types of Exchanges
There are various types of exchanges: delayed exchange (the most common), simultaneous exchange, and reverse exchange (the most complicated of the exchange methods, and least common). Let’s take a closer look at the types:
Delayed Exchange. In a Delayed Exchange, a qualified intermediary is used to transfer the investor’s properties and proceeds. An Exchange Agreement is made between the investor and qualified intermediary, and the investor’s rights in a sales contract are transferred to the intermediary. The intermediary effectively becomes the seller and transfers the relinquished property to the buyer. The intermediary retains the proceeds from the sale and uses these funds to purchase the investor’s new replacement property. The new property is then transferred to the investor and the exchange is complete. We will discuss the specifics below.
Simultaneous Exchange. This type of exchange occurs when the relinquished property and the replacement property are transferred at the same type (simultaneously). It is typically recommended that a qualified intermediary be used to make sure that the transaction is consummated correctly.
Reverse Exchange. This type of exchange occurs infrequently. They typically utilize a “holding” company that is an entity established by a qualified intermediary. The real estate investor utilizes the holding company to “hold” the relinquished or the replacement property. Because of the complexity, you should ensure that you work closely with an experienced exchange professional.
Considering the delayed exchange is the most common type, it deserves a closer look. It is imperative that the rules for the exchange are meticulously followed. The property investor has just 45 days from the close of escrow on the relinquished property to identify potential replacement properties. After the replacement properties have been identified, the real estate investor has 180 days to close escrow on the replacement property (or properties). Again, the qualified intermediary acquires the replacement property with the proceeds from the sale of the relinquished property and transfers the replacement property to the investor.
An important point to note is that the real estate seller must put a clause in the real estate contracts that stipulate that all applicable parties to the contracts must cooperate in the 1031 exchange process. Once the investor has entered into an agreement with a buyer to purchase the property it will be placed into escrow. The investor will then typically enter into an exchange agreement with the qualified intermediary that will allow for the intermediary to become the “substitute seller.”
The 45-Day Rule
Let’s take a closer look at the first timing issue for a delayed exchange. The investor must close escrow on a replacement property or identify potential replacement properties within 45 days from the date of transfer of the exchanged property. The rule is satisfied if the replacement property is received before the 45 day expiration period.
If the replacement property is not acquired within 45 days, the properties identified must be documented by a written document that is signed by the seller and delivered to the qualified intermediary. This notification must include a description of the replacement property, which will typically include the legal description and street address.
However, there are limitations on the number of potential replacement properties. The investor can identify more than one property, but needs to consider the following restrictions:
Three-Property Rule. This rule allows the investor to identify any three properties regardless of their values;
200% Rule. The investor can identify any quantity of properties so long as the combined aggregate market value of the properties does not exceed 200% of the combined aggregate market value of all of the exchanged properties; and
95% Rule. This allows for any number of replacement properties so long as the fair value of the properties received by the end of the exchange period is at least 95% of the combined aggregate fair value of all potential replacement properties identified.
Please realize that the IRS just requires written notification within the 45-day window. However, in practice, the investor may want to have a sales contract in place by the end of the 45 day period. After the expiration of the 45-day window, the investor can no longer acquire any other property that was not previously identified. In addition, failure to submit the identification letter will cause any exchange agreement to otherwise terminate and the qualified intermediary will remit any unused funds to the investor. This will trigger capital gains tax.
The 180-Day Rule
As discussed previously, the investor has 180 days to close on a replacement property. The replacement property must be closed and the exchange completed no later than the earlier of: (1) 180 days after the transfer of the exchanged property; or (2) the tax return due date (including extensions) for the tax year in which the relinquished property was transferred. No provision or rule exists for the extension of the 180-day rule for hardship or any other situation.
The rules for 1031 exchanges can be complex, so make sure that you utilize a competent qualified intermediary. In addition, a knowledgeable CPA and attorney can help you navigate all the rules and requirements. Considering the benefits of the tax-deferred exchange, it can be a wonderful tax planning tool.
- DANGERS OF NEW HOME CONSTRUCTION CONTRACTS
Since most builder contracts favor the builder, you need to read them carefully and have your attorney review the contract as well. Before you sign anything, educate yourself and don’t rush into anything. The following issues are ones that are commonly unaddressed and can cause you problems.
You should be aware of these and, where possible, try to negotiate a more favorable contract addressing these issues to protect your interests. Your ability to do so is often a function of whether you are operating in a buyer’s market or a seller’s market. As a minimum, you need to understand the risks you are undertaking.
Common Issues for New-Home Buyers
The House is Not Delivered on Time
Builder contracts are notorious for allowing builders to deliver projects past the promised deadline without any penalties. Delays are a common occurrence, yet the home buyer does not generally does not have a right to recover damages if the builder is late in finishing the home.
Many times the buyer has made plans to vacate their existing residence and when the builder does not finish the home as promised, it creates a myriad of financial problems for the home buyer.
Negotiate some type of penalty if the builder does not complete the home within a reasonable time from the date promised.
Loss of Deposit Money
Another issue that comes up frequently is deposits and advance payments made to the builder. Builders commonly ask for these advance fees prior to the house being completed. They can add up to substantial amounts of money. The money is supposed to go towards the payment of materials and sub-contractors. What happens many times is the builder has a cash flow problem and uses the funds from one project to finish another. Then when it gets down to your project, they have run out of funds and you are subject to mechanics liens for unpaid bills.
Most builder contract either have no financing contingency or very vague and confusing ones. Nor, unless FHAS or VA financing are involved is there generally an appraisal contingency. This means that as to the absence of a financing contingency that you may lose your deposit even if you do not qualify for financing when the house is built (by which time rates and lending conditions may have changed) and with respect to the absence of an appraisal contingency means that you will have to make up the difference in cash if the property does not appraise high enough to support the originally anticipated loan.
Before you agree to hand over a large sum of money to your builder, you should request that the money be placed in an escrow account and that you be provided with copies of paid receipts to make sure the money is going where it is supposed to. Condominium builders are required by law to escrow deposit funds but single family home builders are not.
Another way to protect yourself is to buy an owner’s title insurance policy protecting with protection against mechanic’s liens.
Make sure that there is a real financing contingency and a valid appraisal contingency on the contract.
Builder Retains Reservations of Rights
Many construction contractors allow the builder to retain the right to create easements across your property.
In order to avoid this dangerous situation, you should negotiate upfront exactly what easements may be allowed on your property to avoid problems later after you move in.
Bad Workmanship or Incomplete Work
Typical builder contracts do not protect the purchaser from incomplete work or bad workmanship after the purchaser has paid the contractor the final payment.
Smart purchasers should negotiate with the builder that funds be set aside in escrow to cover incomplete work or bad workmanship even if the seller is able to obtain a certificate of occupancy. If the builder receives all the money before your punch list is complete, you have no leverage against getting the work corrected or completed.
Legal Protection for Purchaser
The majority of builder contracts provide a financial incentive for the purchaser to use the builder’s attorney as the settlement agent or closing agent.
You should hire your own attorney to protect your interests. At least have someone monitor the process. This way you do not forfeit any incentives built into the contract contingent on using the builder’s title company or attorney for processing the settlement.
Contract Remedies for Breach
Generally, the builder contracts only provide for the buyer to get their deposit back with no provision for monetary damages. Sometimes, they do not even provide for interest on your own deposit money. Conversely they often contain an option for the builder to either retain the deposit monies as liquidated damages or chose to pursue actual damages in the event the market value of the unit has declined.
In order to protect yourself, be sure to negotiate as many contract remedies as possible in case the builder breaches the contract. Just getting back your deposit money may not be good enough to cover losses incurred as a result of the builder’s breach.
Consult with your real estate attorney first to find out what your legal remedies and liabilities are before signing the builder contract.
Builder contracts are mostly one sided favoring the builder. It is your responsibility to educate yourself and to understand the contract terms and their impact upon you. If you are buying a new home from a new home builder, you should consult with a real estate attorney before signing the contract and/or insert a contingency in the contract that is contingent upon the review and approval of your attorney to protect your interests.
Is it Too Late to Talk to a Lawyer?
Sometimes buyers find themselves in the difficult position of having to seek counsel after a contract has been executed, either because they are unable to close due to change in financial condition or because delays in completion have caused the purchase to no longer be financially viable. It is especially important to seek counsel as to your rights and liabilities at the earliest signs of trouble.
Complexities of Real Estate Contracts Require an Experienced Attorney
Builder contracts as a whole, or at least some of the more onerous provisions, may not be valid and enforceable. State laws governing home owner associations often require specific disclosures to be made, failure to comply with which, may render the contract voidable or subject to cancellation. Similarly, federal laws governing large projects (over 100 units) subject builders to very complex contract disclosure requirements which builders often try sidestep and in so doing, they may create a legal mechanism for buyers to cancel the transaction.
These laws also require that builders not unduly limit remedies, restrict the forfeitable deposit to a certain percentage of the purchase price, and do not allow buyers to waive the right to pursue specific performance. Very few attorneys, however, are familiar with the intricacies of the Interstate Land Sales Full Disclosure Act.
- 3 DIFFERENT TYPES OF COMMERCIAL REAL ESTATE LEASES
3 Different Types of Commercial Real Estate Leases
There are three basic types of commercial real estate leases. These leases are organized around two rent calculation methods: “net” and “gross.” The gross lease typically means a tenant pays one lump sum for rent, from which the landlord pays his expenses. The net lease has a smaller base rent, with other expenses paid for by the tenant. The modified gross lease is a happy marriage between the two. While terms vary widely building by building, this basic overview will help businesses shop for the best deal possible.
Gross Lease or Full Service Lease
In a gross lease, the rent is all-inclusive. The landlord pays all or most expenses associated with the property, including taxes, insurance, and maintenance out of the rents received from tenants. Utilities and janitorial services are included within one easy, tenant-friendly rent payment.
When negotiating a gross lease, the tenant should ask which janitorial services are provided, and how often they are offered. Excess utility consumption beyond building standards is sometimes charged back to tenant; so if the tenant is a big consumer of electricity, this point should be clarified in the lease as well. The tenant pays his own property insurance and taxes.
A benefit of this type of lease is that it is supremely easy for the tenant, which can forecast expenses without worrying about an unexpected lobby maintenance charge, for example. The landlord assumes all responsibility for the building, while tenants concentrate on growing their businesses.
In a net lease, the landlord charges a lower base rent for the commercial space, plus some or all of “usual costs,” which are expenses associated with operations, maintenance, and use that the landlord pays. These can include real estate taxes; property insurance; and common area maintenance items (CAMS), which include janitorial services, property management fees, sewer, water, trash collection, landscaping, parking lots, fire sprinklers, and any commonly shared area or service.
There are several types of net leases:
Single Net Lease (N Lease)
In this lease, the tenant pays base rent plus a pro-rata share of the building’s property tax (meaning a portion of the total bill based on the proportion of total building space leased by the tenant); the landlord covers all other building expenses. The tenant also pays utilities and janitorial services.
Double Net Lease (NN Lease)
The tenant is responsible for base rent plus a pro-rata share of property taxes and property insurance. The landlord covers expenses for structural repairs and common area maintenance. The tenant once again is responsible for their own janitorial and utility expenses.
Triple Net Lease (NNN Lease)
This is the most popular type of net lease for commercial freestanding buildings and retail space. It is known as the net net net lease, or NNN lease, where the tenant pays all or part of the three “nets”–property taxes, insurance, and CAMS–on top of base monthly rent. Common area utilities and operating expenses are usually lumped in as well; for example, the cost for staffing a lobby attendant would be part of the NNN fees. Of course, tenants also pay the costs of their own occupancy, including janitorial services, utilities, and their own insurance and taxes.
Landlords typically estimate expenses and charge tenants a portion of these expenses based on their proportionate, or pro-rata share. A tenant who leases 1,000 square feet of a 10,000 square foot building would be expected to pay 10% of the building’s taxes, insurance, and CAMS, for example.
Triple net leases tend to be more landlord-friendly, and tenants should carefully review NNN fees and negotiate caps on the amounts they can be raised annually. An NNN lease can also fluctuate from month to month and year to year as operating expenses increase or decrease, making the company’s expense forecasting tricky and sometimes frustrating.
There are tenant benefits in the NNN leases, however. Transparency is an excellent perk, since tenants can see business operating expenses in relation to what they are charged. Cost savings in operating expenses are passed on to the tenant rather than to the landlord. In addition, the monthly rent in a NNN lease is potentially lower than in a gross lease, as tenants have a higher level of responsibility for the building.
Absolute Triple Net Lease
This is a less common option that is more rigid and binding than the NNN lease, where tenants carry every imaginable real estate risk, for example, being responsible for construction expenses to rebuild after a catastrophe, or for continuing to pay rent even after the building has been condemned. Aptly called the “hell-or-high-water lease,” tenants have ultimate responsibility for the building no matter what.
Modified Gross Lease
As the gross lease is more tenant-friendly, and the net lease tends to be more landlord-friendly, there exists a compromise lease for the convenience of both parties. The modified gross lease (sometimes called the modified net lease) is similar to a gross lease in that the rent is requested in one lump sum, which can include any or all of the “nets”–property taxes, insurance, and CAMS. Utilities and janitorial services are typically excluded from the rent, and covered by the tenant. Tenants and landlords negotiate which “nets” are included in the base rental rate.
The modified gross lease is more popular with tenants because its flexibility translates into an easier agreement between tenant and landlord. Unlike the NNN lease, if insurance, taxes, or CAM charges increase, the lease rate would not change. Of course, if those expenses decrease, the cost savings are passed on to the landlord. As janitorial service and electricity are not covered, tenants can better control how much they spend compared to a gross lease.
Summary of NNN Lease, Modified Gross, or Full Service Commercial Leases
When evaluating options for office space lease, it is important to compare the different lease options with an eye toward all expenses, and not just the base rental rates. NNN base rental rates tend to be much lower, with additional expenses added for the real monthly rate.
Market forces will tend to even out rental rates for comparable properties, regardless of the type of lease. Tenants should expect to pay roughly the same amount with an NNN, modified gross, or full-service lease for similar quality office spaces in the same area.
The most important rule of commercial leases is for tenants to read their leases carefully, and clarify exactly what expenses they have responsibility for. Circumstances under which additional charges will occur should be identified and caps negotiated.
- WHAT IS A NOVATION AGREEMENT? NOVATION VS. ASSIGNMENT
Sometimes businesses enter into agreements, which they later need to give up, be it because of internal restructuring or following an asset purchase. In these types of cases, termination may not always be the most appropriate or possible solution. However, they may be able to transfer both their rights and obligations to a third party. Read this Quick Guide to find out how.Novation is the process by which the original contract is extinguished and replaced with another, under which a third party takes up rights and obligations duplicating those of one of the parties to the original contract. This means that the original party transfers both the benefits and burdens under the contract. The benefits could be in the form of money or the benefit of a service, while burdens are what the party is obliged to do in order to receive the benefits, for example, payment for a service or goods, or the performance of a service.Novation is a complex process, as all the parties involved (the original parties and the incoming party) have to sign the Novation agreement. This is because while the benefits under a contract can be assigned without the other party’s consent, contractual obligations cannot be assigned without their consent. This means that the original party can only achieve this if both the the new party and the third party agree to a Novation. This may be difficult in some cases, for example when there is a change of supplier of services. The other original party may find it difficult to agree, if they don’t see a benefit of Novating the contract or ask for further assurances that they won’t be worse off as a result of the Novation. In these kinds of situations, the party wishing to Novate the contract should be prepared to negotiate with the other party. Ask a lawyer if you need advice based on your specific circumstances.Parties wishing to Novate their contract should carefully check its terms as sometimes, there may be a provision in a contract which will ban all purported transfers of the rights and obligations under the contract or it may specify how consent is to be acquired. A Novation agreement is essentially notice to the remaining party, and therefore the requirements for serving notice should be followed.After the contract is Novated, the outgoing party and the remaining party usually release each other from any liability and claims in respect of the original agreement on or after the date the agreement was signed. They might also agree to indemnify (promise each other to compensate the loss incurred to the other party due to the acts of the first party or any other party). For example, the outgoing party can agree to indemnify the incoming party in respect of any liabilities and obligations the incoming party agrees to take over and the incoming party can agree to indemnify the outgoing party in respect of any liabilities that the outgoing party retains.A Novation agreement transfers both the benefits and the obligations of a contract to a third party. In contrast an assignment does not transfer the burden of a contract. This means the outgoing party remains liable for any past liabilities incurred before the assignment
- TYPICAL STEPS IN AN FSBO HOME SALE TRANSACTION
Typical Steps in an FSBO Home Sale TransactionTo successfully complete the sale and legal transfer of one’s home, the following steps are generally taken: 1) The property must be valued by the seller in order to obtain a legitimate and reasonable sales price for the property. It must then be placed on market for sale and advertised. 2) A written Real Estate Purchase and Sale Agreement, a Lead Hazard Disclosure form and other Real Property Disclosure forms (and other legal documents as may be required by the laws of the state in which the home is located) must be prepared by seller and presented to purchaser. These documents are then signed by the parties. A down payment/deposit is then usually paid to seller by purchaser at this time. 3) The purchaser begins the process of obtaining financing to pay the purchase price. This step may require that the purchaser obtain a survey and/or have a title search completed (or other activity as required by lender). The purchaser and/or lender may require a title insurance policy to be purchased and issued on the property, too. 4) The seller prepares a Deed (Quitclaim, Warranty or some other form of Deed), signs it, has it witnessed and notarized so that the property can be transferred to the purchaser. 5) The closing takes place and the purchaser (and/or lender) tenders the remainder of purchase price (that amount that is to be paid after the down payment is applied to the purchase price of the property) to the seller. The seller pays off all liens and mortgages on the property, and the revised Deed is tendered to purchaser. The purchaser then files that Deed with the governmental recording office in the county or parish in which the property is located so that property is legally transferred to purchaser’s name.
What Else is Required to Complete the FSBO Process?While some additional steps are required if a bank loan is involved (e.g. the bank may require a survey, a home inspection, or may even require some testing for environmental issues), the steps listed above are those usually required in a For Sale by Owner real estate transaction. Additionally, a closing agent (usually a title company) can assist the buyer and seller in helping the parties transfer funds, file the deed and generally “close” the sale. The cost of a title company services are usually fairly modest. Please note that each home sale transaction may be unique and that issues may arise in the transaction requiring additional or different steps be taken (and, in some cases, additional forms and documents may be required). It is recommended that should any issues arise in the transaction that are not “typical”, a licensed attorney be contacted. This article is not intended to provide any legal advice with regard to the purchase or sale of any residential property.
- THE IMPORTANCE OF A PROPERTY SURVEY
If you’ve noticed a person in an orange vest carrying around a brightly colored tripod with a metal device on top, you’ve likely come across a property surveyor. Property surveyors can come in handy when you’re buying a house, selling a house, or if you simply have a property dispute with a neighbor. Here’s more information on what property surveyors do, what they cost, and when you might need one.
Property Surveyor Definition
A property surveyor takes precise measurements to identify the boundaries of a parcel of land and prepares reports, maps, and plots that are used for construction, deeds, or other legal documents. A property surveyor determines the precise location of roads, buildings, and other features that are used to determine any changes to the property line, restrictions on what may be built on a property or where new structures must be located, how large structures may be, and the appropriate building depths for foundations. Some surveyors work for the county while others are employed by private companies such as engineering firms.
What does a surveyor do?
A property surveyor determines the precise location of roads, buildings, and other features of a specific property. This information is then used to determine any changes to the property line, restrictions on what may be built or where new structures must be located, how large structures may be, and the appropriate building depths for foundations. Some surveyors work for the county while others are employed by private companies such as engineering firms.
When do you need a land survey?
If you plan to construct a new home or structure on your existing property, you may need a land survey to identify the precise boundaries and any potential restrictions. For instance, some parcels of land have a right-of-way, which allows adjacent property owners to utilize a portion of your land to access their homes through a driveway or road. Other properties have easements, a service company’s (electric company, water or sewer company, etc.) right to access a portion of your property to make repairs.
A property surveyor identifies these issues, allowing you to modify your plans by moving the location of your planned structure so that it meets requirements and doesn’t infringe on any rights of other property owners or local ordinances.
You might need a property survey if you are having a dispute with a neighbor regarding boundary lines or fence locations. It’s not uncommon to discover that a neighbor’s fence is situated on your property or that a corner of your shed or garage is on a neighboring property.
In any case, you should always hire a property surveyor before making any major improvements or additions such as installing a swimming pool, building a fence, constructing a garage or home addition. If you don’t have your property surveyed and it’s later discovered that you’ve built a structure on property that belongs to a neighbor or is restricted due to a right-of-way or easement, it could become an unpleasant and expensive legal conflict.
What are easements?
Easements are common land or utilities owned publicly and used by the local community. Easements are documented on a title report and may affect what a buyer can build or plant on a property. Common examples of easements include the placement of utility poles, water lines, sewer lines, and right-of-ways. A right-of-way is a type of easement that allows someone, such as a neighbor, to travel across your property. This can be along a pathway or roadway that is generally seen as public space, but does not affect your ownership of that land.
Mortgage Survey vs. Boundary Survey
When you’re buying a home, your lender may request a mortgage survey, which is different from other types of property surveys in that they are typically requested by lenders or insurance companies rather than homeowners. A mortgage survey is how your mortgage lender can verify that the property they’re lending you money to purchase is as described in legal documents and is suitable as collateral for your mortgage loan (if the property is worth at least as much as you’re borrowing). A boundary survey, on the other hand, is a type of house survey that determines the property lines of a home. It defines the property corners as described in the home’s deed and includes any easements on the property.
Property surveyor costs
Property surveyor costs vary widely, ranging anywhere from $200 to $1,000. The cost of depends on the size of the parcel you’re having surveyed, the complexity of the survey (such as how many structures or roads must be identified), and your location. For instance, a survey of a small plot of land in California could cost several times as much as a survey of a few acres in Iowa or Pennsylvania. Most property surveyors are found through word of mouth, or based on recommendations from your lender or title company. If you’re utilizing the services of a private company instead of your county’s property surveyor, it’s a good idea to research several companies that offer property surveying services to find the best price. It is important to note that there is a lot of scientific work as well as historical research done on the property to determine the boundaries, so the price is likely to reflect those factors. However, a good property surveyor should keep you updated on any additional costs before starting the property survey.
Why a property survey is important
It is important to have a property survey before starting any project or addition to your property. It can help avoid problems, in the long run, should you find out that your planned structure interferes with an easement or extends onto a neighboring property. While a property surveyor is not always needed when purchasing a home, it is best to be prepared that your mortgage lender may require a survey.
- SELLING A HOUSE WITH A SHARED DRIVEWAY
We all learned how to share as children, but that concept tends to work easier with crayons and cookies rather than property.Take a shared driveway, for instance. This type of setup, where two or more people jointly own a driveway but negotiate maintenance and use, can crop up in cities and suburbs alike. When the parties are agreeable, a shared driveway is just another quirk of your home. No one hogs the other’s half or blocks the neighbor’s access with bad parking. Everyone’s a happy camper. Unfortunately, that civility depends on how well you get along with your neighbors. Some residents have sued each other over how to navigate a shared driveway. Others might have a pleasant arrangement until one of them moves, leaving the remaining homeowner to assert that the shared driveway is theirs alone because they’ve used it longer, regardless of what a property survey says. “The next buyer quite possibly walks into a quagmire,” said Bryan Kasprisin, a top real estate agent in Joliet, Illinois, who has sold several properties with shared driveways. So how can a seller assure smooth sailing?
Talk about the positivesA shared driveway can be a single space as wide as a single-car driveway (roughly 9 to 12 feet, although some can be smaller) or a double-car driveway (roughly 20 to 24 feet). They also can take the shape of a “Y,” a fish bone, or a flag on a pole. The plusses of such an arrangement might not immediately leap to mind, but there are advantages to a shared driveway: Shared maintenance: As long as a proper deed specifies equal ownership, all owners can shoulder the costs and labor of shoveling show, removing motor oil stains, or resealing the concrete or asphalt because of cracks. Coveted parking: In metropolitan areas like Brooklyn, New York, where parking is at a premium, a shared driveway is a “coveted” feature, regardless of having to split it with someone else. Clearer, safer streets: Streets with housing close together can appear clearer and become safer by reducing “vehicular access points,” such as driveways, said one steering committee about proposed road improvements in Washtenaw County, Michigan. “Sharing or joint use of a driveway by two or more property owners should be encouraged,” the committee’s report said.
Address typical buyer concerns over shared drivewaysSome people refer to a shared driveway as a “common driveway,” but it has a legal definition. Almost all shared driveways are “appurtenant easements,” or rights to “exercise a limited form of ownership or possession of the property of another individual,” real estate lawyers say. These rights attach to the ownership of the land and typically pass along to the new owner. An easement can specify that each homeowner owns part of the driveway but has the legal right to use the full space to drive to and from the garage, according to Nolo.com, a leading legal website since 2011. Other times, one homeowner owns the entire driveway, and the easement grants the neighbor sharing the driveway the right to use part of it, such as parking to one side or for reaching the garage. Concerns that often arise with shared driveways include:
- One neighbor blocks how the other can reach the garage, the front door, or his or her car.
- Children leave bicycles or toys in the driveway.
- One neighbor fails to shovel snow or share in the cost of repairs.
- Neighbors mark out their driveway space with paint, posts, or other dividers.
- There’s uncertainty over legal liability regarding anyone injured in the driveway.
Disclose the property rightsKasprisin said he always discloses when a property has a shared driveway and often must explain to buyers what this means. “Sometimes it’s not an issue to the buyer until we make it an issue by letting them know this is what might happen,” he said. “It doesn’t really bother a buyer until they find out what the liability is or what the problems that could arise are.” Easements are recorded within the county where a property is located, so a title report or a property survey should outline a prospective buyer’s ownership rights. Einhorn, Barbarito, Frost & Botwinick, a Denville, New Jersey, law firm that handles real estate cases, says that homeowners also can check their title insurance policy about any easements regarding the use of or access to the driveway. However, there are neighbors who try to exercise more rights than they should upon learning they’ll have someone new next door. Kasprisin encountered this situation selling an 1895 Victorian home in Joliet, Illinois. The neighbor took the position that he owned the driveway because he’d lived on the street longer and told the buyer, “Just make sure that your people don’t park in the driveway,” the agent said. It turns out that the property line ran through the center of the driveway, giving the buyer the legal right to use half of it, just like the seller had. With the help of a real estate attorney, both parties drafted a maintenance agreement that outlined maintenance, liability, and access. (As of January 2020, 21 states require that a real estate attorney be present at closing, whereas other states require an attorney only to prepare certain documents.) “Some of it was just basic courtesy that I believe should go unsaid, [such as] promise not to park in the middle and not leave your car there on a Saturday night,” Kasprisin said.
Negotiate the rights or divide it if neededMarshall, Roth & Gregory, a law firm in Asheville, North Carolina, that handles estate planning and real estate transactions, said that real estate agents should be alert for any such “shared access issues” before listing the property, as well as before closing. Regardless of how the shared driveway has been used previously, the owners and users should record their property boundaries, responsibilities, and costs in a document such as a Shared Driveway Agreement, these lawyers say. Some lenders will not grant loan approval to prospective buyers interested in a property with a shared driveway without such a recorded legal document, they added. A Shared Driveway Maintenance Agreement can be as brief as a few paragraphs or meticulously detailed over several pages. It should include:
- a legal description of the driveway (hire a land surveyor to measure the plot, record data, and research land records)
- how the parties share the driveway (type of easement, for instance)
- specifics about sharing costs of maintenance, removing snow and ice, and other improvements
- stipulations for nonpayment, such as that one party has the right to place a lien against the other.
How a shared driveway impacts your pricing strategyWhen selling a home with a shared driveway, your real estate agent will use comparable properties to help set the asking price. But depending on how common shared driveways are in your area, your agent may not have to adjust the price to compensate. “You have to look at it case by case, house by house,” Kasprisin said. If your shared driveway is the only one in a residential neighborhood where everyone else has their own driveway, “it’s going to affect value a little bit because it’s something different.” However, if a shared driveway is the norm in your neighborhood, there’s no need of an adjustment, as with the Victorian home that Kasprisin sold. “I didn’t factor the driveway at all into the pricing strategy,” he said. “If you want to live in that neighborhood or in that type of house, that just goes part and parcel with being there.” A buyer also may find that a shared driveway isn’t much of a trade-off for some other benefit, he added. “If I’ve got a seven-car garage but I’ve got a shared driveway, I might not want the shared driveway, but wow, I can get a seven-car garage. Sometimes you take the good with the bad.” A shared driveway might be usual to some buyers, but it doesn’t have to become a barrier to selling your house. “It’s just [a matter of] clear and distinct expectations: ‘This is what needs to be done,’” Kasprisin said. “Like everything else, if everybody has that, then they should be OK.”
- WHAT IS A GIFT OF EQUITY AND HOW DOES IT WORK?
When homeowners sell the family home to a loved one, they may wish to do so at a discounted rate. When this happens, the difference between the home’s market value and its sale price acts as a gift of equity from the seller to the buyer. A gift of equity is beneficial to the buyer, but there are certain requirements and potential tax implications that both parties should be aware of.
What Is A Gift Of Equity?
A gift of equity occurs when someone sells a property to a family member or close associate for a lower price than the current market value. The difference between the two prices represents the gift of equity.
The gift of equity generally serves as the homebuyer’s down payment. It makes it easier for them to get a mortgage by creating equity in the home.
A gift of equity is often used when a home sale occurs between family members. For example, parents might use a gift of equity when selling the family home to their child.
How Does A Gift Of Equity Work?
When parties plan to use a financial gift of equity, the homeowner sells the residence to the buyer at a rate below its market value. No money changes hands between the two parties. Instead, the gift creates equity in the home for the buyer. Then, when it comes time to get a mortgage, that equity serves as the buyer’s down payment rather than having to put down cash.
Suppose a retired couple was moving to a smaller home and decided to sell their family home to their son and his new wife. The home’s value is $200,000, but the parents wish to cover the 20% down payment for their son. Rather than writing their son a check for $40,000, they would simply sell the home to their son for $40,000 less than its market value.
The $40,000 difference is the gift of equity and serves as the son’s 20% down payment. The son is likely to have an easier time getting a mortgage since he’ll have 20% equity in the home. He’ll also avoid paying private mortgage insurance, which is often required for down payments less than 20%.
Gift Of Equity Requirements
There are a couple of specific requirements that the parties must meet to complete a gift of equity. Sellers should keep these in mind if they’re considering using this strategy to sell a home to a loved one.
A gift letter is a document that summarizes all of the information about the gift, including the appraisal price and the sale price. Both the buyer and seller must sign the letter. A second letter will accompany other official documents at the home’s closing.
An Official Appraisal
To complete a gift of equity, the home’s seller must have an official appraisal done. Using the appraisal, the parties can determine the sale price and the gift of equity. The lender requires this appraisal, and the appraisal value will be included in the gift letter.
The Pros And Cons Of A Gift Of Equity
Pros Of A Gift Of Equity
Avoid paying real estate agent commissions: Because a gift of equity often happens between two family members, these home sales often don’t require a real estate agent or an agent’s commission. This benefits the seller, who typically pays commission for both agents.
Lower or no down payment for recipient: Because the gift of equity serves as the down payment, the buyer often doesn’t have to put down any additional money.
Faster home sale: A gift of equity can help to expedite a home sale. First, the buyer doesn’t need time to save a down payment and may have an easier time qualifying for a mortgage. And because the sale occurs between family members, the process can go more smoothly.
Potentially avoid paying private mortgage insurance: Buyers typically must pay private mortgage insurance (PMI) when they purchase a home with less than 20% down. Because the gift of equity often serves as a down payment, it can negate the need for PMI.
Keeping a home within the family: For many people, their family home is an important memento. A gift of equity can help to keep a home within the family even when the buyer may not be able to save enough for a down payment.
Cons Of A Gift Of Equity
Legal fees for both parties: A gift of equity requires a contract between the two parties. As a result, one or both parties may have fees to an attorney to draft the contract.
Potential trigger of the gift tax: The IRS requires that people file a gift tax return when they transfer more than $15,000 in gifts to another individual. If the gifted equity equals more than $15,000, then a seller would have to file this return.
Negative effect on home’s cost basis: When you sell a home for more than you bought it for, you may be subject to capital gains taxes on the profit. Because a gift of equity reduces the sale price of a home (aka the cost basis), it increases the chances that the buyer will end up paying those capital gains taxes.
Negative effect on local real estate market: A gift of equity reduces the sale price of a home. Doing so could impact the neighborhood’s real estate market because there’s a record of a property being sold below market value.
The Bottom Line
A gift of equity is a strategy that people can use to sell a family home to a relative for less than its market value. The lower sale price serves as the buyer’s down payment, making it easier for them to buy the home.
- LAND PATENT
A land patent is a form of letters patent assigning official ownership of a particular tract of land which has gone through various legally proscribed processes – such as surveying and documentation, followed by the letters signing, sealing, and publishing in public records – made by a sovereign entity.
It is the highest evidence of right, title, and interest to a defined area. It is usually granted by a central, federal, or state government to an individual, partnership, trust or private company.
The land patent is not to be confused with a land grant. Patented lands may be lands previously granted by a sovereign authority in return for services rendered or accompanying a title or otherwise bestowed gratis, or they may be lands privately purchased by a government, individual, or legal entity from their prior owners.
“Patent” is both a process and a term. As a process, it is somewhat parallel to gaining a patent for intellectual property, including the steps of uniquely defining the property at issue, filing, processing, and granting. Unlike intellectual property patents, which have time limits, a land patent is permanent.
In the United States, all claims of land ownership can be traced back to a land patent, first-title deed, or similar document regarding land originally owned by France, Spain, the United Kingdom, Mexico, the Kingdom of Hawaii, Russia, or Native Americans. Other terms for the certificate that grants such rights include first-title deed and final certificate.
A land patent is known in law as a “letters patent”, and usually issues to the original grantee and to their heirs and assigns forever. The patent stands as the supreme title to the land because it attests that all evidence of title existent before its issue date was reviewed by the sovereign authority under which it was sealed and was so sealed as irrefutable; thus, at law, the land patent itself so becomes the title to the land defined within its four corners.
In practice, the “irrefutability” of counter-claims is relative; however, once a patent is granted permanence of title is established.
History of land patents in the United States of America
Land in the United States of America was acquired by claim, seizure, annexation, purchase, treaty, or war from France, Great Britain, the Kingdom of Hawaii, Mexico, Russia, Spain and the Native American peoples.
As England, later to become Great Britain, began to colonize America, the Crown made large grants of territory to individuals and companies. In turn, those companies and colonial governors later made smaller grants of land based on actual surveys of the land. Thus, in colonial America on the Atlantic seaboard, a connection was made between the surveying of a land tract and its “patenting” as private property.
Many original colonies’ land patents came from the corresponding country of control (e.g., Great Britain). Most such patents were permanently granted. Those patents are still in force; the United States government honors those patents by treaty law, and, as with all such land patents, they cannot be changed.
Many early patents of lands originally granted by Native peoples were contested, occasionally in court, as a result of different understandings of “private property” and “ownership” between those people, who typically held land and its bounties communally, reinforced by oral tradition, and colonizers from Western Europe who held established and finite views on assets, their transfer, and their adjudication in a system of written laws, Crown rights and officials, courts, and permanent records.
After the American Revolution and the ratification of the Constitution of the United States, the United States Treasury Department was placed in charge of managing all public lands. In 1812, the General Land Office was created to assume that duty.
In accord with specific Acts of Congress, and under the hand and seal of the President of the United States of America, the General Land Office issued more than 2 million land grants made patent (land patents), passing the title of specific parcels of public land from the nation to private parties (individuals or private companies). Some of the land so granted had a survey or other costs associated with it. Some patentees paid those fees for their land in cash, others homesteaded a claim, and still, others came into ownership via one of the many donation acts that Congress passed to transfer public lands to private ownership. Whatever the method, the General Land Office followed a two-step procedure in granting a patent.
First, the private claimant went to the land office in the land district where the public land was located. The claimant filled out entry papers to select the public land, and the land office register (clerk) checked the local registrar records to make sure the claimed land was still available. The receiver (bursar) took the claimant’s payment because even homesteaders had to pay administrative fees.
Next, the district land office register and receiver sent the paperwork to the General Land Office in Washington. That office double-checked the accuracy of the claim, its availability and the form of payment. Finally, the General Land Office issued a land patent for the claimed public land and sent it on to the President for his signature.
The first United States land patent was issued on March 4, 1788, to John Martin. That patent reserves to the United States one-third of all gold, silver, lead and copper within the claimed land.
A land patent for a 39.44-acre (15.96 ha) land parcel in present-day Monroe County, Ohio and within the Seven Ranges land tract. The parcel was sold by the Marietta Land Office in Marietta, Ohio in 1834.
Usage restrictions (e.g., oil and mineral rights, roadways, ditches, and canals) placed on the land are spelled out in the patent. These are distinct from state and local statutory regulations relative to property appurtenant to the land, such as zoning and building codes, as well as property taxes applying to both land and property.
Private property rights accompanying land patents can also be thereafter negotiated in accord with the terms of private contracts. The rights inherent in patented land are carried from heir to heir, heir to the assignee, or assignee to assignee, and cannot be changed except by private contract (warranty deed, quitclaim deed, etc.). In most cases, the law of a particular piece of patented land will be governed by the Congressional Act or treaty under which it was acquired, or by terms spelled out in the patent. For example, in the United States, the laws governing the land may involve the Homestead Act or reservations placed on the face of the patent, or the Treaty of Guadalupe Hidalgo, which governs certain jurisdictional dicta relating to large amounts of land in California and adjoining territories.
Legal entities other than natural persons (such as trusts and corporations) cannot obtain land patents except by express act of the United States Congress. An example of Congress granting land through patents to corporate entities is the railroad grants made under the Pacific Railroad Acts to compensate the railroad companies for building a transnational railroad across America.
Former U.S. territories
When a territory agreed to enter the Union of the United States of America, an Enabling Act was agreed to as a condition precedent of statehood. The Enabling Act requires that all unappropriated (not yet privately owned) lands be forever disclaimed by the territory and the people of the territory, and the title ceded to the United States for its disposition. For example, the enabling act of the Washington Territory declares, in part:
… that the people inhabiting said proposed States do agree and declare that they forever disclaim all right and title to the unappropriated public lands lying within the boundaries thereof, and to all lands lying within said limits owned or held by any Indian or Indian tribes; and that until the title thereto shall have been extinguished by the United States, the same shall be and remain subject to the disposition of the United States. ..
After the right and title to the land was disclaimed by the people of the territory, it was held in trust by the United States until someone proved a claim to it, typically by improving the homestead parcel for a certain period of time. Once a proper claim has been filed, the General Land Office (now the Bureau of Land Management) certifies that the claimant has paid for a survey, as well as depositing another sum of money. Then, pursuant to the various land acts of Congress, the land is granted to the private owner by letters patent under the signature and seal of the President of the United States of America.
- WHAT IS A GIFT OF EQUITY?
When homeowners sell the family home to a loved one, they may wish to do so at a discounted rate. When this happens, the difference between the home’s market value and its sale price acts as a gift of equity from the seller to the buyer.
A gift of equity is beneficial to the buyer, but there are certain requirements and potential tax implications that both parties should be aware of.
What Is A Gift Of Equity?
A gift of equity occurs when someone sells a property to a family member or close associate for a lower price than the current market value. The difference between the two prices represents the gift of equity.
The gift of equity generally serves as the homebuyer’s down payment. It makes it easier for them to get a mortgage by creating equity in the home.
A gift of equity is often used when a home sale occurs between family members. For example, parents might use a gift of equity when selling the family home to their child. When parties plan to use a financial gift of equity, the homeowner sells the residence to the buyer at a rate below its market value. No money changes hands between the two parties. Instead, the gift creates equity in the home for the buyer. Then, when it comes time to get a mortgage, that equity serves as the buyer’s down payment rather than having to put down cash.
Suppose a retired couple was moving to a smaller home and decided to sell their family home to their son and his new wife. The home’s value is $200,000, but the parents wish to cover the 20% down payment for their son. Rather than writing their son a check for $40,000, they would simply sell the home to their son for $40,000 less than its market value.
The $40,000 difference is the gift of equity and serves as the son’s 20% down payment. The son is likely to have an easier time getting a mortgage since he’ll have 20% equity in the home. He’ll also avoid paying private mortgage insurance, which is often required for down payments of less than 20%.Gift Of Equity Requirements
There are a couple of specific requirements that the parties must meet to complete a gift of equity. Sellers should keep these in mind if they’re considering using this strategy to sell a home to a loved one.
A gift letter is a document that summarizes all of the information about the gift, including the appraisal price and the sale price. Both the buyer and seller must sign the letter. A second letter will accompany other official documents at the home’s closing.
An Official Appraisal
To complete a gift of equity, the home’s seller must have an official appraisal done. Using the appraisal, the parties can determine the sale price and the gift of equity. The lender requires this appraisal, and the appraisal value will be included in the gift letter.
The Pros And Cons Of A Gift Of Equity
Pros Of A Gift Of Equity
Avoid paying real estate agent commissions: Because a gift of equity often happens between two family members, these home sales often don’t require a real estate agent or an agent’s commission. This benefits the seller, who typically pays commission for both agents.
Lower or no down payment for recipient: Because the gift of equity serves as the down payment, the buyer often doesn’t have to put down any additional money.
Faster home sale: A gift of equity can help to expedite a home sale. First, the buyer doesn’t need time to save a down payment and may have an easier time qualifying for a mortgage. And because the sale occurs between family members, the process can go more smoothly.
Potentially avoid paying private mortgage insurance: Buyers typically must pay private mortgage insurance (PMI) when they purchase a home with less than 20% down. Because the gift of equity often serves as the down payment, it can negate the need for PMI.
Keeping a home within the family: For many people, their family home is an important memento. A gift of equity can help to keep a home within the family even when the buyer may not be able to save enough for a down payment.
Cons Of A Gift Of Equity
Legal fees for both parties: A gift of equity requires a contract between the two parties. As a result, one or both parties may have fees to an attorney to draft the contract.
Potential trigger of the gift tax: The IRS requires that people file a gift tax return when they transfer more than $15,000 in gifts to another individual. If the gifted equity equals more than $15,000, then a seller would have to file this return.
Negative effect on home’s cost basis: When you sell a home for more than you bought it for, you may be subject to capital gains taxes on the profit. Because a gift of equity reduces the sale price of a home (aka the cost basis), it increases the chances that the buyer will end up paying those capital gains taxes.
Negative effect on local real estate market: A gift of equity reduces the sale price of a home. Doing so could impact the neighborhood’s real estate market because there’s a record of a property being sold below market value.
The Bottom Line
A gift of equity is a strategy that people can use to sell a family home to a relative for less than its market value. The lower sale price serves as the buyer’s down payment, making it easier for them to buy the home.
- COMMON HOA RULE VIOLATIONS
Here are some of the most common HOA rules violations you should know about:
HOAs are responsible for the community’s curb appeal, so expect yours to have rules about overgrown lawns, weeds and unkempt exteriors. Be sure to check your bylaws about what types of trees, plants and shrubs are allowed to be planted.
HOAs often limit how many and what type of motor vehicles (RVs, boats and commercial vehicles, for example) can be kept on the property, as well as enforce speed limits and rules about parking in designated areas.
Some HOAs have rules about subletting homes, both because of security and because most communities’ insurance is dependent on the percentage of owners versus renters. Most HOAs require written permission to rent a home, which may require a homeowner to join a waitlist.
Homeowners in an HOA can get into trouble for throwing certain items, like boxes that haven’t been broken down or pieces of furniture, into community dumpsters. It might also be against the rules to put trash cans out too early or not bring them in by a certain time, since they can attract pests and detract from the community’s appearance.
5. Exterior storage
HOAs sometimes limit what types of equipment can be stored outside. For instance, you might have to keep bicycles or kayaks out of view, behind a fence. Your HOA might also have rules limiting or preventing the addition of storage structures that aren’t attached to the home.
To keep their residents safe and comfortable, HOAs often have restrictions about where pets can and can’t walk, keeping dogs on leashes and picking up after your pet. You might also be limited to how many pets you can own, and specific breeds and sizes.
Most HOAs have rules that restrict loud noises between certain hours. (Most cities and counties also have noise ordinances that must be followed, even if the HOA doesn’t have restrictions.)
8. Holiday decorations
If you’re the neighbor who keeps Christmas lights up until Valentine’s Day, living in an HOA community might not be ideal. Some HOA rules include rules for how long before and after a holiday you can decorate your home’s exterior. Others might even regulate the size and type of decor allowed.
9. Design changes
HOAs often have strict rules about changing the appearance or structure of your home. Simple things like painting your house, adding a patio or deck or even changing your mailbox usually require written approval from the HOA’s design review committee.
Can the police enforce HOA rules?
The short answer is yes, police can enforce some HOA rules. That’s because HOA rules have to comply with state and local laws and ordinances. For instance, police could enforce speed limits, noise ordinances and pet leash laws because they are legal matters, but they wouldn’t enforce other HOA rules on landscaping or paint violations.
What happens if you violate HOA rules?
An HOA can’t force a homeowner to sell a home for not following the HOA rules; however, it can enforce the rules and initiate reasonable fines for violations.
Just ask Atlanta homeowner Parker Singletary. Before Atlanta hosted the Super Bowl in 2019, one of Singletary’s neighbors mentioned that residents were allowed to rent their homes just for that weekend. Singletary cleaned his house, took photos and posted them on a popular property rental site.
“Nobody ended up taking my house for the weekend, so I thought I was done with the situation,” Singletary says. Instead, he received a cease-and-desist letter from a local law firm for breaking the HOA rules, along with a $1,000 fine.
As Singletary discovered, whether you knowingly break the HOA rules or overstep them by mistake, the consequences can be costly. If a bylaw is broken, it’s the association’s responsibility to notify the offending resident to allow them to comply, or assign a fine.
In Singletary’s case, he didn’t receive a warning. Instead, he received a $1,000 fine, which he appealed. The fine was later reduced to $300 to cover legal fees.
If a homeowner doesn’t pay a fine for a violation, late fees can pile up, and the HOA can put a lien against their home (even if it has a mortgage). The HOA can opt to foreclose on the lien, too, so it’s best to avoid that outcome if possible.
How to respond to HOA rules violations
Address it. Ignoring a violation won’t make it go away, and can actually make the situation much worse. Once you’ve received a violation notice, take steps to understand and correct the violation, and either pay or appeal the fine, if there is one.
Don’t take it personally. Remember that the HOA’s rules were created to keep the community safe and comfortable for residents, including you. You also agreed to abide by the rules when you bought your home.
Communicate. While friendly face-to-face communication can address minor infractions or warnings, written communication and documentation helps create clarity for everyone involved. When you’ve been accused of an HOA rule violation, it’s best to address it in writing. If there are extenuating circumstances — like a family emergency that causes you to fall behind on lawn care — communicate that to your HOA property manager. You don’t know if an exception can be made until you ask.
Get involved. “There is usually a correlation between the level of homeowner involvement and the long-term success of a community,” Bauman says. So, if you want to improve your community, volunteer for a board position or attend meetings to see how you can contribute.
Living in an HOA community isn’t for everyone, but if you’re interested in joining one, be sure to do your homework and understand the rules before making an offer on a home. How an HOA enforces its rules and handles violations can vary between communities, so obtain a copy of the association’s CC&Rs to ensure you understand what you’re buying into and agreeing to.
“Homeowners have the right to receive all documents that address rules and regulations governing the community association,” Bauman says, adding that “since association rules vary from community to community, common HOA violations also differ.”
- HOA RESTRICTIONS ON SHORT TERM RENTALSAt first blush, short-term rentals seem like a win-win situation. You can find a nice place to stay for a few nights, and it is frequently cheaper than booking a hotel. Just as importantly, vacation houses and condos rented out through Airbnb or VRBO are often more interesting places to stay, with the individual character and idiosyncrasies you do not get from a cookie-cutter hotel room. It can be a great deal for property owners, too. In the right location, a property rented for short-term stays can bring in significantly more revenue than with a traditional year-to-year lease. That extra cash can be put toward improving the property, making it into a more attractive destination that can command higher rates. Or, it can just provide supplemental income. Either way, the property owner is coming out ahead. So far, short-term rentals sound like a great deal for all involved parties. Yet, there has been a growing trend to prohibit them in HOA communities. Is it just a case of power-tripping HOA boards lording their authority over members by banning a potentially lucrative source of secondary income? Actually, no. As is so often the case, there is more to it than that. For all their virtues, Airbnb, VRBO, and similar services can have genuine downsides for a homeowners’ association. On a smaller scale, it is analogous to the so-called “Lemon Socialism,” where profits are privatized, and risks are socialized. In this case, the advantages of short-term rentals (i.e., increased income) are reaped by individual property owners, while the potential downsides (when they are present, which is not always the case) are borne by the community as a whole. Why Do HOAs Prohibit Short-Term Rentals? When an HOA imposes a restriction on homeowners’ use of their properties, it needs to have some justification (or at least a feasible pretense). With short-term rental restrictions, the purpose is generally to protect other members and preserve the character of the community. A quiet, sleepy neighborhood that all-the-sudden has vacationers coming and going on a regular basis stands a good chance of losing its quiet, sleepy nature. Vacation renters tend to be messier and noisier, especially at night, than permanent residents. The commotion can become a nuisance for people who reside in the community year-round—specifically, other homeowners and their families. Short-term renters also tend to ignore HOA rules or simply not know what the rules are. In a community with common areas and facilities, vacationers can overtax the commons, preventing full-time residents from enjoying the benefits for which their assessments pay. Vacationers do not pay HOA fees and are less vested in the long-term condition of the community. From a practical standpoint, short-term renters can increase a neighborhood’s traffic and parking problems. And, if travelers regularly use common facilities like a pool or recreation center, the HOA’s insurance rates are likely to increase, as additional use of the facilities by more people inevitably leads to more damage and risk of premises liability claims. With that said, a lot depends on the nature of an individual community. If the impact from short-term rentals will be minimal—or if the community is in a vacation hotspot where a large percentage of owners like the idea of renting through Airbnb or VRBO—a rental restriction might not make sense for that community. Authority to Restrict Short-Term Rentals. Even if a community has a valid reason to restrict short-term rentals, it still needs legal and/or contractual authority to support the restriction. Typically, the authority comes from an HOA’s declaration, from state law, or a combination of the two. A declaration is a contract among property owners in a community. The owners jointly agree to accept certain obligations and restrictions on how properties in the community can be used. If everyone complies, the community as a whole will benefit—or at least that is the idea. Throughout the country, courts generally assume HOA restrictions are enforceable as long as a restriction promotes a legitimate purpose and is not forbidden by statute. See, e.g., Saunders v. Thorn Woode Partnership, L.P. 265 Ga. 703, 462 S.E.2d 135 (Ga., 1995); Laguna Royale Owners Assn. v. Darger, 119 Cal.App.3d 670, 174 Cal. Rptr. 136 (Cal. Ct. App. 1981). Even broad restrictions against all rentals have been upheld in some jurisdictions if the restriction is in the HOA’s declaration, and the board can offer a legitimate justification for it. See, Four Brothers Homes at Heartland Condominium II, et al., v. Gerbino, 262 A.D.2d 279, 691 N.Y.S.2d 114 (N.Y. App. Div. 1999). So, the starting point when deciding if an individual HOA has the authority to ban short-term rentals is to look at the community’s declaration. If the declaration prohibits rentals (short-term or long), then the HOA can likely enforce the prohibition unless there is some other reason why the restriction is unenforceable. Armstrong v. Ledges Homeowners’ Assoc., Inc., 633 S.E.2d 78 (N.C. 2006). Limitations on Rental Restrictions. Though state HOA laws can vary considerably from state to state, multiple state legislatures have recognized that the right to rent out a property is valuable enough for homeowners to warrant some statutory protection. In general, state-law limitations on rental restrictions do not say that rental restrictions are per se unenforceable. Instead, the laws seek to protect property owners’ due process rights and avoid a scenario in which an owner is deprived of a valuable property right without adequate notice. In Arizona, for instance, an HOA cannot enforce a rental restriction against an owner unless the restriction was already in the community’s declaration when the owner acquired title to the property. A.R.S. §33-1260.01A. HOA declarations are public records recorded within county land records, so owners are assumed to have notice of restrictions and covenants in the declaration when accepting the deed to a property. The Arizona law protects owners from being deprived of a right they reasonably anticipated having when deciding to purchase the property. California law gives potential purchasers of homes in HOA communities the right to receive a written statement of any rental restrictions in a community before title to a property is transferred. Cal. Civ. Code §4525(a)(9). The law recognizes that, while a recorded declaration serves as formal notice to purchasers, buyers do not always read them thoroughly before agreeing to a purchase. Contractual & Statutory Protections. The most common state-law approach for protecting owners’ vested property rights is through “grandfather” laws. A grandfathering provision lets an HOA enforce a newly adopted restriction prospectively but protects owners who previously relied on the restriction’s absence. Grandfathering statutes relating to rental restrictions recognize that a substantial portion of a property’s value can consist of the owner’s ability to generate revenue by renting it out. As such, owners who previously enjoyed that right should not be deprived of it in the future without their consent. In a nutshell, it is unfair to enforce a rental restriction against an owner who purchased a property when the restriction was not in place. Florida and California laws prevent enforcement of rental restrictions against owners if the restriction was not already in effect at the time of purchase, and the owner did not vote to adopt the restriction. Fla. Stat. §718.110(13), Cal. Civ. Code §4740(a), (b). Similarly, Arizona’s law will not let an HOA enforce a rental restriction against an owner who purchased a property before the restriction’s enactment unless the restriction was approved by a unanimous member vote. A.R.S. §33-1227. So far, this all seems straight-forward enough, but there is a curveball coming. Under California’s HOA law, existing owners are generally protected against later-adopted HOA rental restrictions. However, HOAs can enforce “reasonable” limitations, if not outright prohibitions. Laguna Royale Owners Assn. v. Darger, 119 Cal.App.3d 670, 174 Cal. Rptr. 136 (Cal. Ct. App. 1981). What that practically means is that an owner protected against rental restrictions, in general, might nonetheless be prevented from engaging in short-term rentals. California courts have recognized that short-term rentals can negatively affect a community beyond what results from ordinary, long-term rentals. With that in mind, the courts reasoned that a minimum lease period (or similar rule preventing short-term rentals) does not offend California’s grandfathering law because the owner still has the right to rent the property. The right has been limited, but the owner can still rent to a long-term tenant. Watts v. Oak Shores Community Assn., 235 Cal.App.4th 466 (2015), Mission Shores Assn. v. Pheil, 166 Cal.App.4th 789, 83 Cal. Rptr. 3d 108 (Cal. Ct. App. 2008) But that raises a question: what is so different about short-term rentals compared to long-term rentals? Residential vs. Commercial Use. Residential use restrictions are one of the most common restrictions included in HOA declarations, and they have been consistently upheld by reviewing courts throughout the country. Essentially, a declaration says that properties in the community are intended to be used as homes, not as businesses or farms. And, by accepting a deed to a property subject to the HOA, owners covenant that they will not use their properties for commercial (i.e., business-related) purposes. It is similar to a single-family residential zoning ordinance—just adopted by an HOA instead of a local government. Some HOAs have tried to prohibit short-term rentals, relying on commercial-use restrictions. The argument is that if you are using your property as a short-term rental, you are effectively using it for a commercial purpose. Before looking at this question further, it is worth emphasizing two points. First, state courts are not consistent in how they have interpreted the issue. Second, a short-term rental prohibition based on a residential-use covenant is distinct from an ordinary rental restriction. If an association can rely on an enforceable restriction prohibiting rentals, it does not need to argue that short-term rentals are a commercial use. The argument generally comes up when an HOA wants to prevent short-term rentals but does not have a rental restriction—or it has a rental restriction that it cannot enforce against a specific homeowner due to (for example) a grandfathering clause. When considering this issue, an appeals court in Michigan held that an HOA that prohibited short-term rentals based on a commercial-use restriction did not exceed its authority. Eager v. Peasley, 911 N.W.2d 470, (Mich. Ct. App. 2017). Noting that “provid[ing] temporary housing” to vacationers is a “profit-making enterprise,” the court concluded that “the act of renting property to another for short-term use is a commercial use, even if the activity is residential in nature.” Thus, under the Eager Court’s reasoning, a Michigan HOA with a commercial-use restriction could adopt and enforce a policy against short-term rentals, even if the HOA did not have an express rental restriction in its declaration. On the other hand, states that afford greater deference to individual homeowners’ property rights have come down the other way. In North Carolina, for example, courts typically interpret unclear restrictions in favor of homeowners. Based on that principle, a North Carolina court held that a generalized restriction against non-residential use by itself was insufficient authority for an HOA to prohibit short-term rentals. Wise v. Harrington Grove Cmty. Ass’n, 584 S.E.2d 731 (2003). Unsurprisingly, the Texas Supreme Court likewise came down in favor of the property owner in Tarr v. Timberwood Park Owners Ass’n, 61 Tex. Sup. Ct. J. 1174 (2018). In that case, the HOA relied on a restriction that only allowed properties in the community to be used as single-family residences. According to the Tarr Court, the provision did not plainly forbid short-term rentals because, as long as renters used the home for residential purposes, the covenant was satisfied. Unfortunately, the question as to whether a residential use provision provides adequate grounds to prohibit short-term rentals is inconsistent from state to state. Accordingly, the most sure-fire way for HOAs to prevent short-term rental of properties within the community is to amend their declarations to unambiguously forbid short-term rentals. Adopting and Enforcing Short-Term Rental Restrictions. As we have seen, an HOA cannot just decide one day that it wants to prohibit short-term rentals. The prohibition must be grounded in some authority derived from the community declaration. For the most part, a community with an existing rental restriction in its declaration will have the right to enforce the restriction. If it doesn’t, the HOA will need to amend its declaration following the amendment process provided under state law and the declaration itself. Usually, the amendment requires the approval of at least a majority of homeowners in the community. When proposing language for a rental restriction, an HOA board should clearly define what rentals will be prohibited. A common approach is to establish a minimum lease period (such as 30 days), with any rental period below that threshold forbidden. If there will be any exceptions to the general prohibition, they need to be spelled out, too. To avoid challenges from existing homeowners, it can be a good idea to include a grandfathering clause within a proposed amendment restricting rentals. Remember, multiple states have laws that prohibit enforcement of a rental restriction against a homeowner if the restriction was not in place when they acquired the property—unless the owner consents to the restriction. Even in states without these statutory protections, affected owners can argue that a newly adopted restriction deprives them of a vested property right. A “grandfather” clause might let an owner currently engaged in short-term rentals continue doing so. Or an amendment could establish a cap on the number of homes in the community that can be used as short-term rentals. Rental restrictions should include an enforcement mechanism that can be used against non-compliant owners. For example, fines might be imposed on violative owners, or access to common facilities could be limited for so long as a violation continues. State HOA laws vary with regard to permissible penalties, so an HOA needs to make sure its enforcement mechanism is statutorily compliant. When all else fails, an HOA can seek recourse via civil litigation. In that case, the board (on behalf of the HOA) files suit against the non-compliant owner and requests an order from a judge directing the owner to cease short-term rentals. Of course, litigation is often expensive and time-consuming, so it is usually better to resolve things out of court if possible. Importantly, an HOA should consult with an experienced attorney when attempting to amend its declaration. An attorney familiar with HOA law can help create an enforceable policy that complies with state law and ensures the amendment process is properly observed—mitigating the risk of future challenges to the policy. As a general matter, an HOA’s enforcement of rental restrictions (or any other restrictions, for that matter) needs to be “procedurally fair and reasonable.” Enforcement should be consistent and proportional and never “arbitrary and capricious.” Saunders v. Thorn Woode Partnership, L.P., 265 Ga. 703, 462 S.E.2d 135 (Ga., 1995). Inconsistent or arbitrary enforcement can provide homeowners with a defense against enforcement actions. White Egret Condo., Inc. v. Franklin, 379 So.2d 346 (Fla. 1979). In many jurisdictions, courts have found that an association that attempts to enforce a restriction that it has not previously enforced consistently or enforced against some owners but not others—has effectively abandoned or waived its right to enforce the restriction. Liebler v. Point Loma Tennis Club, 40 Cal. App. 4th 1600, 1610-11 (4th Dist. 1995); Prisco v. Forest Villas Condominium Apartments, Inc., 847 So 2d 1012 (Fla.App. Dist.4, 2003). Similarly, enforcement aimed only at homeowners that fall within certain groups is subject to challenge by the singled-out homeowners. See, e.g., Bloch v. Frischholz, 533 F.3d 562 (7th Cir. 2008). Fair Housing Act Implications. Like with any other policies, an HOA’s short-term rental restriction policies need to comply with the federal Fair Housing Act. The FHA prohibits housing discrimination based on race, color, religion, sex, familial status, national origin, or disability. 42 U.S.C. §3604(a). Blatantly discriminatory policies are obviously banned. For instance, an HOA cannot adopt a policy that prohibits short-term rentals to Episcopalians or prevents Episcopalians (but only Episcopalians) from renting their properties. The FHA can also cover policies and actions that are unintentionally discriminatory. If a policy results in a disproportionately “disparate impact” on a protected class, the policy may violate the FHA. Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., 135 S.Ct. 2507 (2015). “Familial status” discrimination can be a potential FHA tripwire for HOAs. Under federal court decisions interpreting the FHA, “familial status” does not just mean things like whether a person is married, single, or divorced. The term has also been interpreted to include most age-based discrimination. See, Iniestra v. Cliff Warren Investments, Inc., 886 F. Supp. 2d 1161, 1164 (C.D. Cal. 2012). Restrictions against families with children—or restrictions that appear designed to prevent rentals to families with children—can likewise amount to familial status discrimination in violation of the FHA. So, for instance, an HOA that tries to enforce a validly adopted blanket prohibition on short-term rentals will probably be upheld. But an HOA that allows some short-term rentals—but not to renters who have children—may find itself subject to an FHA complaint. HOA laws can be complex, with many variations between states. Homeowners who have questions about how their association’s rules affect their rights—and associations that are unsure of the breadth of their restrictions or are considering an amendment to covenants—should consult with an experienced attorney familiar with the HOA laws of the state in which the community is situated.
- OWNING PROPERTY INUNEQUAL SHARESA tenancy in common is a popular way for co-owners to take title to a home. This way of vesting offers an alternative to joint tenancy, in which a home is co-owned, but the owners split their interests evenly. Here, we talk about what a tenancy in common is, and why its allowance for co-owning in unequal shares can be a benefit. The Tenancy in Common: A Popular Choice for Co-Owners When people acquire a property together, they should be ready to specify what form of vesting will appear on the deed. In some states, the tenancy in common is the default vesting mode for married couples. In some states, it’s the default mode for unmarried co-owners, so these owners become tenants in common unless they affirmatively pick another form of vesting. Tenants in common can be a pair of owners or a group. They can be related to each other or unrelated. They can be spouses, siblings, partners, or friends. When they decide to hold title to a home in a tenancy in common, can these co-owners divide ownership unequally? Can each co-owner pitch in for maintenance in different amounts? On both counts, yes: The co-owners need to state their specific share percentages. This is sometimes overlooked by title companies — but the co-owners should have their own plan. Equal shares might not be optimal. Each owner can hold any percentage of the whole, and the deed will show each co-owner’s ownership percentage. Unless otherwise agreed, co-owners share expenses in proportion, too. When two or more people buy a house together, they’ll likely have different reasons and capacities for investing. We’ll take a look at some scenarios in the next section. Do the co-owners need to inhabit the home together? Only if that’s the plan. No one, legally speaking, is allowed to keep any part of the home off-limits to the other co-owner(s). In other words, the co-owners, even if they hold unequal portions of the property, enjoy a right to of access to all of it. But they can buy a home together without any intention to physically share it. Scenarios: Why Co-Buy Many people decide to share equity in their homes. Payments and expenses can be collaborative investments. Co-buying with a friend, business colleague, or sibling as tenants in common may help one or more of the co-buyers become homeowners. One owner might be on firmer financial ground than the other, and offer to be a co-buyer in order to help the other buy. The plan might involve refinancing later, in order to transfer the title into sole ownership, without the benefactor. A lender may want the additional co-signer on the loan to be a co-owner, so the financially stronger person has a stake in the asset. In this case, the primary buyer will live in the house, pay for the house, make all mortgage and tax payments, and take full responsibility for repairs, homeowner’s association dues, landscaping, and so forth. “Owner B” will pay nothing, and is only in the tenancy in common to help “Owner A” buy and have real estate. “Owner B” may take the lower percentage of ownership the lender allows. Later, when “Owner A” achieves sole ownership, only the smaller portion needs to be conveyed from B to A, so the new sole owner will have a lower transfer tax. These co-owners should think through every what-if scenario. What if “Owner B” passes away before the refinancing and transfer to sole ownership is complete? Did the co-owners create a legal agreement, explaining what should happen to the property if one co-owner dies during a temporary co-ownership? By default, the house will go into probate. Another reason for co-buying with a small ownership percentage could involve a condo purchase. Condo properties generally limit the renting of units and restrict owner-investors to some extent. A tenancy in common with unequal interests can be a workaround for the investor—if the mortgage lender approves of the ownership disparity on the deed. How the Mortgage Works for a Tenancy in Common If co-owners are taking title without having to finance the home, their unequal ownership percentages are up to them. They could have 99% and 1% interests; they tenancy in common allows for it. But if the house is financed, a lender is unlikely to let one borrower have minimal rights to the asset’s value. The point of requiring co-owners is to have everyone on the loan share responsibility for paying it back. Ultimately, the lender wants the option to claim the whole property in the event of default—thus, banks like co-signers to be co-owners. In reality, though, just one person might be paying the mortgage, and the other is on the deed in name only. “Owner B,” the Good Samaritan co-borrower, should be aware that no one is exempt from responsibility for paying off the mortgage and prepare for that unintended possibility. Selling: What Happens When a Co-Owner Wants Out When co-owners buy a home in a mutually beneficial agreement, they can later sell and divide the proceeds according to their share percentages. But tenants in common do not need to all be on board with selling at the same time. The co-owners in a tenancy in common: Can sell or take a loan out against their own share. Can sell their own interests in the property without the other owners’ consent. Cannot sell the entire property (forcing the others to sell) without the others’ consent. People can come into, as well as leave, the agreement. At any time, a new co-owner may come on board. At this time, the current group will need to convey their deed to the new, larger group—while leaving their original agreement intact. Unmarried tenants in common must pay tax when selling the property in whole or in part. Yet owners who make capital gains from the sale are eligible to exclude up to $250,000 of that profit from income tax, if they meet the IRS requirements. Last Wishes: What Happens When a Co-Owner Passes A tenancy in common differs from a joint tenancy with rights of survivorship. Should one of the owners pass away during the tenancy in common, that property interest winds up in probate, in the deceased homeowner’s estate. Put in another way, tenants in common may leave their portions of the property to any beneficiaries they designate in their wills. Upon any co-owner’s death, the living co-owners could wind up sharing ownership of the home with a beneficiary they do not know. This problem can be averted through a consultation with a wills and estates lawyer early in the process. In short, co-owners: Can pass their ownership shares to their named beneficiaries; and Cannot automatically pass the right of survivorship when they pass away. The Co-Ownership Agreement It can be well worth the time to hammer out a co-ownership agreement so the owners agree on how they will behave in certain situations. If the state in which the home exists allows it, co-owners in the tenancy in common may forge a written agreement to let one co-owner live in the house exclusively. They can also allocate responsibility for repairs and expenses. It helps to lay out in writing: What percentages in ownership shares the co-owners hold. Who will live in the house. How the rooms will be allocated if more than one owner will live in the house. Who is responsible for various up-front costs during the buying process. Who will cover the monthly mortgage loan payments, insurance, association fees, taxes, and other normal expenses. Who will handle other responsibilities desired by the group. A date by which refinancing and title transfer must occur if, for example, one owner is expected to achieve improved financial footing and become the sole owner. How the parties intend to bequeath their interests should one of them pass away.
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- QUIT CLAIM DEED
Quitclaim Deeds can be complicated legal documents. They are commonly used to add/remove someone to/from real estate title or deed (divorce, name changes, family and trust transfers).Last updated: April 9, 2021 The quitclaim deed is a legal document (deed) used to transfer interest in real estate from one person or entity (grantor) to another (grantee). Unlike other legal conveyance deeds, the quitclaim conveys only the interest the grantor has at the time of the deed’s execution and does not guarantee that the grantor actually (legally) owns the property. Without warranties, the quitclaim deed offers the grantee little or no legal recourse against the seller if a problem with the title arises in the future. This lack of protection makes a quitclaim unsuitable when purchasing real property from an unknown party in a traditional sale. It is, however, a useful instrument when conveying property from one family member or spouse to another, and it is commonly used in divorce proceedings or for estate planning purposes. Title companies may require a person to execute a quitclaim document in order to clear up what they consider to be a cloud on the title prior to issuing title insurance. Similarly, prior to funding a loan, lenders may ask someone who is not going to be on a loan, such as a spouse, to complete and record a deed quit claiming their interest.
- WARRANTY DEED
Warranty Deed, the Most Common Deed in Real EstateOf all the real estate deeds, General Warranty Deeds provide the most protection to the grantee (buyer). This type of deed guarantees that the grantor (seller) holds a clear title to a piece of real estate and has a right to sell it to the grantee. The guarantee is not limited to the time the grantor owned the property as with a special warranty deed; rather, it extends back to the property’s earliest title. As such, earlier grantors occasionally find themselves confronted by issues from future grantees. The grantors also guarantee that, during their period of ownership, they did not encumber the property in any way that prohibits its transfer. Incorporate express references to any easements, restrictions, or other agreements of record that relate to the specific parcel of land, into the text of the deed. Providing this information puts the grantee on notice of the warranty’s limitations and upholds the covenant against encumbrances. Traditionally, general warranty deeds include six common law covenants of title. Those six covenants can be separated into two categories: present covenants and future covenants.
- Covenant of seisin: the grantor promises that he/she holds valid title to and possession of the property
- Covenant of right to convey: the grantor guarantees that he/she may legally convey both title to and possession of the property
- Covenant against encumbrances: the grantor legally declares the property to be free of any liens (encumbrances) unless stated in the deed
- Covenant of warranty: the grantor will protect and defend the buyer against anyone who claims a superior title to the property
- Covenant of quiet enjoyment: the grantee will be able to access and use the property without restrictions
- Covenant of further assurances: the grantor will take reasonable actions necessary to resolve defects in the title
- GRANT DEED
Grant DeedA grant deed is a legal document that is used to transfer (convey) rights in real property from one entity or person (the grantor) to another (the grantee). A grant, or bargain and sale deed, contains no express warranties against encumbrances. It does, however, imply that the grantor holds title and has possession of the property. The language used in the granting clause is usually “ABC grants and releases,” or “XYZ grants, bargains, and sells,” and is often dictated by statute. Because the warranty is not specifically stated, the grantee has little recourse if title defects appear later. In some states, this deed is used in foreclosures and tax sales. Each party transferring an interest in the property, or the grantor, is required to sign it. Then, the document must be acknowledged before a notary public (notarized) or other official authorized by law to administer oaths. The notary public or other official then places a seal and marks the document accordingly. The grant deed must be notarized in order to provide evidence that the instrument is genuine, as transaction documents are sometimes forged. The grant deed must also include a legal description of the property, which includes boundaries and/or parcel numbers. In most cases Grant deeds do not need to be recorded to be valid; however, it is in the grantee’s best interest to record the deed at the country recorder’s office in the county where the property is located. The law recognizes a grant deed in writing. Hence, it must be an original and filed with the proper government authority. The deed must indicate the involved parties, which is both the grantor (seller) and the grantee (buyer). It must clearly state a legal description of the property being transferred. Guarantees and responsibilities must be stated in the deed as well. These guarantees indicate that the grantor owns the property free and clear, and the seller assumes the responsibility for settling any future claims. If there is a time limit on the guarantees, it must also be incorporated in the deed. The finished copy of the deed must be duly signed by the parties and notarized according to law. The grantor settling any future claims on the property is the main criterion of writing a grant deed. However, this depends on the stipulated period, i.e., for the duration of time when the grantor maintains the rights to the property before the deed comes into effect. This clause is akin to general warranty deeds in some states, while a limited warranty deed for others. The seller is obliged to prove the falsehood of any claim challenge, and if the grantor fails to prove the claim fraudulent then he/she must pay the amount to settle the claim. Further, if the claim remains unsettled and the grantee must forgo the ownership, the grantor must return the amount to the buyer. The amount also involves the cost of renovating or improving the property.
- CORRECTION DEED
Correction Deed – Correcting A Recorded DeedOnce a deed has been recorded, it is part of the public record and cannot be changed. It is possible, however, to amend that record by adding a newly executed deed, usually called correction or corrective deed, deed of correction, or, in some states, deed of confirmation. As a confirmatory instrument, it perfects an existing title by removing any defects, but it does not pass title on its own. A correction deed confirms the covenants and warranties of the prior deed. It needs to refer to that instrument by indicating its execution and recording date, the place of recording, and the number under which the document is filed. It also must identify the error or errors by type before supplying a correction. The body of this new deed contains the same information as the original deed and thus confirms the conveyance of title. Generally, all parties who signed the prior deed must sign the correction deed in the presence of a notary, who will acknowledge its execution. A corrective deed is most often used for minor mistakes, such as misspelled or incomplete names, missing or wrong middle initials, and omission of marital status or vesting information. It can also be used for obvious errors in the property description. For example, errors transcribing courses and distances; errors incorporating a recorded plat or deed reference; errors in listing a lot number or designation; or omitted exhibits that supply the legal description of the property. A correction deed can also amend defects in the execution or acknowledgment of the original deed. Resolving material errors often causes confusion. A material correction constitutes an actual change in the substance of the deed, such as changing the legal description, adjusting the amount of consideration, and adding or removing names. Some states allow a corrective instrument to address these flaws, but others require an entirely new deed. Non-material changes are generally typographical in nature and may be adjusted with a less involved correction. For example, some states accept a re-submission of the original deed with corrections, along with a cover page that contains a correction statement, error identification, and clear reference to the previously recorded deed. Depending on the error type and gravity, re-acknowledgment may not be required under such circumstances. In some states, an affidavit of correction or a scrivener’s affidavit may be recorded and serve as notification of an error in a recorded deed. It is usually reserved for minor corrections and typographical mistakes, and it can often be given by persons other than the parties of the original instrument, as long as reasons for the correction and knowledge of the facts corrected are stated and evidence of notification of the original parties or their heirs are provided. However, it does not constitute an actual correction of the original deed in the way a corrective deed does. Changes affecting the legal description of the property are often sensitive in nature and best handled by a new corrective deed, signed by the original grantor. Some states generally recommend that both parties, that is, the grantor and grantee, sign a corrective instrument to assure valid title. For larger errors or to include/omit a name from the existing deed, a new standard conveyance, such as a warranty or quitclaim deed, may be more appropriate than a correction deed.
- TRANSFER ON DEATH DEED
Transfer on Death Deed
Setting up real estate to be transferred upon your death.
Real estate is often one of the most significant assets to consider in a comprehensive estate plan. There are a number of ways to distribute the property after the owner’s death. Some of the more common options are wills, trusts, joint ownership, or transfer on death (TOD) deeds. Note: unless identified otherwise, all definitions originated with Black’s Law Dictionary, Eighth Edition.
Wills are probably the first thing people think of when considering how to handle their assets. More specifically known as a last will and testament, this is the most recent document by which a person directs his or her estate to be distributed upon death. Regardless of other available tools, almost everyone should have something in place for this purpose. A well-constructed will reinforces other estate planning strategies, such as a trust or a transfer on death instrument.
On the surface, wills appear simple, and they can be, but their complexity tends to increase quickly. In addition, changes demand a review of the entire document and can incur legal and filing fees associated with every update. Real property distributed by a will must pass through probate, which adds time and expense to the process. Provisions exist to simplify things for smaller estates, but otherwise, both wills and probate can be tricky and are best approached by an attorney.
A trust is a property interest held by one person (the trustee) at the request of another (the settlor) for the benefit of a third party (the beneficiary). The structure and purpose can vary — there are dozens of different kinds of trusts, and variations within each type. They can exist independently from a will (nontestamentary), or be triggered by provisions found in a will (testamentary). It is important to seek legal guidance when arranging a trust because the wrong choice can have serious financial consequences. Because of these and other issues, it makes sense to consult an attorney to construct, administer, and modify a trust.
Survivorship tenancy is a form of shared ownership that identifies the joint owner’s right to the whole title upon the death of the other joint owner. The remaining owner(s) gains the title as a function of law, meaning it happens almost automatically (in theory). Three primary forms of property ownership support the right of survivorship: most joint tenancy, tenancy by the entirety, and some community property. Note that tenancy by the entirety and community property are only available to couples who are either married or in a legal civil union. For clarity, the right of survivorship must be written into the portion of the deed that identifies how the owners will hold title to the property. The exact format and wording may vary by state, but something along the lines of “John Doe and Jane Doe, as joint tenants with right of survivorship, and not as tenants in common.”
Survivorship tenancies can lead to potential complications. For example, the property could be at risk if one owner has credit problems or other financial issues. Real estate held this way cannot be included in a will except by the last surviving owner. Any sale or transfer of the property requires participation from all co-tenants or the joint tenancy is broken and changes to tenancy in common.
Life is unpredictable, and sometimes the best way to handle an unexpected situation is to change or even revoke (cancel) a beneficiary designation. The established tools discussed above can be cumbersome and expensive to modify, and savvy clients needed more flexibility in their estate planning.
Enhanced life estate, or “Ladybird” deeds, originated as the earliest direct answer to those demands. These deeds provided landowners with a responsive, non-probate option to direct the distribution of their real estate after death. They build on the premise of the life estate, which immediately transfers ownership of the property to the grantee/beneficiary, but allows someone else named in the document to live there for the remainder of his/her life.
Traditional life tenants have little or no control over what happens to the property after they die. The “enhanced” part comes in with the reservation of powers to the grantor/owner on an otherwise standard warranty, grant, or quitclaim deed. When executed, grantors transfer the property to one or more grantees/beneficiaries but convey a life estate back to themselves, and reserve the power to sell the property outright, change or revoke the future transfer, or otherwise use the real estate as they wish, with no restrictions other than the requirement to formally record the changes during their natural lives.
This reservation of powers enables landowners to retain full title rights, preserving their homestead status (if claimed) as well as any deductions, protections, and tax exemptions associated with the real estate during their lifetimes. The remainder, if any, goes to the named grantees/beneficiaries after the owner’s death, thereby avoiding the probate process. Ladybird deeds are most common in Michigan, Florida, California, and Rhode Island. Even though they have been used and accepted for years, enhanced life estate deeds are not generally statutory (Rhode Island is one exception. See R.I.G.L. 34-4-2.1).
Some states decided to take the concept of an enhanced life estate a step further and include laws for real property transfers on death (TOD) in their statutes. For example, Arizona (A.R.S. section 33-405) and Colorado (C.R.S. 15.15.401, et seq.) offer statutory beneficiary deeds. Ohio codified its transfer on death designation affidavit at ORC 5302.22 et seq. While Ladybird and beneficiary deeds, as well as other state-specific instruments, are still in use, a newer, but related, approach is gaining popularity — a transfer on death deed under the Uniform Real Property Transfer on Death Act (URPTODA).
Unlike wills, trusts, or survivorship tenancies, which tend to follow the same rules across the US, TOD instruments vary according to each state’s interpretation and application of the law. Completed in 2009, the URPTODA describes the Uniform Law Commission’s process to unify and standardize the use of these non-probate transfers. In addition to the associated definitions and rules, the Act contains model forms for both a deed and a revocation instrument. So far, Alaska, Hawaii, Washington, Oregon, Nevada, North Dakota, South Dakota, Nebraska, New Mexico, Illinois, West Virginia, Virginia, the District of Columbia, and most recently, Texas have chosen to enact the URPTODA, modified as needed to incorporate existing state laws and customs.
Variations exist among the different transfer on death instruments, but they include specific common features:
- All initial and subsequent documents related to the transfer on death must be executed and recorded, in the county where the property is situated, during the owner’s natural life or they have no effect.
- Executing transfer on death instruments requires the same competency as a will does.
- Transfers on death only convey the owner’s interest in the property, if any, present at the time of death.
- Owners retain full title and absolute control over the real estate, its use, and its distribution until death.
- Beneficiaries have no rights to or interest in the property during the owner’s lifetime.
- The form must state that the transfer is revocable.
- The power to revoke is at the heart of transfer on death instruments. Because of this feature, there is no obligation for the owner to provide notice to or collect consideration from the beneficiary (consideration implies a transfer of ownership that is not present here). Even so, many grantors inform beneficiaries about the potential transfer in order to save confusion later.
- The property is taken with all restrictions, easements, and debts in place, including mortgages.
- TOD instruments must meet state and local content and format requirements for real estate deeds.
There are three primary ways to revoke a recorded transfer on death instrument:
- Execute and record an instrument of revocation
- Execute and record a new transfer on death instrument, explicitly revoking any previously recorded transfers on death related to the same property
- Convey all interest in the property to someone who is uninvolved with the original transfer. This option is possible because the owner retains full ownership of the property, and also because there is no consideration associated with TOD instruments.
The procedure to collect the property transferred at death often differs from state to state. Generally, the beneficiary records an official copy of the owner’s death certificate, accompanied by an affidavit containing details about the interest conveyed and the recorded TOD instrument. Some states simplify the situation and include a specific affidavit form in their statutes.
Transfer on death deeds have some potential drawbacks, though. For example, recorded transfers on death might interfere with eligibility for state and federal assistance programs, and could trigger an estate recovery process for recipients of Medicaid’s long term care benefits. In addition, some people might encounter difficulty obtaining title insurance or mortgaging the property when such documents appear in a title search.
In most cases, beneficiaries take the property with no warranties of title, which could leave them at risk from outside claims against the property if there were any irregularities in the ownership history (chain of title). Two or more beneficiaries vest as tenants in common, meaning that they each get an individual share of the title. There are some exceptions, though, especially with enhanced life estate deeds, so consult a local attorney with specific questions.
Property held jointly requires both owners to join in the TOD deed to ensure transfer to the named beneficiary. Otherwise, the transfer could be invalidated because the property is automatically distributed to the remaining co-owners. Survivorship tenants wishing to execute TOD deeds should review state laws concerning joint tenancy, or seek legal advice.
Transfer on death instruments are flexible and convenient, and offer owners of real property a responsive tool for estate planning. Even so, they are not necessarily appropriate for everyone. Each circumstance is unique, so take the time to review and understand the relevant laws and customs. Finally, don’t hesitate to contact an attorney with specific questions or for complex situations.
- AFFIDAVIT OF DEED
Affidavit of Deed
Protect Yourself from Unrecorded Real Estate TransfersIn general, a real estate deed must be delivered to and accepted by the grantee(s) to be properly executed or valid. Since most states do not require the grantee’s signature on a deed, the grantor may find it difficult to prove delivery and acceptance. With the Affidavit of Deed form, grantors in a transaction can verify the date of the completed conveyance and protect themselves from future claims or questions when applying for Medicaid or other asset-based benefit programs. An affidavit is a sworn statement, made in front of a notary or other officer authorized to administer oaths. An affidavit of deed confirms delivery and acceptance of a deed by the grantee, and thereby its validity. It is a useful document because most states only require the grantor’s signature on a deed, so it can be difficult to prove delivery and acceptance, both of which are required to have a properly executed deed in many states. With a correctly executed affidavit of deed, grantors in a transaction are able to prove the date of the completed conveyance and protect themselves from future claims regarding ownership of their former property. In addition, Medicaid and other asset-based benefit programs often uncover title problems when processing applications. If the grantor is protected by an affidavit of deed, these issues are generally easier to resolve. Unsuspecting homeowners have found their wages garnished, their credit destroyed, and their tax refunds seized, all because of unrecorded deeds for property they thought they sold. They’ve opened their mail to find bills for back taxes, graffiti-scrubbing services, demolition crews, and trash removal. They answered their front doors to encounter bailiffs brandishing summonses to appear in court. In some cities, people in this situation can be sentenced to probation with the threat of jail if they don’t bring their houses into compliance. There has been much talk about so-called Zombie Titles in the wake of the recent foreclosure crisis. While an affidavit of deed will not directly help in these situations unless the foreclosing lender accepts a deed in lieu of foreclosure and signs an affidavit, it will help in similar situations caused by unrecorded deeds. For example, Tom Homeseller inherited a vacant house and no longer wants it. He sells the house to a company that specializes in managing low-end rental properties. Mr. Homeseller prepares the deed, signs it, and delivers it to the company buying the property. Despite the fact that the company placed tenants in the house (and collected rent from them), they never bothered to record the deed. The company also failed to provide suitable property insurance, to pay the real estate taxes, or even to cover the water and sewer bills. A few years go by and the house catches fire. The company walks away from the property. The tax collectors come after Mr. Homeseller since the deed was never recorded and his name still appears on the title as the owner the property. For the same reason, he is also obligated to pay the removal and cleanup costs of the property as required by local codes. He could even be held responsible for any loss the tenants suffered if the fire was a result of poor maintenance. Without an affidavit of deed, signed by the grantee, Mr. Homeseller will have a difficult time proving that he ever sold the property. These are just a few reasons why the grantor should require the grantee to sign an affidavit attesting to the deed whenever ownership of or interest in real property is transferred from one party to another. Information deemed reliable but not guaranteed, you should always confirm this information with the proper agency prior to acting. The materials available at this web site are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. These materials are intended, but not promised or guaranteed to be current, complete, or up-to-date.
- IF YOU ARE A PURCHASER OF AN INVESTMENT PROPETY YOU NEED TO OBTAIN AN ETOPPEL CERTIFICATE TO AVOID LAWSUITS AND POTENTIAL CLOUDS ON TITLEAn Estoppel Certificate (or Estoppel Letter) is a document often used in due diligence in Real estate and mortgage activities. It is a document often completed, but at least signed, by a tenant used in their landlord’s proposed transaction with a third party. A mortgage lender intending to collateralize a tenant-occupied property or a purchaser intending to purchase such a property will often want to verify certain representations made by the landlord. An estoppel certificate provides confirmation by the tenant of the terms of the rental agreement, such as the amount of rent, the amount of security deposit, and the expiration of the agreement. Further, the estoppel certificate may give the opportunity to the tenant to explain if they may have any claims against the landlord, which may affect a buyer’s or lender’s decision to complete the proposed transaction. Some lease agreements require the tenant to complete such a certificate or to waive their responses by allowing the landlord to complete the estoppel certificate under certain circumstances.[ If the language in the lease so provides, a tenant can be in default under a lease after failing to comply with a request from the landlord for an estoppel certificate. The majority of commercial leases include a provision establishing the requirements for the provision of a tenant estoppel certificate following the landlord’s request.
- PENDING RENTAL MARKET CRISIS FOR RENTERS
At the coronavirus pandemic’s onset in March 2020, millions of people saw cuts to their work hours, and millions more were laid off. The result of this was an inability to pay rent, and in response to lost wages, the federal government offered rental assistance through the CARES Act, while a September executive order directed federal agencies to halt evictions for some renters.One year later, the pandemic’s persistence threatens to expose the cracks in federal and state policy designed to absorb renter shock and prevent landlords from evicting tenants who cannot pay rent. Expiring eviction moratoriums raise the question that housing justice advocates have long wondered: How will we face a potential eviction cliff?Advocates are worried that tens of billions in rent debt coupled with an expiring eviction moratorium will lead to mass evictions. Rent debt (the unpaid rent between the months of March 2020 and April 2021) plagues as many as 14.2 million renter households across the country. There are about 43 million renting households in the U.S., accounting for nearly one-third of the country’s housing market. And much like the pandemic itself, rent debt — and a potential eviction — is a crisis that also disproportionately burdens the least resourced in the country, like poor people, people of color, disabled people, and immigrants.An eviction crisis was brewing even before the pandemic struck, prompted by multiple forms of income inequality and socioeconomic class stratification. According to the non-partisan Economic Policy Institute, wages for low-earning people have not risen in recent decades while income for the very rich has skyrocketed. Taken together, this led to a widening income gap between low-wage workers (who tend to be renters) and those in the top 10 percent of earners (who are likely to be salaried white-collar workers).Because of a system that increases profits for business owners while keeping wages low for workers, renters have only saved 2.4 percent of their income in the past two decades, or about $440 in today’s dollars, according to the Urban Institute. While wages have plateaued, the cost of rent has continued to increase across the country in the past decade — as much as 90 percent in large cities. In some cases, renters are paying over 70 percent of their income on housing costs, leaving little money for food and other expenses while making saving extraordinarily difficult, if not impossible.Behind the economics of the situation are the political conditions: The federal government has never guaranteed affordable home purchases and there is no federal right to housing. American social and legal structures don’t have adequate backstops and protections for renters, and generational wealth is built and sustained through property ownership.Renters who do face eviction see a ripple of negative effects. Landlords are less likely to rent to those who’ve faced eviction proceedings, which means that renters might be forced into choosing homes in neighborhoods with under-resourced schools, fewer hospitals, fewer grocery stores, and less public transportation, meaning that a home isn’t just a home: neighborhoods can be determinative of life outcome.“There are so many renters who are basically facing homelessness,” says Shanti Singh, the communications and legislative director of Tenants Together, a California-based coalition of tenant’s rights organizations. Without state or federal legislative action and broad cultural change, Singh says that California’s 18 million renters could be headed for the eviction cliff.In California, renters face $2.4 billion in rent debt, which Singh explains will remain with families long after individuals are vaccinated. While we know that the economic fallout of the pandemic will persist, it’s unclear if state and federal protections will. Singh says that at the very least, California needs to pass a legislative extension of protection against evictions and institute policies that achieve a just recovery where renters are able to find work again without having to shoulder the burden of repaying thousands of dollars of rent debt.Other than legislative proposals to forgive debt increase wages, and allow renters to save money and build wealth, Singh says that broad cultural shifts are needed to value renters in the ways homeowners are. “Renters blame themselves for what’s happened to them [and] for their inability to pay rent, [but] they did not lose their jobs on purpose,” Singh says. “When you see the ways people take it out on themselves, it speaks to [the] culture that we have to change where we blame the most vulnerable people in our society.”
- PURCHASING A PROPERTY SUBJECT TO
What Buying Subject-To Means
Buying subject-to means buying a home subject to the existing mortgage. It means the seller is not paying off the existing mortgage. Instead, the buyer is taking over the payments. The unpaid balance of the existing mortgage is then calculated as part of the buyer’s purchase price.
Under a subject-to agreement, the buyer continues making payments to the seller’s mortgage company. However, there’s no official agreement in place with the lender. The buyer has no legal obligation to make the payments. Should the buyer fail to repay the loan, the home could be lost to foreclosure. However, it would be in the original mortgagee’s name (i.e., the seller).
Reasons a Buyer May Purchase a Subject-To Property
The biggest perk of buying subject-to real estate is that it reduces the costs to buy the home. There are no closing costs, origination fees, broker commissions, or other costs. For the real estate investor who plans to rent or re-sell the property down the line, that means more room for profits.
For most homebuyers, the primary reason for buying subject-to properties is to take over the seller’s existing interest rate. If present interest rates are at 7% and a seller has a 5% fixed interest rate, that 2% variance can make a huge difference in the buyer’s monthly payment. For example:
- A $200,000 mortgage at a 5% interest rate is amortized at a payment of $1,073.64 per month
- A $200,000 mortgage at a 7% interest rate is amortized at a payment of $1,330.60 per month
- The monthly savings to a buyer under these circumstances is $256.96 or $3,083.52 per year
Another reason certain buyers are interested in purchasing a home subject-to is they may not qualify for a traditional loan with favorable interest rates. Taking over the existing mortgage loan may offer better terms and fewer interest costs over time.Buying subject-to homes is a smart way for real estate investors to get deals. Often, investors will use county records to locate borrowers who are currently in foreclosure. Making them a low, subject-to offer can help them avoid foreclosure (and its impact on their credit) and result in a high-profit property for the investor.
Three Types of Subject-To Options
A subject-to sale does not necessarily involve owner financing, but it could. Whether the seller carries any type of financing depends on whether they wrap the mortgage or the amount of the down payment versus the purchase price.
There are three types of subject-to options:
A Straight Subject-To Cash-To-Loan
The most common type of subject-to is when a buyer pays in cash the difference between the purchase price and the seller’s existing loan balance. For example, if the seller’s existing loan balance is $150,000 and the sales price is $200,000, the buyer must give the seller $50,000.
A Straight Subject-To With Seller Carryback
Seller carrybacks, also known as seller or owner financing, are most commonly found in the form of a second mortgage. A seller carryback could also be a land contract or a lease option sale instrument. For example, let’s say the home’s sales price is $200,000, with an existing loan balance of $150,000. The buyer is making a down payment of $20,000. The seller would carry the remaining balance of $30,000 at a separate interest rate and terms negotiated between the parties. The buyer would agree to make one payment to the seller’s lender and a separate payment at a different interest rate to the seller.
A wrap-around subject-to gives the seller an override of interest because the seller makes money on the existing mortgage balance. For example, an existing mortgage carries an interest rate of 5%. If the sales price is $200,000 and the buyer puts down $20,000, the seller’s carryback would be $180,000. At a rate of 6%, the seller makes 1% on the existing mortgage of $150,000 and 6% on the balance of $30,000. The buyer would pay 6% on $180,000.
The Difference Between a Subject-To and a Loan Assumption
In a subject-to transaction, neither the seller nor the buyer tells the existing lender that the seller has sold the property. The buyer is now making the payments. The buyer did not obtain the bank’s permission to take over the loan. Lenders put special verbiage into their mortgages and trust deeds that give the lender the right to accelerate the loan and invoke a “due-on” clause in the event of a transfer. This clause simply means the loan balance is due in full.
Not every bank will call a loan due and payable upon transfer. In certain situations, some banks are simply happy that somebody—anybody—is making the payments. But banks can exercise their right to call a loan due to the acceleration clause in the mortgage or trust deed, which is a risk for the buyer. If the buyer can’t pay off the loan upon the bank’s demand, it could initiate foreclosure.
If a buyer makes a loan assumption, the buyer formally assumes the loan with the bank’s permission. This method means the seller’s name is removed from the loan, and the buyer qualifies for the loan, just like any other kind of financing. Generally, banks charge the buyer an assumption fee to process a loan assumption. The fee is much less than the fees to obtain a conventional loan. FHA loans and VA loans allow for a loan assumption. However, most conventional loans do not.
Pros and Cons of Buying Subject-To Real Estate
Subject-to properties mean a faster, easier home purchase, no costly or hard-to-qualify-for mortgage loans, and potentially more profits if you’re looking to flip or resell the home.
On the downside, subject-to homes do put buyers at risk. Since the property is still legally the seller’s liability, it could be seized should they enter bankruptcy. Additionally, the lender could require a full payoff if it notices the home has transferred hands. There can also be complications with home insurance policies.
- REPAYING THE FIRST TIME HOME BUYERS CREDITHave you claimed the first-time homebuyer tax credit? For some buyers, it’s time to start repaying Uncle Sam. Introduced in 2008, the first-time homebuyer tax credit originally was a type of interest-free loan. Anyone who purchased a house in 2008 and claimed the credit the following spring on their tax return would have to repay the sum starting two years later. That means the first payment is due in April. The government waived the payback rule for homes purchased in 2009 and after unless the home ceases to be the taxpayer’s main residence within a three-year period following the purchase. Still, the Internal Revenue Service maintains specific rules for getting the full benefit of the tax credit. Here’s what you need to know: The repayment plan If you claimed the first-time homebuyer tax credit in 2008, you have to start paying it back this tax-filing season. Repayment is made in equal installments over 15 years. So, if you claimed the maximum $7,500 credit, you’ll owe $500 per year.To make the payment, you have to file Form 5405, which is available in the free and basic versions of most tax-prep software, including those offered through the Internal Revenue Service’s Free File program. Don’t know how much you owe? Check your mail: The IRS sent letters outlining the amount of credit you received and what you owe this year. Exceptions to the rule There are few ways to avoid repaying the credit, unfortunately. “You can’t get around this,” said Mark Luscombe, principal federal tax analyst for CCH, a provider of tax-prep software. “Even though Congress eliminated the repayment requirement in 2009, they didn’t do it retroactively.” Some exceptions exist, however. For one, if you’ve since gotten divorced and transferred the house to your ex as part of the settlement, you are no longer responsible for payments. Your ex-spouse is. Or, if you’ve sold the home, you owe only up to the amount of gain you made on the sale. In other words, if you pocketed $5,000 from selling your home, you’re on the hook for only $5,000, not the full $7,500, if you claimed the maximum credit. If you incurred a loss, your debt to the IRS gets erased. To see a complete list of exceptions, visit tinyurl.com/co4sng. You could owe the lump sum If you sell your home or stop using the property as your main residence, the 15-year repayment plan goes out the window, and the full credit (or balance) is due in full that tax-filing season. A similar rule applies if you claimed the first-time homebuyer’s credit in 2009 or 2010: For those buyers only, you owe the full credit if the home no longer serves as your principal residence within 36 months of buying the property. Sell after that three-year period, and you don’t owe the credit. The maximum credit in 2009 and 2010 was $8,000 if you were buying a principal home for the first time, or $6,500 if you had been a homeowner. The government considers first-time homebuyers those “taxpayers who have not owned another principal residence at any time during the three years prior to the date of purchase,” according to IRS.gov.
- ASSIGNMENT AND ASSUMPTION AGREEMENTS
The Assignment and Assumption Agreement
An assignment and assumption agreement is used after a contract is signed, in order to transfer one of the contracting party’s rights and obligations to a third party who was not originally a party to the contract. The party making the assignment is called the assignor, while the third party accepting the assignment is known as the assignee.
In order for an assignment and assumption agreement to be valid, the following criteria need to be met:
The initial contract must provide for the possibility of assignment by one of the initial contracting parties.
The assignor must agree to assign their rights and duties under the contract to the assignee.
The assignee must agree to accept, or “assume,” those contractual rights and duties.
The other party to the initial contract must consent to the transfer of rights and obligations to the assignee.
A standard assignment and assumption contract is often a good starting point if you need to enter into an assignment and assumption agreement. However, for more complex situations, such as an assignment and amendment agreement in which several of the initial contract terms will be modified, or where only some, but not all, rights and duties will be assigned, it’s a good idea to retain the services of an attorney who can help you draft an agreement that will meet all your needs.
The Basics of Assignment and Assumption
When you’re ready to enter into an assignment and assumption agreement, it’s a good idea to have a firm grasp of the basics of assignment:
First, carefully read and understand the assignment and assumption provision in the initial contract. Contracts vary widely in their language on this topic, and each contract will have specific criteria that must be met in order for a valid assignment of rights to take place.
All parties to the agreement should carefully review the document to make sure they each know what they’re agreeing to, and to help ensure that all important terms and conditions have been addressed in the agreement.
Until the agreement is signed by all the parties involved, the assignor will still be obligated for all responsibilities stated in the initial contract. If you are the assignor, you need to ensure that you continue with business as usual until the assignment and assumption agreement has been properly executed.
Filling in the Assignment and Assumption Agreement
Unless you’re dealing with a complex assignment situation, working with a template often is a good way to begin drafting an assignment and assumption agreement that will meet your needs. Generally speaking, your agreement should include the following information:
Identification of the existing agreement, including details such as the date it was signed and the parties involved, and the parties’ rights to assign under this initial agreement
The effective date of the assignment and assumption agreement
Identification of the party making the assignment (the assignor), and a statement of their desire to assign their rights under the initial contract
Identification of the third party accepting the assignment (the assignee), and a statement of their acceptance of the assignment
Identification of the other initial party to the contract, and a statement of their consent to the assignment and assumption agreement
A section stating that the initial contract is continued; meaning, that, other than the change to the parties involved, all terms and conditions in the original contract stay the same
In addition to these sections that are specific to an assignment and assumption agreement, your contract should also include standard contract language, such as clauses about indemnification, future amendments, and governing law.
Sometimes circumstances change, and as a business owner you may find yourself needing to assign your rights and duties under a contract to another party. A properly drafted assignment and assumption agreement can help you make the transfer smoothly while, at the same time, preserving the cordiality of your initial business relationship under the original contract.
- EXECUTORS DEED VS. ADMINISTRATORS DEED
What is the difference between an executors deed and an administrators deed?
When dealing with the distribution of an estate after a person dies, you will likely either hear the term executor’s deed and administrator’s dee d. Both are documents designed to officially distribute property and transfer it to the decedents, but an executor’s deed is used when the deceased left a will behind. An administrator’s deed is the document of someone who died without official notification of how he or she wanted their property distributed.
An executor is the person appointed by the deceased to see to it that property is distributed according to the will. The executor may be named in the will itself, or may have been officially given the role before the person in question passed away. The executor may also be an official, such as a lawyer – or it may be a family member, spouse, or friend. This depends entirely on the wishes of the deceased.
Should a person die with property left behind and no will stating how to distribute it, the probate court will take responsibility for the property and appoint an administrator. This person is then given the official power to distribute the property. Legally, none of the family of the deceased has the right to this property until it has been officially handled by the probate court and released to them by the administrator.
Both executors and administrators must prepare official deeds to transfer property titles into the names of those receiving them. The deeds generally must be officially worded and state the process by which the decision to transfer the property was made, whether it is in accordance with a will or by the judgment of the court-appointed administrator. The deed must be witnessed and notarized, and then becomes a legal and binding document.
In any case, after a death, you should strongly consider speaking with a lawyer to handle the distribution of assets and other legal complexities that arise.
- IS AN ORAL AGREEMENT FOR THE SALE OF REAL ESTATE ENORCEABLE IN MISSOURI?
IS AN ORAL AGREEMENT FOR THE SALE OF REAL ESTATE ENORCEABLE?
Generally, a verbal contract is binding in Missouri. However, there are certain circumstances in Missouri when a verbal contract is not enforceable. Those circumstances are described in Missouri’s “statute of frauds”. According to the statute, the following verbal contracts are not binding.
EXECUTOR OR ADMINISTRATOR
Any administrator of an estate will not bind the estate to pay for a claim against the estate unless the agreement is in writing and signed by the administrator.
PROMISE TO PAY THE DEBT OF ANOTHER
In Missouri, a guaranty to pay the debt of another person must be in writing and signed by the guarantor. A guaranty is a contract whereby the guarantor agrees to pay the debt of another in the event of a default. In Capital Group, Inc. v. Collier, defendant was the President of a company. The company entered into a credit agreement with plaintiff. The agreement signed by the defendant said that the undersigned will be liable for the payment “of any and all goods and/or services furnished by [plaintiff]”.
Plaintiff contended that defendant was personally liable for the debt of the company, because he signed the agreement without indicating his title. The court disagreed, holding that the agreement did not clearly show that defendant intended to guaranty payments owed under the agreement.
AGREEMENT IN CONSIDERATION OF MARRIAGE
In the Estate of Kilbourn, Wayne and Marjorie Kilbourn entered into an antenuptial agreement stating that they relinquished all rights to the property of the other. Marjorie then died, and Wayne asserted that her estate owed him for labor and other things he provided to her property when she was alive. The court denied his claim and said that any modification of the antenuptial agreement must have been in a writing signed by Marjorie, as the antenuptial agreement had been made in consideration of the marriage.
CONTRACT FOR THE SALE OF LAND
In Shaffer v. Hines, the administrator of an estate obtained an order from the probate court to sell certain land owned by the estate. Defendant was the high bidder at the auction. Defendant tendered a check to the attorney for the administrator, made payable to the estate. He later stopped payment on the check. The administrator then sued the defendant, claiming that he breached his verbal contract to purchase the land. Both parties agreed that the check was not a written agreement to purchase the land. The court of appeals held that the verbal contract was not enforceable pursuant to Missouri’s statute of frauds.
LEASE LONGER THAN ONE YEAR
A lease for more than one year must be in writing and signed by the party against whom a breach is asserted. A lease for more than one year that is not in writing and signed is not a lease. Rather, the tenants are tenants at will. In fact, pursuant to Section 432.050 RSMo., any lease not in writing and signed creates a tenancy at will. A tenant at will may be terminated with one month’s notice. Missouri courts have interpreted the one month period to encompass one rent period. For example, if rent is due March 1st, the notice must be served on the tenant before March 1st. The tenancy will then terminate on April 1st.
AGREEMENT NOT TO BE PERFORMED WITHIN ONE YEAR
An agreement that cannot be performed within one year must be in writing and signed. In Sales Service v. Daewoo, plaintiff agreed to provide consultation services to defendant over three years in exchange for $40,000 per year. Plaintiff was also to receive a percentage of defendant’s sales during the three years. Plaintiff sent a memo to defendant to this effect, but defendant never signed it. Defendant sent numerous signed memos to plaintiff related to the agreement, but none of them stated that the agreement was for three years. After 23 months, defendant informed plaintiff that defendant would no longer perform the services of the agreement. Plaintiff sued defendant for the amount plaintiff would have received under the rest of the contract. However, the agreement had to be in a signed writing, because it could not be performed within one year.
Most rules have exceptions. Such is true with Missouri’s statute of frauds. In Missouri, if a party committed a fraud in the formation of a verbal contract covered by the statute of frauds, then the courts nonetheless have the discretion to enforce such verbal contract. However, the verbal contract must still conform to all of Missouri’s other requirements for the formation of a contract.
- CHECKLIST OF CLOSING DOCUMENTS
Checklist of Closing Documents for Home Buyers
So, what kind of paperwork will you have to sign when you close? While the process can vary from one borrower to the next, there are some commonalities that apply to most situations. Here’s a checklist of common documents that are needed for the mortgage closing process.
1. The Mortgage Promissory Note
This is one of the most important documents home buyers sign on closing day, and you’ll soon understand why. This doc is also referred to as the “mortgage note” for short, and sometimes just “the note.”
By signing this document, you are agreeing to repay the mortgage loan as outlined within the document itself. The promissory note will contain important details relating to your loan, such as the total amount you owe, the interest rate assigned, the length of the repayment period (e.g., 30 years), and other key details.
It also specifies where the payments are to be sent, and what happens in the even of default (where the borrower fails to repay the debt).
As a home buyer and borrower, it’s crucial that you read this mortgage document at closing and ask questions about anything you don’t understand. The promissory note obligates you to repay the debt in the manner specified. So you want to make sure you understand it prior to signing.
2. The Mortgage / Deed of Trust / Security Instrument
When you sign the previous closing document above (the promissory note), you’re agreeing to repay the loan in the manner outlined within that document. The actual mortgage or deed of trust, on the other hand, is what gives the lender a legal right to take the home back through foreclosure — should you fail to repay the debt.
This closing document is also referred to as the “security instrument.” What you need to know is this: When you hear your lender talk about “the mortgage,” they’re most likely referring to this document in particular.
The deed of trust is a fairly lengthy form, and most of it is boilerplate. As a borrower, you’ll want to pay particular attention to the fill-in-the-blank portions of the deed of trust / security instrument. Those are the sections that will contain information specific to your loan.
3. The deed (for property transfer).
You’ll notice there are two closing documents on this list with “deed” in the title. They’re actually two separate things. Bear with me.
The deed of trust mentioned earlier (a.k.a., “the mortgage”) gives the lender the right to foreclose on the home if you don’t make your payments. The “deed” covered here is the document that transfers ownership of the property from the seller to the buyer.
The terminology here is confusing. So let’s clarify it again:
Deed: Document used to give the new owner rights to the property.
Deed of trust: Document that allows the lender to take the home in default scenarios.
4. The Closing Disclosure
This is another important document home buyers sign at closing. Actually, you should receive this disclosure before the day you close. Federal law requires mortgage lenders to give borrowers a Closing Disclosure document three days prior to the scheduled close. This gives you time to review the disclosure and, if necessary, resolve any issues.
As its title suggests, the Closing Disclosure shows how much money you’ll have to pay on the day you close. This includes whatever down payment is due, along with all of your other closing costs. Collectively, these items are referred to as your “cash to close” amount.
In a typical home-buying scenario, the borrower will bring this amount to the closing in the form of a cashier’s check. A wire transfer is another option, but most people bring a check.
Home buyers should review this mortgage closing document as soon as they receive it. If something looks different from what you expected, be sure to ask your loan officer and/or escrow agent about it. The idea is to get your questions answered and resolve any issues prior to the closing day, to avoid unwanted delays.
5. The initial escrow disclosure statement.
This document, which home buyers usually sign at closing, shows the specific charges you will pay into your escrow account each month (in accordance with the terms of your mortgage agreement).
An escrow account is a special kind of account used to pay property-related expenses. As a homeowner, you pay money into the account. And your mortgage lender or bank then uses those funds to pay your property taxes and home insurance premiums on your behalf.
When you sign the initial escrow disclosure document at closing, you are basically agreeing to the terms of that arrangement.
6. The transfer tax declaration (in some states)
This is a regional closing document that’s required in some states but not in others. So, depending on where you live, you might have to sign this document when you close on a home as well.
It’s primarily used in states (and counties) that charge a property transfer tax. Both the home buyer and seller have to sign the transfer tax declaration, at or before closing.
- WHAT IS A FINAL WALKTHROUGH?
What Is a Final Walkthrough?
A final walkthrough is just like it sounds—it’s a walk through the house you’re about to buy. It’s an opportunity for you and your real estate agent to spend a few hours looking over the place—room by room, inside and out—to check that everything works as it should.
Here’s what to know:
The final walkthrough gives you time to confirm that the seller made agreed upon repairs, and to check that no new issues have cropped up since the home inspection (which happens earlier in the house-buying journey).
It’s really rare (and often really awkward) for the seller and buyer to meet on final walkthrough day. But if the seller does hang around, they should have their realtor there, too.
A final walkthrough is never a waste of time—even if you feel great about the house. Buying a home is probably the biggest purchase you’ll make in your lifetime, and you want to make the most of this chance to give it one more look before you commit!
When Does a Final Walkthrough Happen?
The walkthrough happens as close to closing day as possible—usually a few days before. It can sometimes happen on closing day itself.
This part is important: Having the walkthrough near closing day means the house should be empty, giving you a good look at the whole place as a blank canvas. The seller should have moved out their stuff and hopefully not damaged floors and walls in the process.
Be sure to clarify this with your real estate agent to make sure the timing of the walkthrough is after the seller moves out and not before. Otherwise, you’ll be left wondering if the movers are going to accidentally knock a dent in the wall between the time you last saw the house and the closing that makes it legally yours. You don’t want any nasty surprises on closing day!
How Long Does a Final Walkthrough Take?
It could take one hour. It could take four hours. It all depends on the size of the property you’re walking through! Let’s pretend you’re closing on a three bedroom, two bathroom detached home in five days.
For your final walkthrough, you should set aside at least three hours from beginning to end.
What Should You Take to the Final Walkthrough?
Want to be prepared for anything? Bring these things:
Home purchase agreement: This legally binding contract lays out the terms agreed upon by the seller and the buyer. It covers everything from the appliances included in the purchase to repairs that should be carried out before the final walkthrough.
Home inspection report: This report contains the results of the home inspection. You can use it to review the issues the inspector flagged, then check that the seller made the necessary repairs.
Pen, paper and sticky notes: These are handy to make notes and mark any areas in the house that need further attention—like drywall or mold.
Camera: You’ll want to take photos of anything that concerns you in and around the house.
Something to test outlets: A night-light or phone charger is useful when testing electrical outlets—especially if the seller agreed to fix specific ones around the house.
What to Look For During a Final Walkthrough
Your final walkthrough day has arrived! What do you need to look out for? And let’s not forget the seller. What should they do in the days up until the final walkthrough?
For the Buyer
Outside the Home
The first thing you should do during your walkthrough is go through the agreed upon repairs. Did the seller need to replace a faulty smoke alarm? Was the HVAC overdue for a tune-up? The seller should make all the agreed upon repairs by final walkthrough (and have receipts for everything to give to you.)
Next, is anything missing from the house that you expected to remain? For example, is the flower bed missing a row of shrubs that were there before? You could withhold money from the seller for the shrubs you assumed would stay put.
Here are a few other items to check for:
Do the roof and gutters look okay from ground level?
Is there any debris around the home that the seller should’ve cleared? (You don’t want to be responsible for disposing of tins of paint or bags of cement.)
Are there any signs of pests—like rodent droppings or rotting wood from termites?
Check that the garage door openers are available and work correctly.
Make sure the doorbell works and that the mailbox is in good shape.
Keep in mind, this is not necessarily the time to bring up new issues you didn’t cover in the contract or after the home inspection. It’s more of a final check to make sure there aren’t any glaring issues or unexpected red flags—like a back door that may have been broken since you last viewed the home.
Inside the Home
You should first check that the utilities (water, electricity and gas) are all on. Run major appliances like the washing machine and dishwasher to ensure that they work and don’t cause any leaks. You should also do a brief test of the dryer.
Here are other items to check:
Run the heating and cooling using the HVAC system regardless of the temperature outside!
Is the refrigerator switched on and working as it should be in all compartments?
Run hot and cold water through all the faucets in the home, and check that sinks drain properly and don’t leak.
Briefly test all the showers and bathtubs.
Look for any mold that wasn’t there before. Check in the corners of rooms and in places where there used to be furniture.
Flush all the toilets a few times to ensure they work and fill correctly. Check for leaks.
Run the garbage disposal.
Test all the stove burners.
If there’s an extractor fan above the stove or any bathroom extractor fans, check them.
Test any outlets the inspector flagged for repair and make sure they work.
Test all the light switches and ceiling fans in every room.
Open and shut all the doors and windows and make sure they lock correctly. Are there any sticky doors or missing window screens?
Look at all the walls, ceilings, floors, crown molding and baseboards. Are there caulking and painting repairs the seller agreed to make but hasn’t done? Are there signs of new damages after they moved out?
Are all the fixtures present and in place? Fixtures are items like doorknobs, blinds and ceiling fans. They’re usually fixed into the home and shouldn’t be removed (unless agreed upon). And they’re different from personal property like table lamps or drapes that can be easily moved from room to room. If it looks like the Grinch has been through the house and unscrewed every fixture and light bulb, it can cost you a lot of unexpected cash to replace them.
Finally, is the house broom clean? In other words, does it look like it’s been swept and roughly cleaned? You should expect a basic level of cleanliness from the seller, even if you choose to do further work on the house or give some areas a deeper scrub yourself.
Pay extra attention if it’s a new construction. With new homes, plumbing and HVAC units haven’t had a lot of time to “settle in.” Kitchen cupboards might be misaligned or the laundry room could be missing a shelf. Surprises can (and often do) crop up during a final walkthrough, even with a brand-new home.
For the Seller
Now, the seller also has some key responsibilities by the time the final walkthrough happens. The seller should:
Empty and clean the entire house. It doesn’t need to gleam. It’s okay just to sweep with a broom. Give the bathrooms a quick clean, too.
Make sure you’ve made all the repairs you agreed to in the contract. You should have receipts and records of the repairs for the buyer in case they need to follow up on anything.
Make sure any appliances you’ve agreed to include in the purchase are functioning, clean and empty. Don’t surprise the buyer with leftovers from last night’s takeout in the fridge!
Fill in and paint over holes in walls after you’ve removed items like TV mounts and photos.
Finally, review the purchase agreement so you’re reminded of what you agreed to leave behind. After all, you’re busy moving out and have a lot going on—just like the buyer!
Problems During the Final Walkthrough
These days, the contract between a buyer and a seller will usually give the seller up to a few days before closing to make repairs. Any problems after that deadline should be resolved before closing day. But life happens!
Let’s say you discover the seller didn’t fix the electrics in the basement even though it was one of their agreed upon repairs. What happens next? Here are some options:
You could ask for money due to the seller to be held in escrow (a neutral third party) until the problem is fixed. This is a good option for expensive repairs. If the repairs would only cost a small amount (like $100 or so), then you could agree to a concession. This means the seller pays the buyer to fix the issue and closing day can go ahead as planned.
You could ask for closing to be delayed until the seller arranges to fix the problem. Some title companies and attorneys might also push for a delay until the seller makes the repair.
If the closing timeline can’t be altered, both parties could sign a summary of the walkthrough and note any faults the seller agrees to fix after closing day.
Closing day is so important in the house-buying process. Nobody wants to delay it! So it’s usually in everyone’s best interest to resolve any issues ahead of time.
- SPECIAL WARRANTY DEED
What Is a Special Warranty Deed?
Although general warranty deeds are more common in residential real estate transactions, there is one area where the special warranty deed becomes the norm. This one arena is for foreclosed properties, real-estate-owned (REO), or short-sold properties.
Most Federal National Mortgage Association (FNMA), Housing and Urban Development (HUD), and bank-owned residences sell using this sort of deed. Perhaps one primary reason for the use of special warranty deeds is because the selling authority has no wish to be liable for any situation concerning the property before the seizure.
A special warranty deed is a deed to real estate where the seller of the property—known as the grantor—warrants only against anything that occurred during their physical ownership. In other words, the grantor doesn’t guarantee against any defects in clear title that existed before they took possession of the property.
Special warranty deeds are most commonly used with commercial property transactions. Single-family and other residential property transactions will usually use a general warranty deed. Many mortgage lenders insist upon the use of the general warranty deed.
Special warranty deeds go by many names in different states including covenant deed, grant deed, and limited warranty deed.
A special warranty deed is a deed in which the seller of a piece of property only warrants against problems or encumbrances in the property title that occurred during his ownership.
A special warranty deed guarantees two things: The grantor owns, and can sell, the property; and the property incurred no encumbrances during his ownership.
A special warranty deed is more limited than the more common general warranty deed, which covers the entire history of the property.
Understanding Warranty Deeds
A warranty deed provides the transfer of ownership or title to commercial or residential real estate property and comes with certain guarantees made by the seller. These guarantees include that the property title is being transferred free-and-clear of ownership claims, outstanding liens or mortgages, or other encumbrances by individuals or entities other than the seller.
A special warranty deed—also known as a limited warranty deed—is a variation of the general warranty deed. The general warranty deed is the most common and preferred type of instrument used to transfer real estate titles in the United States.
Both the general and special warranty deeds identify:
The name of the seller—the grantor
The name of the buyer—the grantee
The physical location of the property
The property is free of debt or encumbrances other than those noted in the deed
The grantor warrants that they are the rightful owner of the property and have a legal right to transfer the title.
The grantor warrants that the property is free-and-clear of all liens and that there are no outstanding claims on the property from any creditor using it as collateral.
There is a guarantee that the title would withstand any third-party claims to ownership of the property.
The grantor will do whatever is necessary to make good the grantee’s title to the property.
Both deeds provide the same general protections for the buyer. However, the primary difference between a special warranty and a general warranty deed is how they deal with the timeframe of protection given to title ownership.
Special Warranty Deed
While the use of the word “special” may communicate to a buyer the idea that the deed is of higher quality, the special warranty deed is less comprehensive and offers less protection due to the limited timeframe it covers. In residential property, special warranty deeds are frequently used in foreclosures and the forced sale of the property to satisfy a debt.
A general warranty deed covers the property’s entire history. It guarantees the property is free-and-clear from defects or encumbrances, no matter when they happened or under whose ownership. The general warranty deed assures the buyer they are obtaining full rights of ownership without valid potential legal issues with the title.
With a special warranty deed, the guarantee covers only the period when the seller held title to the property. Special warranty deeds do not protect against any mistakes in a free-and-clear title that may exist before the seller’s ownership. Thus, the grantor of a special warranty deed is only liable for debts, problems, or other encumbrances to the title that they caused or that happened during their ownership of the property. The grantee assumes responsibility for any problems that arise from the previous owners.
As an example, imagine a home has had two previous owners before you. The first owner was a hoarder, and soon the home and yard fell into disrepair. The city’s code enforcement department issued fines against the owner which attached to the property. The owner fell behind on their mortgage and the bank foreclosed, selling the home to the second owner.
To the pleasure of the neighborhood, the new owner fixed the house and cleaned the yard. After 10 years they put the home on the market, and you buy it using a special warranty deed. A few years later you decide to sell the home. However, because the code enforcement liens remain against the property, they could encumber your sell. At the very least, you will need to satisfy the city’s lien to free the title.
Title Searches and Title Insurance
Most times a title search will uncover any liens or claims to the title of a property. A title search is a review of available public records to determine the ownership of property. Attorneys, title companies, and individuals can complete title searches to verify ownership of property. While these searches are extensive, there is always the possibility that something will be missed.
For this reason, most buyers—regardless of the type of warranty deed they use—also purchase title insurance when buying a property. Title insurance is an indemnity insurance policy that protects a buyer from financial claims against the title of a property that they own.
Special warranties allow the transfer of property title between seller and buyer.
The purchase of title insurance can mitigate the risk of prior claims to the special warranty deed.
Special warranty deeds provide narrow protection for the grantees or buyers.
Special warranty deeds cover only the period of ownership of the grantor or seller.
- CERTIFICATE OF TRUST
The Definition of a Certificate of Trust
When creating a revocable living trust, you are acting as a trustee. This means that you can move property within the trust at will, even dissolving it if you wish to do so. When doing business, banks, lenders, and other types of financial institutions may want to confirm that some assets are still within the trust and that you can still access them.
A certification of trust is a document that is used to certify that a trust was established. It provides important information, like the name of the trust, the trustees, and the date it was formed. It is also referred to as an abstract or memorandum of trust. It provides substantiation that property is being held in the trust.
This certificate will do the same job with an irrevocable trust. A certification of trust is a type of self-certification. This means it is made by the trustee as a declaration on penalty of perjury.
What the Certificate of Trust Includes
While the certificate requirements will be different in each state, it generally provides the following:
The identification of the trustee who is in charge of moving, selling, or otherwise giving away property in a trust
It will cite the creation of the trust and any changes that are made from the original trust.
If its a revocable trust, it will explain who is allowed to revoke.
Advantages of a Certificate of Trust
One advantage of a certificate of trust is that it does not include information that you want to keep private. It will not list your beneficiaries, what they are going to inherit, or when they will receive it. This permits your trustee or you to conduct business while not disclosing information that you want to keep private.
What is a Certification of Living Trust?
Another name for the certification of living trust is the certification of inter vivos trust. A living trust is sometimes referred to as a family trust or inter vivos trust. They make sure that all assets acquired are in the name of the trust.
Banks and brokerage firms require that when you are opening a new account you need to provide a copy of the trust. It is also requested from escrows when you purchase real estate. Some don’t want to provide a copy of the trust since it has private information inside, which includes the name of their children. The certificate of inter vivos trust will provide the necessary information to facilitate a transfer from the trust to your banking institution, transfer agent, or other third party.
It will also confirm that the trustee has the authority to act for the trust. It will prevent anyone from getting into the trust that should not, including individuals and other institutions that have no business doing so.
What is a Memorandum of Trust?
A memorandum of trust is also a certification, abstract, or certificate of trust. It is a shorter version of the trust certificate. It provides institutions with information they need, but allows you to keep some components confidential. You are not required to provide the names of beneficiaries. It is almost always accepted in place of a regular trust.
States with Their Own Certification Rules
A lot of states will have their own laws regarding trusts. They state that if a certification of trust has certain information, the institution has to accept it in place of the whole trust document. Many states have certain statutes that lay out the contents of the certification of trust. As long as your certificates meet all state requirements, different institutions have to accept it. Otherwise, it will be liable for any losses that occur.
- IS YOUR HOA UNDER FUNDED?
How Much Should an HOA Have in Reserve?
Choosing to live in a condominium complex or gated townhouse community certainly has many perks as to the maintenance of the property. As part of such a community, homeowners enjoy care-free living while the homeowners association or HOA is tasked with ensuring that all of the common areas of the property are well-maintained and cared for.
This includes having all the landscaping cared for on a weekly basis, the pool (if there is one) cleaned and maintained, and all other physical aspects of the property kept in good working condition. Basically, anything that isn’t connected with the individual unit in which you live is the responsibility of the HOA to repair and replace in a timely manner.
That’s why you pay your HOA fees on a regular basis. A portion of these resources are allocated to the Operating budget, which covers the routine management, upkeep and maintenance of the shared areas of the property. From the pool, to the utilities, to the yard work, your association fees are being used to make sure these parts of the community are tended to on a regular basis and everything is in good working order.
If the Board of Directors is acting responsibly, a portion of these fees are also allocated towards the Reserve budget. This covers repair and replacement costs that will come about over time. Let’s say the driveway needs to be sealed or the exterior of the buildings need to be repainted, your HOA fees will be used for those things, in addition to the various routine costs of managing the property.
But if your HOA doesn’t have enough cash in reserve to cover the expenses of a major repair or replacement, you could be subject to a Special Assessment in which all of the homeowners of the units contained on the property will be expected to come up with their proportionate share of the project cost. Depending on the work that needs to be performed, you could be on the hook for thousands of dollars when you least expect.
Does this mean your Board of Directors is being derelict in their duties? If the special assessment is for a predictable (Reserve) project that failed in plain sight right on schedule, it certainly appears that way!
In some states, an HOA is not bound by law to conduct a Reserve Study. In others, the Board must disclose relevant reserve information to all pertinent parties involved in any real estate transactions within the HOA. Regardless, a Board is responsible to meet the financial needs of the association & comply with all applicable laws.
Reserve Fund Adequacy
Let’s consider those HOAs that do conduct regular Reserve Studies and work towards maintaining “adequate reserves”. A long time HOA trade organization called the Community Associations Institute (CAI) worked closely with a number of Reserve Study professionals to develop the following definition of reserve adequacy: “Adequate Replacement Reserves” is defined as a Replacement Reserve Fund and stable and equitable multi-yr Funding Plan that together provide for the timely execution of the association’s major repair and replacement expenses as defined by National Reserve Study Standards, without reliance on additional supplemental funding.
You’ll notice that the definition contains two parts: having enough cash -and- not relying on outside funding sources like loans or Special Assessments.
A current Reserve Study is the only way to determine reserves adequacy. That’s because a Reserve Study contains a funding plan designed as much as possible to avoid the need for outside funding sources. Absent a Reserve Study, it’s just a guess!
The Reserve Study examines the basics of the HOA, things like age and condition of the building, as well as all of the features and common area amenities that the HOA is responsible to maintain.
The study is a forecast of sorts, estimating when certain components of the property would be due for a repair or a replacement and the expenses associated with having this work performed at that time. While the Reserve Study is certainly a projection, it is based on projects that are both inevitable and predictable! The study provides Boards with numbers to work with in attempting to fund reserves at the same pace of the property’s deterioration and ahead of repair or replacement costs.
It’s possible that your HOA is currently underfunded and the Board will be forced to rely on a Special Assessment at the time of an expensive repair or replacement of something around the property.
Resources on Reserve
But let’s assume for the sake of argument that your homeowners association is taking all of the necessary steps to ensure that the property’s reserves are well funded and prepared for both inevitable and predictable future repair and replacement expenses. How much should the HOA have on hand to address these costs?
Although every property is unique, most reserve experts will suggest that the reserves be funded at 70% or higher of the property’s calculated deterioration. A reserve fund at that level will, in most cases, mean a low risk of Special Assessment, and satisfy the definition of reserve adequacy as long as responsibly sized contributions continue to be made. However, HOAs with weaker reserve funds (i.e., less than 30% funded) can also satisfy adequacy requirements. Despite being underfunded, they can achieve reserve adequacy by adopting an aggressive funding plan that avoids reliance on outside funding sources.
Whether or not the homeowners association takes action to ensure the money is available to complete repairs and replacements in a timely manner is a decision the Board will need to make. It is important for the owners of the various units of the property to have confidence that the Board is fulfilling their responsibility in this regard. Studies have shown that homes in condominium associations with strongly funded reserves sell for 12% more than comparable homes in underfunded associations.
- EFFECTS OF INFLATION ON REAL ESTATE
Ways Inflation Affects the Real Estate Market
Inflation from January 2007 through December 2016 was extremely low, averaging only 1.77% per year in the U.S. and 2009 was actually negative (i.e. falling prices = deflation). Although 2017 has seen a bit more inflation it is still low by historical standards. In times of low inflation, inflation is a vague term that economists throw around when they’re trying to make one point or another. However, when inflation begins rising and hitting your pocket, the reality begins to set in. And it can have a quite noticeable effect on, not only the goods you buy at your favorite big box store, but even on real estate. Let’s take a quick look at some ways rising (or sinking) prices get their tentacles into that new house being built or the one for sale down the street.
Stop and think for a moment about the different materials go into building a house. This is an example where the final product is a sometimes less-than-obvious sum of its parts. A partial list would include wood, copper, concrete, glass, steel, etc. Do you notice a pattern? These are all basic commodities to one degree or another, and there are many more that go into a house before it is finished. When the prices of these basic materials go up, it costs your friendly neighborhood construction company more money to build a house. They can choose to either make less profit (not likely) or raise prices. Guess what they usually choose? So price inflation drives up basic materials costs making new houses more expensive.
Money Gets Expensive
Another effect of rising inflation is that interest rates rise due primarily due the the FED raising the Federal Funds Rate (i.e. the interest rate at which banks lend reserve balances to other banks overnight). The FED does this in an effort to quench the fires of inflation, Thus it becomes more expensive to borrow money. So fewer people are able to afford loans, which causes demand to drop and fewer houses to be built. In times when less money is borrowed, economic growth in general becomes suppressed.
A Shift Into Rentals
The higher cost of borrowing also tends to shift people into rentals rather than the home buyer market. Obviously, this is bad for single family residential sales but can be a boon for landlords, perhaps even motivating them to build more multi-unit structures. Plus unlike mortgages, rents can be raised to compensate the landlord for inflation thus affecting those who can least afford it the most.
Houses Provide Protection Against Inflation
As mentioned above, once you lock in your mortgage, as inflation cuts the value of each dollar, you are able to pay off your mortgage with ever less valuable dollars. In addition, since a house is a commodity, it tends to appreciate pretty much in sync with rising inflation. So although owning a home won’t make you rich it does provide some protection against rising prices. Unlike your personal home, investing in income producing Real Estate however, can make you rich by getting your tenants to pay off your mortgage. The one caveat where a mortgage can bite you during rising inflation is if you have an “Adjustable” mortgage where your mortgage payment can be increased due to rising interest rates.
What Do Foreclosures Have to Do With It?
Follow this chain of logic and you’ll understand why an increase in foreclosures is another result of inflation. We’ve already discussed how growing inflation makes everything you buy more expensive. Let’s say a family has a mortgage they can barely afford with prices the way they are. Throw higher prices for food, gas, and all of life’s other basics into the mix and suddenly they’re having to choose between eating supper or paying the house note. This is how waves of foreclosures start like we had back in 2007. It is also a time when lenders become more predatory in their willingness to approve loans. It is something that borrowers have to be very careful about. And another reason we caution you against Variable (or Adjustable) mortgages.
The focus here has been rising prices, which we call Price inflation which is commonly the result of “Monetary Inflation” (i.e. an increase in the money supply). Though inflation is much more common than its opposite, known as deflation – or sinking prices – there have been a few short instances of the latter in recent memory. At first, it seems that dropping prices would be a good thing. The problem is that it is usually associated with sinking demand brought on by high unemployment or by a contracting money supply due to a market crash. In the long run, it’s not a good thing for the housing market since it can result in falling housing prices as well. And once people see that they owe the bank more than their house is worth many end up defaulting on their mortgage which in turn increases the supply of houses on the market thus driving house prices down even further.
- WHAT IS OWNER FINANCING?
Buying or selling a home can be a complicated process. Sometimes, homebuyers have trouble qualifying for a mortgage. Other times, sellers yearn to cut through the red tape and net potentially more profit.
The solution for both may be owner financing. Although not very common today, owner financing is when the seller offers direct financing to the buyer instead of or in addition to a mortgage.
What is owner financing?
Owner financing occurs when the owner of a property for sale provides partial or complete financing to the buyer directly, after the buyer makes a down payment.
The agreement here is very similar to a mortgage loan, except the owner of the home owns the debt instead of a bank or other lender.
Owner financing is usually not reported on the buyer’s credit report. There is typically a substantial down payment required (usually 10 percent to 15 percent) that makes up for the fact that the financing is usually not dependent on the buyer’s income or credit history — although sellers are advised to perform a credit check regardless.
Chris McDermott, real estate investor and broker of Jax Nurses Buy Houses in Jacksonville, Florida, has offered owner financing himself on investment properties he’s sold. McDermott says it can be a common practice in some areas, “specifically for rural land or homes that a seller owns free and clear.”
Owner financing can be beneficial to buyers who aren’t eligible for a desired loan from a mortgage lender, or if the lender only qualifies the buyer for a portion of the purchase price. In the latter scenario, the buyer might be able to take out a first mortgage from the lender for that portion, and then obtain owner financing for the shortfall.
How does owner financing work?
In most owner financing arrangements, the owner (seller) records a mortgage against the property, which is sold via deed transfer to the buyer.
Typically, the owner lets the buyer take over and move into the house without a mortgage, but after the buyer makes a down payment the buyer signs a promissory note and makes monthly payments to the seller, but the owner keeps the title to the home as leverage in the deal.”
The buyer makes mortgage payments to the seller over an agreed-upon amortization schedule at a specified fixed interest rate. Typically, the seller will not hold that mortgage for longer than five or 10 years. After that time, the mortgage commonly comes due in the form of a balloon payment owed by the buyer.
To make that balloon payment — generally a large lump sum — the buyer usually (by that time) qualifies for and obtains a mortgage refinance, likely for a lower interest rate.
Alternatively, the buyer can get a first mortgage from a bank or other lender while the seller takes a second interest in lieu of some of the down payment.
Say you want to buy a $200,000 house but the bank will only loan you $160,000. If the seller will take back a second mortgage for $40,000, the deal may be able to close.
Just because a seller is providing the funds doesn’t mean the buyer won’t pay closing costs which costs can include deed recording and title fees.
The good news is that the costs “are usually substantially less than you’d pay with bank financing.
These are some of the different types of owner financing you might encounter:
Second mortgage – If the homebuyer can’t qualify for a traditional mortgage for the full purchase price of the home, the seller can offer a second mortgage to the buyer to make up the difference. Typically, the second mortgage has a shorter term and higher interest rate than the first mortgage obtained from the lender.
Land contract – In a land contract agreement, the homebuyer makes payments to the seller on an agreed-upon basis. When the buyer finishes the payment schedule, they get the deed to the property. A land contract typically doesn’t involve a bank or mortgage lender, so it can be a much faster way to secure financing for a home.
Lease-purchase – With a lease-purchase agreement, the homebuyer agrees to rent the property from the owner for a period of time. At the end of that time, the buyer has the option to purchase the home, usually at a prearranged price. Typically, the buyer needs to make an upfront deposit before moving in and will lose the deposit if they choose not to buy the home.
Wraparound mortgage – Home sellers can use wraparound financing when they still have an outstanding mortgage on their home. In this situation, the owner agrees to sell the home to the buyer, who makes a down payment plus monthly loan payments to the owner. The seller uses those payments to pay down their existing mortgage. Often, the buyer pays a higher interest rate than the interest rate on the seller’s existing mortgage.
Example of owner financing
Say a seller advertises a home for sale with owner financing offered. The buyer and seller agree to a purchase price of $175,000. The seller requires a down payment of 15 percent — $26,250. The seller agrees to finance the outstanding $148,750 at an 8 percent fixed interest rate over a 30-year amortization, with a balloon payment due after five years.
In this example, the buyer agrees to make monthly payments of $1,091 to the seller for 59 months (excluding property taxes and homeowners insurance that the buyer will pay for separately.
At month 60, a balloon payment of $141,451.27 will be due. The seller will end up collecting $233,161.27 after 60 months, broken down as:
$26,250 for the down payment
$58,161.27 in total interest payments
Total principal balance of $148,750
Pros and cons of owner financing
No closing costs
Flexible down payment requirement
Less strict credit requirements
Higher interest rate
Not all sellers are willing
Many deals involve large balloon payments
Many lenders won’t allow unless seller pays remaining balance
For home sellers
Potential for a good return if you find a good buyer
Title protected if the buyer defaults
Receive monthly income
Agreements can be complex and limiting
Many lenders won’t allow unless you own home free and clear
Potential for buyer to default or damage home, meaning you’ll have to initiate foreclosure, make repairs and/or find a new buyer
Tax implications to consider
Owner financing offers advantages and disadvantages to both homebuyers and sellers.
The buyer can get a loan they otherwise could not get approved for from a bank, which can be especially beneficial to borrowers who are self-employed or have bad credit.
However, the interest rate charged by a seller is usually much higher than a traditional mortgage lender would charge and the balloon payment that comes due after a few years will be significant.
The advantages to the seller are manifold. Owner financing allows the seller to sell the property as-is, without any repairs needed that a traditional lender could require.
Additionally, sellers can obtain tax benefits by deferring any realized capital gains over many years. Depending on the interest rate they charge, sellers can get a better rate of return on the money they lend than they would get on many other types of investments.”
The seller is taking a risk, though. If the buyer stops making loan payments, the seller might have to foreclose, and if the buyer didn’t properly maintain and improve the home, the seller could end up repossessing a property that’s in worse shape than when it was sold.
How to buy a home with owner financing or offer it
If you can’t get the financing you need from a bank or mortgage lender, a skilled real estate agent can help you find properties with owner financing.
Just be sure the promissory note you sign is legally compliant and clearly lays out the terms of the deal. It’s also a good idea to revisit a seller financing agreement after a few years, especially if interest rates have dropped or your credit score improves — in which case you can refinance with a traditional mortgage and pay off the seller earlier than expected.
If you want to offer owner financing as a seller, you can mention the arrangement in the listing description for your home.
Be sure to require a substantial down payment — 15 percent if possible. Find out the buyer’s position and exit strategy, and determine what their plan and timeline is. Ultimately, you want to know the buyer will be in the position to pay you off and refinance once your balloon payment is due.
It’s important to have a real estate attorney prepare and carefully review all the documents involved, as well, to protect each party’s interests.
- HOW TO REMOVE A LIS PENDENS NOTICE
A party to a lawsuit intended to affect real estate may record a notice on the land records containing the names of the parties, the name and object of the suit, the court where it will be heard, and a description of the property. This is called a notice of lis pendens, which signifies pending litigation. This notice binds any subsequent acquirer of an interest in the real estate to the result of the lawsuit just as if the acquirer were a party to the lawsuit.
The law has procedures a property owner may follow to get the lis pendens notice removed from the land records. If the underlying lawsuit has been filed, the property owner may file a motion with the court to have it discharged. If the underlying lawsuit has not been filed, the property owner may file an application for discharge, together with a proposed order and summons.
In addition, the law allows any interested party to file a motion to discharge a notice of lis pendens if it is not intended to affect property, if certain procedural requirements were not complied with, or the notice never became effective or has become ineffective.
APPLICATION OR MOTION FOR PROBABLE CAUSE HEARING FOR DISCHARGE OF LIS PENDENS NOTICE
The property owner may either make application for, or file a motion for, a hearing to determine whether the notice of lis pendens should be discharged. An application may be made if the litigation affecting the property is not yet before the court; a motion may be made if such litigation is already pending. A motion may be made at any time unless an application was previously ruled upon.
The application must be made to the court where the underlying litigation is planned and must be accompanied by a proposed court order and a summons. The application, order, and summons must be substantially the same as those, which appear as suggested forms in the law. The court must give reasonable notice of the hearing to the person who filed the lis pendens notice. In no event may the notice be given less than seven days before the hearing.
HEARING TO DISCHARGE LIS PENDENS NOTICE
The burden of proof at the hearing is on the person who filed the lis pendens notice to establish that (1) there is probable cause to sustain the validity of his claim, and (2) if the notice involves an allegation of an illegal, invalid, or defective transfer of a real estate interest, the transfer occurred fewer than 60 years before the court claim. After the hearing, the court may either deny the application or motion or order that the lis pendens notice be discharged.
APPLICATION TO STAY DECISION OF COURT PENDING APPEAL
Either party may appeal the court’s decision within seven days of the date it is handed down. The party taking such an appeal may within the seven-day period, file an application with the court which rendered the decision requesting a stay of the decision’s effect pending the appeal. The application must state the reasons for the request and a copy must be sent to the adverse party. A hearing on the application must be held promptly.
If the party taking the appeal gives a bond with surety in an amount the court deems sufficient to indemnity the adverse party for any damages, which might result from the stay, the court must stay the decision pending appeal.
MOTION TO DISCHARGE LIS PENDENS NOTICE BY ANY INTERESTED PARTY
An interested party (as opposed to just the property owner) may file a motion requesting the court to discharge a lis pendens notice in any case in which:
1. the lis pendens is not “intended to affect real property” as defined by law;
2. the recorded lis pendens notice does not contain the information required by law;
3. the property owner did not receive notice of the litigation the recording of the lis pendens notice as required by law; or
4. for any other reason the lis pendens notice never became effective or became in effective.
RECORDING OF DISCHARGE OF LIS PENDENS OR STAY
Any order of discharge or any order of a stay takes effect when a certified copy is recorded in the office of the town clerk in which the order of lis pendens was recorded. The court clerk is not permitted to provide any certified copies of the order until the time for taking an appeal elapses or, if applicable, until a decision is rendered relative to the granting of a stay.
EFFECT OF RECORDING ORDER OF DISCHARGE
When a certified copy of an order discharging a lis pendens notice has been recorded, the lis pendens no longer constitutes constructive notice of the litigation to any third party who acquires an interest in the property that is subject to the litigation.
DURATION OF NOTICE OF LIS PENDENS
No list pendens notice can be valid as constructive notice for more than 15 years unless it is re-recorded within 10 years after it was first recorded and the recording party serves a copy of the notice on the record owner within 30 days after it is re-recorded. If a lis pendens notice is re-recorded it is only valid for 10 years from the re-recording date.
- MISSOURI MERCHANDISING PRACTICES ACT
Our office gets calls everyday from home purchasers who discover after taking possession that there is a Material Defect to the property purchased – defective sewer line, defective foundation, defective roof, defective mechanical systems, defective plumbing, and the remedy in these cases usually falls under the Missouri Merchandising Practices Act.
The Missouri Merchandising Practices Act (MMPA) exists to protect consumers.
Missouri’s Supreme Court has observed that the unfair practices declared unlawful by the MMPA are exceedingly broad and, for better or worse, cover every practice imaginable, and every unfairness to whatever degree. Because attorneys may recover attorneys’ fees if a defendant is held liable for an MMPA action, it may be easier to find a lawyer to take your case, even if the damages are not significant.
The elements of an MMPA Claim
There are four elements to an MMPA claim: (1) the plaintiff purchased, or attempted to purchase, merchandise (which includes services) from a defendant in the state of Missouri; (2) the plaintiff’s purchase of, or attempt to purchase, merchandise (or services) was for personal, family, or household purposes; (3) the plaintiff suffered an ascertainable loss of money or property; and (4) the plaintiff’s ascertainable loss was a result of an action by a defendant that has been declared unlawful by § 407.020 RSMo.
The MMPA statute declares many things to be unlawful. For example, the MMPA specifically prohibits “any deception, fraud, … [or] misrepresentation.” It also prohibits “the concealment, suppression, or omission of any material fact.” However, reliance is expressly not an element of the MMPA. Thus, the fourth element requires the plaintiff to establish that his or her ascertainable loss was the result of either deception or fraud or a misrepresentation or the concealment or suppression or omission of any material fact by a defendant. Any one of these acts is sufficient to satisfy this element. Importantly, the MMPA specifically states that these acts can be before, during, or after the sale. The only requirement for this fourth element is that the ascertainable loss be the result of the unlawful act. There is no requirement that the ascertainable loss occur before the sale. Thus, damages which arise after the sale are also recoverable (as they would be in other cases).
If these elements are satisfied, then the plaintiff may recover his or her actual damages. Importantly, actual damages are not limited to the ascertainable loss. For instance, emotional distress damages may be recoverable.
Reliance is not an element
The MMPA is a strict liability statute. As such, it does not require intent on the part of the actor, but it also does not require reliance. Indeed, even a consumer who admits that they did not believe the false statements may still recover damages arising from those false statements. Hess v. Chase Manhattan Bank, USA, N.A., 220 S.W.3d 758, 774 (Mo. banc 2007) (“a fraud claim requires both proof of reliance and intent to induce reliance; the MPA claim expressly does not.”) (citing 15 C.S.R. § 60-9.110(4)).
Likewise, the MMPA does not contain an intent requirement for civil liability for actual damages. Thus, even if the defendant does not know whether a representation is not truthful or otherwise know that it is committing an unlawful act, that does not defeat a plaintiff’s claim under the MMPA. See State ex rel. Webster v. Areaco Inv. Co., 756 S.W.2d 633, 635 (Mo. App. 1988) (“It is the defendant’s conduct, not his intent, which determines whether a violation has occurred.”).
Damages recoverable under the MMPA
Upon a showing of the four elements of the MMPA claim, a plaintiff is permitted to recover all of his or her “actual damages.” The statute does not define what constitutes “actual damages.” There is little question that out-of-pocket losses and diminution of value damages are recoverable. But these are not the only types of actual damages which may be recovered under the MMPA. In addition, to the damages discussed below, a plaintiff may in certain circumstances recover punitive damages.
The law is clear that inconvenience damages are recoverable under an MMPA claim. Crank v. Firestone Tire & Rubber Co., 692 S.W.2d 397, 408 (Mo. App. 1985) (“when the inconvenience is coupled with a compensable element of damage, the inconvenience occasioned by the breach may be compensated where it is supported by the evidence and shown with reasonable certainty.”).
Garden variety emotional distress damages
These types of emotional distress damages are recoverable in MMPA cases. In Lewellen v. Franklin, the Missouri Supreme Court En Banc affirmed a judgment in an MMPA case which awarded a consumer damages for “damage to her good credit”, “stress of being unable to make her loan payments” and “fear that she would go to jail.” 441 S.W.3d 136, 147 (Mo. banc 2014) (emphasis added). Likewise, in Dierkes v. Blue Cross & Blue Shield of Mo., the Missouri Supreme Court recognized that in fraud cases the benefit of the bargain rule can be inadequate, in which case “other measures of damages may be used.” 991 S.W.2d 662, 669 (Mo. banc 1999)
Garden variety emotional distress damages do not require medical diagnosis
Garden variety emotional distress damage are “ordinary or common place emotional distress, which [are] simple or usual.” Recently, the Missouri Court of Appeals, Western District has held that garden variety emotional distress damages such as “humiliation may be established by testimony or inferred from the circumstances. Intangible damages, such as pain, suffering, embarrassment, emotional distress, and humiliation do not lend themselves to precise calculation.” Soto v. Costco Wholesale Corp., 502 S.W.3d 38, 55 (Mo. App. 2016). Specifically, these damages do not require medical testimony, and may be supported solely based upon testimony of the plaintiff and lay witnesses.
In conclusion, the MMPA is very broad and can be used against parties who use any unlawful act or deceptive practice in connection with the sale or services of a product for personal, family, or household purposes. You will see the MMPA asserted a lot of the time in Missouri class action cases where the damages may be minor but the defendant deceived hundreds or even thousands of consumers. You will also have a better chance of a lawyer taking your case because the MMPA allows for attorneys’ fees if you win your case.
- NOMINEE MANAGER
For many, the use of a nominee manager is a simple and effective way to maintain private business matters private and to make the business owner a less attractive target for potential lawsuits, solicitations or other nuisances.
Nominee manager service is not about hiding things. It is about keeping private business matters private vis-a-vis on line records readily available to the general public. The Secretary of State (or equivalent agency) in each jurisdiction in the U.S. looks to that jurisdiction’s business statutes to determine what information it must collect and maintain in order for business entities to remain in compliance with the minimum disclosure requirements in that jurisdiction. For LLCs, the general requirement is to list the managers or the members of the LLC. Corporate Creations can provide a corporate nominee to appear as manager of the LLC in state on line public records. This is significant because the publicly available information relating to the LLC becomes that of the corporate nominee manager, not the business owner’s. The owner can now limit and better control who has their information. Further, the owner of the LLC retains all operational authority and remains in full and complete control of the LLC. The owner retains sole signature authority over any bank or other financial accounts, the owner retains the sole right to enter any lease arrangements or other contracts, etc. The corporate nominee does not touch or have any access or signature authority over any funds or company bank or financial accounts associated with the LLC. Also, the owner of the LLC can, at any time, remove the nominee manager from the LLC if they so choose. The nominee manager thus preserves the business owner’s privacy by satisfying the legal requirement for an LLC to have one or more listed managers.
- KANSAS CITY MISSOURI IS A GREAT CITY TO LIVE AND INVEST
The Kansas City Real Estate Market: Investor’s Guide For 2021
Written by Jeff Rohde
Kansas City has been named as one of the top 10 housing markets for buyers to consider. Looking at the recent performance statistics for the real estate market in Kansas City, it’s easy to understand why.
Active listings are down by nearly 50% year-over-year, while median sales prices have increased by almost 15% over the last 12 months. As homes become more expensive and harder to find, many households in Kansas City are choosing to rent rather than own.
In fact, growth and demand are two words that best describe the real estate market in Kansas City, according to one local economist. Today, it seems like Kansas City is growing everywhere you look: downtown, in the first-ring suburbs, and in the outlying areas.
Kansas City, Missouri (nicknamed ?KC? for short) is the largest city in the state and spans the Missouri and Kansas state lines. Located where the Missouri and Kansas Rivers meet, KC is known for its jazz music, pro sports teams, and delicious Kansas City-style barbecue. The economy is diverse, and the government is pro-business, two of the many things that help keep the real estate market in Kansas City growing strong and steady.
There are about 500,000 people in Kansas City itself and more than 2.1 million residents in the metropolitan area. The population of Kansas City has grown faster than St. Louis and other large Midwestern cities including Cincinnati and Cleveland.
Key Population Stats:
With more than 2.1 million residents, Greater Kansas City is the 38th most populated metropolitan area in the U.S.
Population of Kansas City has grown by 0.73% year-over-year.
The population of the nine-county Kansas City metro area is about the same as Austin, Las Vegas, and Pittsburgh, based on data from the Mid-America Research Council.
People moving to Kansas City from other parts of the country account for about 50% of KC’s population growth, according to a recent report from station KCUR in Kansas City.
Over the last 10 years the population of Kansas City grew by 7%, and is expected to add another 400,000 residents by 2040.
Unemployment in the Kansas City MSA is down to just 4.5%, according to the BLS (as of Oct. 2020). The U.S. Bureau of Labor Statistics reports that some of the employment sectors in Kansas City showing the fastest signs of recovery include construction, trade and transportation, education and health services, and government.
Kansas City is a major transportation hub and is also home to high-growth tech sectors like IT and finance. Going forward, it’s likely that employment in the management and business, sales and office, and production and transportation sectors in Kansas City will continue to match or outpace U.S. averages.
Key Employment Stats:
GDP of Kansas City is nearly $138.5 billion, according to the Federal Reserve Bank of St. Louis, and has grown by more than 38% over the last 10 years.
Kansas City, Missouri accounts for 56% of the metro area workforce with employment growing by 0.85% over the last 12 months.
Largest employment sectors in Kansas City are education and health services, professional and business services, retail, trade, and manufacturing and construction.
Major companies with headquarters in Kansas City include American Century Investments, Commerce Bancshares, Dairy Farmers of America, Garmin, Hallmark Cards, Interstate Bakeries (maker of Twinkies and Wonder Bread), Sprint Nextel, and one of the largest freight shipping companies in the world, YRC Worldwide.
Ford and General Motors both have large manufacturing and assembly facilities in the Kansas City metro area, and Sanofi-Aventis has one of the largest drug manufacturing plants in the U.S. in south Kansas City.
Largest federal government employers in Kansas City include the Department of Defense, Internal Revenue Service, Social Services Administration, and the Department of Veterans Affairs. The Kansas City Federal Reserve Bank is also headquartered here.
Companies in Kansas City that recently created new jobs include Amazon Flex, CarMax, Hostess, U.S. Department of Agriculture, and Zillow Home Loans.
Major universities in the Kansas City metro area include University of Kansas, University of Missouri-Kansas City, University of Central Missouri, and Park University.
92.8% of people in the metro area are high school graduates or higher, while 37.7% hold a bachelor’s degree or advanced degree.
Four major Interstate highways (I-70, I-49, I-35, and I-29) pass through Kansas City.
Major cities less than 800 miles from KC include Atlanta, Chicago, Dallas, Denver, Houston, and Minneapolis.
Freight railroads serving Kansas City include Burlington Northern Santa Fe and Union Pacific.
Shipping channels in Kansas City have 41 dock and terminal facilities in the metro area.
Kansas City International Airport (KCI) is served by major airlines including Air Canada, American, Delta, Southwest, and United.
Real Estate Market
The Kansas City real estate market is booming with buyers ‘snatching up new homes especially in the mid-price range.?
As FOX4 recently reported, the surge of home buying in the Kansas City metropolitan area was completely unpredictable, even while building permits are up 15% compared to this time last year. Rising construction and materials costs help to make resale homes an attractive option, which further increases the demand for single-family homes in Kansas City.
Key Market Stats:
Zillow Home Value Index (ZHVI) for Kansas City is $176,763 (as of November 2020).
Home values in Kansas City have increased by 10.8% year-over-year and are forecast to growth by another 11.0% in the next 12 months.
Over the past five years home values in Kansas City have grown by 51%.
Median list price of a single-family home in Kansas City is $215,000 based on the most recent report from Realtor.com (Nov. 2020).
Median listing price per square foot for a home in Kansas City is $120.
Listing prices for homes in Kansas City have increased by 16.7% year-over-year.
Median sales price for homes in the Kansas City area is $250,000.
Of the 217 neighborhoods in Kansas City, KCI – 2nd Creek is the most expensive with a median listing price of $410,000.
Most affordable neighborhood for home buyers in Kansas City is Ruskin Heights where the median price of a home is $91,300.
Attractive Renters? Market
Kansas City is ranked as one of the top markets for renters by WalletHub. The report measures key criteria such as activity in the rental market, affordability, and quality of life rating. A low supply of housing inventory may also be helping to drive the demand for single-family rentals in Kansas City. As the Kansas City Business Journal notes, the metro area had the second-largest decline in active housing supply in the entire country.
Key Market Stats:
Average rent in Kansas City is $1,037 per month based on the most recent research from RENTCaf? (as of Oct. 2020).
Rents in Kansas City have increased 3% year-over-year.
Over the past three years rents in metropolitan Kansas City has grown by nearly 9.2%.
41% of the rental units in Kansas City rent for more than $1,000 per month.
Renter-occupied households in Kansas City make up 45% of the total occupied housing units.
Neighborhoods in Kansas City with the lowest rents include Blenheim Square – Swope Park Campus, Mount Cleveland – Sheraton Estates, and Oak Park where rents all average $660 per month.
The most expensive neighborhoods to rent in Kansas City include Wendell Phillips, Paseo West, and Columbus Park where rents range between $1,391 and $1,463 per month.
Historic Price Changes & Housing Affordability
Each month Freddie Mac publishes its House Price Index report (FMHPI) that allows rental property investors to track both short- and long-term historical price trends.
The most recent FMHPI from Freddie for home price trends in metropolitan Kansas City reveals:
October 2015 HPI: 127.45
October 2020 HPI: 187.48
5-year change in home prices: 47.1%
One-year change in home prices: 12.1%
Monthly change in home prices: 1.0%
Affordability is another tool real estate investors can use to help forecast the current and future demand for rental property in Kansas City. According to the annual report from Kiplinger that tracks the affordability of housing in the top 100 U.S. markets:
Since the last real estate cycle market peak in May 2006, home prices in Kansas City have decreased by 0.3%.
Since the last real estate cycle market bottom in March 2012, home prices in Kansas City have increased by more than 66%.
Kansas City has an affordability index of 3 out of 10, meaning the metro area is one of the more affordable places to own a home in the U.S.
Quality of Life
Cost of living has a major effect on the quality of life in an area. According to the cost of living calculator from NerdWallet, the cost of living in Kansas City is more than 40% less than big expensive urban areas such as San Francisco, New York City, and Seattle.
Key Quality of Life Stats:
Forbes ranks Kansas City as one of the best places for business and careers, job growth, and education in the U.S. with a cost of living 3% below the national average.
Total per capita tax burden in Kansas is about 10% less than the national average.
Kansas City is one of the least-congested metro areas in the U.S. and has one of the shortest commuting times.
The RideKC Bike system has 42 locations across Kansas City, and the city plans to build 1,000 miles of bike lanes and pedestrian walks over the next 20 years.
KC Streetcar serves the Central Business District, and connects the River Market, Crown Center, Union Station, and Crossroads Art Districts.
Kansas City has more boulevards than any city in the world except Paris, earning it the nickname ?Paris of the Plains?.
The NFL Kansas City Chiefs, MLB Kansas City Royals, and MLS Sporting Kansas City soccer teams give residents of Kansas City and real estate investors plenty to cheer about.
- Missouri real estate sex offender law
Missouri prohibits sex offenders from living within 1,000 feet of a public or private school up to the 12th grade or childcare facility which existed at the time the offender established his/her residency. In addition, sex offenders are prohibited from working or loitering within 500 feet of a school, childcare facility, or public park with playground equipment or a public swimming pool. Residency restriction policies are universally applied to all registered sex offenders.
- MAKING CHANGES AFTER CONSTRUCTION STARTS
MAKING CHANGES AFTER CONSTRUCTION STARTS
Have you always wondered how you go about making changes to your house plans once the project is already underway? Or, perhaps you are in the middle of a project right now, and you are wondering how to proceed. The good news is that you can make changes to an extent. Once parts of your new home are in place, you wont be able to do a major redesign or make structural changes. But you can make changes to many of the smaller details. We will give you an overview of the things you can and cant do once construction has started.
The Trouble with Structural Changes
The key thing to remember about a home is that designers go to great lengths to make sure that loads are properly balanced from the roof all the way down to the footing. This means that any major structural changes should be made during the design phase, not during the construction phase. Theoretically, you could add space or move rooms around once construction has started, but you will run into some major problems:
You will need new drawings and new permits for the changes, which means you will spend time and money as your designer and your local engineer go over the changes and approve everything.
Changing the layout of a home changes the structure of the home. You will face major delays as your builder deconstructs most or all of the things that are already in place to start over with new footers, new roof trusses and more.
The cost of your new home will skyrocket. Not only will your builder need more labor and materials to make the changes, but you will also be responsible for paying for the time and materials that have already been used but cant be reused.
major structural changes should be made during the design phase, not during the construction
Which Changes Can You Make?
This isn’t to say that you cant make changes at all. Changes that involve the homes structure may be a bad idea, but there are many other, smaller changes that you can make.
You can decide to go with a different roofing or siding material. However, keep in mind that if you make a drastic change ? say, from lightweight shingles to an extremely heavy tiled roof, your home may need extra structural support, which would count as a structural change.
Before the plumbers and electricians arrive, you can tweak the layout of your fixtures, but you will need to consult with your designer and your builder to see where they can be moved to.
You can go with different kitchen and bathroom cabinetry and you can even change up the layout of those cabinets if desired.
You can also make changes to paint and flooring choices, wallboards, window styles and more. However, all of these changes need to be made sooner rather than later. Don’t expect to change the shape and size of your windows if your builder has already installed the framework for them. You should also make every effort to specify a change before your builder orders the materials, otherwise you could end up paying for the materials you originally specified as well as your new choice.
Overall – it’s truly most cost effective to make changes during the design phase of your home – before construction starts.
- Experts Predict What The Housing Market Will Be Like In 2021
Experts Predict What The Housing Market Will Be Like In 2021
Brenda Richardson Senior Contributor
The housing market is largely being driven by a shortage of available housing inventory.
The housing market has been on fire this year with record-low mortgage rates and a sudden wave of relocations made possible by remote work. Meanwhile, home prices have pushed new boundaries as buyer demand continues to surge. As we near the end of 2020, here is a look at the expectations of real estate experts for 2021.
Danielle Hale, realtor.com chief economist: We expect sales to grow 7 percent and prices to rise another 5.7 percent on top of 2020’s already high levels. While we expect mortgage rates to tick up gradually, sales and price growth will be propelled by still strong demand, a recovering economy, and still low mortgage rates. High buyer demand and still-lagging supply will keep prices growing, but at a slower pace than 2020 as buyers contend with mortgage rate and price increases that create affordability challenges.
While younger Millennial and Gen-Z buyers are expected to play a growing role in the housing market, fast-rising prices will create a bigger barrier to entry for the many first-time buyers in these generations who don’t have existing home equity to tap for down payment savings. Although supply is expected to lag, we do expect the declines to slow and potentially stop by the end of the year as sellers grow more comfortable with the market environment and new construction picks up. Single-family housing starts are expected to grow another 9 percent in 2021. On the whole, the market will remain seller-friendly, but buyers will still have relatively low mortgage rates and an eventually improving selection of homes for sale.
Robert Dietz, senior vice president and chief economist, National Association of Home Builders: With home builder confidence near record highs, we expect continued gains for single-family construction, albeit at a lower growth rate than in 2019. Some slowing of new home sales growth will occur due to the fact that a growing share of sales has come from homes that have not started construction. Nonetheless, buyer traffic will remain strong given favorable demographics, a shifting geography of housing demand to lower-density markets and historically low interest rates.
But supply-side headwinds will persist. Residential construction continues to face limiting factors, including higher costs and longer delivery times for building materials, an ongoing labor skills shortage, and concerns over regulatory cost burdens. For apartment construction, we will see some weakness for multifamily rental development particularly in high-density markets, while remodeling demand should remain strong and expand further.
Elana Knoller, Better.com chief product officer: Homeowners and the housing industry at-large will utilize technology even more next year to engage buyers and execute deals. 2020 changed the game in everything from touring properties to looking for and locking rates, and participating in secure eClosings.
We expect homeowners looking to refinance will do so sooner rather than later to take advantage of the low interest rate environment. While the Fed has indicated it doesn’t plan to hike rates soon, uncertainty over what the new administration might do in addition to broad availability of a Covid-19 vaccine, on top of what we hope is an improving economy, could bring an end to the ultra-low rates that we have seen this year. We will continue to see the growth of Millennial home buying regardless of the rate backdrop.
Todd Teta, chief product officer at ATTOM Data Solutions: Were exiting 2020 with a number of dynamics that will more than likely keep this crazy housing market going. There is incredibly low inventory, with less than 500,000 homes for sale, mortgage rates are at 50-year lows, and there’s no sign yet of distressed sellers from the recession coming out. These supply and demand factors will push prices even higher in the first half of the year. Inventory and pricing should ease a bit in the second half of the year, and larger economic headwinds could start showing up. Until then, buyers should be cautious and sellers jubilant.
Selma Hepp, CoreLogic deputy chief economist: While 2020 did not surprise with its fair share of surprises, 2021 could still have more surprises in store for us. Still, expectations for the housing market remain generally positive. First, interest rates, which have motivated many buyers in 2020, are expected to remain low and will help ameliorate some of the affordability concerns resulting from rapid home price appreciation seen in 2020. In other words, low mortgage rates continue to provide greater purchasing power, especially for first-time home buyers.
Second, first-time home buyers will remain a strong force in the market as the largest cohorts of Millennials are turning 30 ? critical household formation years. But also, the oldest Millennials are increasingly contributing to the trade-up market. As a result, 2021 home sales activity is expected to remain strong and outpace 2020 levels. Third, inventory levels are likely to see some improvement, partially from sellers who have been on the sidelines, partially from distressed homeowners, and partially from more new construction. But the housing market will continue to struggle with an imbalance between supply and demand, which will lead to sustained competition among buyers and further home price appreciation, albeit at a slower pace than seen in 2020.
Amy Kong, president of the Asian American Real Estate Association of America: Asian American households saw the biggest income growth of any racial or ethnic group in the United States over the past decade and a half ? almost 8% compared to a 2.3% national average. Education certainly is a major contributor to this growth with more than 54% of Asian Americans having a bachelors degree compared to the national average of 32%. With this income growth and low interest rates, we project a continued increase in homeownership rates within our community across non-traditional markets, particularly in the Southwest and Southeast region of the country. States like North Carolina, Alabama and Texas are seeing an increase in net migration of Asian Americans.
Although this is good news altogether, lets not forget that there’s an income disparity within our community. While a lot of Asian American households are experiencing income growth, also been hit hard with the pandemic with small businesses closing and jobs lost due to Covid-19.
Jesse Vaughan, co-founder of Landed: Essential professionals and individuals who can work from home are buying homes. They are also changing housing preferences, for example, seeking more space. Combined with record-low mortgage rates and forbearance programs, odds are the housing market will remain strong, but it is not a foregone conclusion. There is still significant risk to the downside if economic normalization coming out of the pandemic is botched or significantly delayed.
The trend of Millennials moving to the suburbs and mid-size cities will continue after the pandemic subsides as it was in motion before Covid-19. The pandemic has accelerated what is a generational trend: getting married, having children and desiring more space. I expect price increases in the highest-cost metropolitan areas, such as San Francisco and New York, will trail rising mid-size cities, such as Austin, Texas and Salt Lake City.
Daryl Fairweather, chief economist of Redfin: Although the U.S. may be able to vaccinate most of its citizens by the end of 2021, many countries will struggle to distribute vaccines. Thus, the global economic recovery could take much longer, which would make U.S. mortgage-backed securities attractive to international investors, keeping mortgage rates low. Even as the pandemic hopefully nears its end, Americans will continue to buy homes that fit their new lifestyle. As a result, 2021 will see more home sales than any year since 2006. Annual sales growth will increase from 5% in 2020 to over 10% in 2021.
Rising prices for existing homes will increasingly drive more buyers to consider a new one. And because home buyers are now more eager to buy in suburban and rural areas where land is cheaper than in the cities, there will be more areas where homes can be built profitably. By the end of the year, the homeownership rate will rise above 69% for the first time since 2005.
Antoine Thompson, executive director of the National Association of Real Estate Brokers: As the nation continues to grapple with Covid-19, the 2021 housing market will continue to have low interest rates. Congress will likely approve funding and legislation by the Biden-Harris administration for the creation of a new closing cost and down-payment assistance program and/or tax credit to help increase the rate of Black and minority homeownership. There will be a push by housing and civil rights advocates to have the Biden-Harris administration fix the fair housing and community reinvestment policies rolled back by the Trump-Pence administration.
David Howard, National Rental Home Council executive director: Two things to watch are supply and affordability. Will there be enough homes for those that need them, and at what price? Covid-19 served to accelerate a move toward single-family home living that had started to take shape over the past few years. Much of this move is being led by Millennials, who are transitioning squarely into prime household formation years. However, that generation is also the least wealthy at a time when the cost of homeownership continues to climb. We believe these demographic factors bode well in the coming years for the rental housing market, particularly single-family rental homes. Millennials demand for housing is not going to diminish, but it may just take a little longer to make homeownership a reality.
Paul Lueken, chief executive of Draper and Kramer Mortgage Corp.: As the Covid-19 vaccine is distributed, the economy will begin to open up and recover. Economic activity will most likely return to pre-pandemic levels by late 2021 or early 2022. The Federal Reserve will continue to support a low interest rate environment for much of 2021, and mortgage rates can be expected to remain low for most of the year. Home sales will therefore stay strong due to the low interest rates and the recovering economy.
Gary Acosta, co-founder and CEO of the National Association of Hispanic Real Estate Professionals: Nationwide, low interest rates will fuel homeownership demand in the first half of the year while employment gains will keep demand high in the second half of the year. Texas, home to many Latinos and a greater number of newcomers, will see the highest number of new homeowners. The pandemic and subsequent exodus from some cities will cause home prices in New York and California to flatten with modest price declines in Manhattan and San Francisco.
Lawrence Yun, National Association of Realtors chief economist: Home sales surprised with a surge in the second half of 2020 and the momentum will carry into 2021. The record low mortgage rates have been the key factor for home buying even in a difficult job market condition. As we enter 2021, jobs will steadily recover especially knowing that the vaccine distribution is just around the corner.
The interest rates will continue to be favorable since the Federal Reserve has indicated such. And supply will rise based on the higher number of housing starts of single-family homes. This will give consumers more choices, and more importantly, will tame home price growth. Demand could be stronger in the outlying suburbs and in more affordable metro markets, while the downtown locations could witness softer demand.
Steve Baird, president and CEO of Baird & Warner: As we all found ourselves spending more time at home this year, the market for new homes and even secondary residences exploded, and we expect that to continue in 2021 as priorities change in response to Covid-19. Many buyers aren’t waiting for a return to normal. Instead, they are anticipating a new normal in which they live, work and entertain differently than ever before and view housing through that lens.
Edward Mermelstein, founder and CEO of One and Only Holdings: With the new administrations plan to offer housing incentives, we can expect to see an uptick in the housing market. The luxury real estate front will continue to experience the slowdown that started two years ago, however, areas that have been battered throughout the pandemic such as San Francisco, Los Angeles, and New York City should begin to pick back up with federal aid in the new year.
Jarred Kessler, CEO and co-founder of EasyKnock: As companies announce plans to allow employees to permanently work remotely, high-tax cities will continue to see a talent drain as people relocate in search of cities with a lower cost of living. Second-tier cities like Austin, Charlotte and Tampa will experience a residential building boom.
As Covid-19 rages on and with new restrictions likely to be put into place, the financial options for homeowners is growing scarce. 2021 will see an increase of alternative financing options for homeowners to provide additional flexibility during times of financial crisis.
The federal government will create an incentive stimulus program for landlords and homeowners to allow renters or owners to remain in their homes and will extend the eviction moratorium to line up with the vaccine rollout.
Tendayi Kapfidze, LendingTree chief economist: The housing market should continue to be a bright spot in 2021. Key to this will be mortgage rates that we expect to remain low as the Fed keeps up its security purchases. A less appreciated factor is a savings rollover from 2020 that will support home purchases by wealthier households. Additional fiscal stimulus could also find its way into the housing market. The new Biden administrations policies may also increase access to the housing market through things like down payment support. Finally, student loan forgiveness could boost the ability of many to afford buying a home and saving for down payments.
There are some downside risks to this outlook. The economy will be recovering as vaccines lead us down the path of normalcy, but the labor market could remain weak. A tepid labor market recovery would be accompanied by tepid income growth. Job losses are moving up the income scale and transitioning to permanent losses from temporary. Lending standards are likely to tighten further as the end of forbearance and foreclosure moratoriums are a wild card, potentially weighing on home prices in some areas. The rent crisis is another wild card and could bleed in the owner-occupied market via adding supply or affecting the financial markets.
Keith Gumbinger, vice president of mortgage information website HSH.com: While a good year for home sales is likely, it may be hard to improve much on 2020. Record and near-record low mortgage rates will continue to create demand for homes, and these come amid demographic tailwinds from Millennials moving into their prime home-buying years, enhanced by the Covid-19 work-from-home or anywhere trend. However, sales will be met by tempering forces: declining affordability due to still-rising home prices and a lack of supply of houses, especially existing homes. The new home market may provide options for some home buyers, so sales there should be well supported, too.
Sara Rodriguez, president of the National Association of Hispanic Real Estate Professionals: The real estate market will continue to be strong for the first half of the year. There is still pent-up demand for inventory, and the historic low interest rates don’t seem like they will rise next year. Due to Covid-19, we have seen a decrease in construction materials, so we don’t see a lot of new construction to keep up with this demand. Although we will see some distressed homes come on the market from those people in forbearance or who have lost their jobs due to Covid-19, the demand will be there to absorb additional homes in most markets.
Susan Wachter, Sussman Professor of Real Estate and Finance at The Wharton School of the University of Pennsylvania: The residential real estate market will prosper in 2021, even as Covid-19 continues to ravage the economy, delaying full recovery to 2022. Low interest rates will prevail, resulting in lower mortgage costs for home buyers who can qualify. We will see slower price rises in the mid-single digit range, as affordability gaps cut demand.
Although 2021 will not see the spike in demand for residential property that characterized 2020, I expect to see a continuation in 2021 of trend shifts catalyzed by the pandemic. While 2021 will see home builders responding to higher prices, supply and inventory will still be limited. Fed policy will enable lower mortgage rates for highly creditworthy borrowers, while inflation may begin to emerge. Finally, the Millennial generation will continue to be the defining demographic group in the housing market for years to come.
Joe Tyrrell, president, ICE Mortgage Technology: In addition to record-breaking volume for refinance and purchases, there has been an increase in relocations, as people are shifting away from metropolitan areas to more rural ones. We expect this migration trend to continue as people redefine what home means for them. We will likely see borrowers invest more in their houses and choose home locations in places that fit their lifestyles, versus the need to be close to offices or particular schools.
We expect lenders to adopt true automation that increases their scale, especially in the shift to eClosings as the standard, while also reducing their dependency on staff for tasks that can and should be automated. More than ever, the goal for lenders will continue to be to serve borrowers better, faster and more efficiently by leveraging technology that fundamentally supports digitally closing loans.
Jeff Tucker, Zillow senior economist: We expect to see the housing market continue its bull run from this summer and autumn well into 2021. Home value appreciation will approach 9% or even 10% by July, before cooling somewhat down toward 7% appreciation. This rapid price growth will be driven by the same factors that took the steering wheel in 2020: strong demographics, low mortgage rates, and inadequate supply.
The Millennial generation is moving into their mid-30s, bringing a wave of demand from renters looking to buy their first homes. Mortgage rates may inch back up to around 3%, but even at that level, they will be making home purchases more attractive all along the price range. And although builders are finally firing on all cylinders delivering new homes to the market, it will take them a long time to make up for the home building deficit we accumulated from 2008 to 2019.
The clearest barometer we have that reflects all these dimensions of the housing market is active inventory, which is down more than one third year-over-year. That suggests continued fast price appreciation ahead and fierce competition between buyers.
Kiran Vattem, executive vice president, chief digital and technology officer at ServiceLink: As a growing real estate market goes digital, cybersecurity moves front and center. Low mortgage rates and homeowners growing desire to move to suburbs is driving todays booming residential real estate market, with no plans to slow in 2021.
While Covid-19 has accelerated digital adoption across the mortgage life cycle making real estate transactions more automated and streamlined ? it has also opened the industry up to new security vulnerabilities and potential for hackers to access sensitive data. In 2021, the industry’s focus will probably shift in order to balance front-end innovation with the tech that can be leveraged to fortify the mortgage ecosystem from cybersecurity risks in an increasingly digital future.
Dan Kessler, chief executive of Harbor: Consumers will prioritize home safety and self-sufficiency as natural disasters continue. The home is a key frontier yet to be enabled by technology. If we use software to help us learn faster, exercise more or communicate, why don’t we use software to make our homes safer and more efficient? I am not talking about smart home tech per se, but rather the basic safety and maintenance of the home is not yet managed by any meaningful technology.
In 2021, I see preparedness, readiness and home self-sufficiency being a major trend that’s going to dominate a set of habits, practices and products for consumers. Increasingly, well see this become a part of goals and planning as uncertainty ? and risks ? rise. You cant plan for future success if you don’t feel secure at a fundamental level, and Covid-19 validated that there’s a need for technology and tools around emergency preparedness. In the real estate market, we will see consumer need for security drive tech-enabled safety products.
Kris Lindahl, CEO and founder of Kris Lindahl Real Estate: After seeing record buyer engagement coupled with incredibly low inventory, well see a gradual increase in homes for sale in the late winter and early spring, followed by a huge loosening in the summer. I wouldn’t be surprised if inventories tracked closely with vaccine rollout. So many people have been sitting on the sidelines waiting for a feeling of certainty, a light at the end of the tunnel or any positive news on the pandemic.
Well have a tough early winter as far as inventory goes, but once people start to feel some positive momentum around Covid, we could see the largest and fastest influx of homes on the market in a century. Well also see continued growth in people opting for guaranteed offers and other ways of selling that emphasize certainty, control and convenience.
People are realizing that they no longer have to deal with showings and open houses, and as long as they can still get a competitive offer in their home, they will do it. And in general, well see more people wanting to buy based on how much home has meant to people over the course of the pandemic. We have seen our homes become our schools, offices, gyms, restaurants and entertainment centers. Even post-pandemic, people will want space, privacy and backyards.
Eric Fontanot, president of Patten Title: We expect to see home prices continue to climb to new highs. This continued rise is due in large part to inventory not having caught up to the strong buyer demand, builders not being able to get homes on the ground fast enough, and low interest rates continuing to help with buying power.
We also anticipate a return of more traditional seasonality in the residential market. For buyers, the forecast will most likely consist of a highly competitive market during the traditional buying months due to low inventory and low interest rates, which will drive housing prices to reach near all-time highs. This also means buyers will have to contend with challenges of affordability, especially when rates rise, even ever so slightly, which could happen toward the end of 2021.
For sellers, the rollover from 2020 should mean consistent home sales, relatively low time on market, and at or above asking price offers, especially during the peak season. It is not out of the realm of possibility that home prices hit new highs in 2021. That said, when rates begin to taper off or rise, the balance between affordability and asking price tilts, causing the market to slow.
Scott Verlander, senior vice president and head of retail and affiliate banking at TIAA Bank: Housing demand will continue to outstrip supply in 2021. Following the initial downturn, there has been a V-shaped recovery in home-improvement spending, home prices and new construction projects. But the inventory of houses for sale remains low as people continue to invest in their homes by refinancing and renovating while the market recovers.
Virtual property tours have the potential to become the new normal in the home-buying process. 3D tours are efficient for buyers and sellers alike because they create a 24/7 open house.
- HOUSING INVENTORY IN 2021
Housing Inventory in 2021
Although the housing market is healing and by many measures doing better than before the pandemic, inventory remains housings long haul symptom. There were an insufficient number of homes for sale going into 2020 in large part due to an estimated shortfall of nearly 4 million newly constructed homes. Much to the surprise of many, the coronavirus and recession did not lead to a distressed seller driven inventory surge as we saw in the previous recession, but further reduced the number of homes available for sale. Starting in fall 2020 the housing market saw more than half a million fewer homes available for sale than the prior year. We expect to see an improvement in the pace of inventory declines starting just before the end of 2020 that will continue into Spring 2021, so that while the number of for-sale homes will be lower than one year ago, the size of those declines will drop. We expect a more normal seasonal pattern to emerge which will contrast with the unusual 2020 base and lead to odd year over year trends, but taken as a whole we expect inventories to improve and, by the end of 2021, we may see inventories finally register an increase for the first-time since 2019.
While total inventories will remain relatively low thanks to strong buyer demand, the number of new homes available for sale and existing home sellers, what we call newly listed homes, will be more numerous which will help power the expected increases in home sales.
- SUBURBAN MIGRATION IN 2021
2021 TRENDS: Suburban Migration
With remote work becoming much more common, home shopping in suburban areas had a stronger post-COVID lockdown bounce back than shopping in urban areas, starting in the spring and continuing through the summer. These trends, which have been visible in rental data as well, suggest that city-dwellers freed from the daily tether of a commute to the office and looking for affordable space to shelter, work, learn, and live were finding the answer in the suburbs. In fact, a summer survey of home shoppers showed that while a majority of respondents reported no change in their willingness to commute, among those who did report a change, three of every four reported an increased willingness to commute or live further from the office.
Even before the pandemic, homebuyers looking for affordability were finding it in areas outside of urban cores. The pandemic has merely accelerated this previous trend by giving homebuyers additional reasons to move farther from downtown.
Housing Market Perspectives
- REAL ESTATE TRENDS WITH MILLENIALS & GEN Z
2021 TRENDS: Millennials & Gen Z
The largest generation in history, millennials will continue to shape the housing market as they become an even larger player. The oldest millennials will turn 40 in 2021 while the younger end of the generation will turn 25. Older millennials will be trade-up buyers with many having owned their first homes long enough to see substantial equity gains, while the larger, younger segment of the generation age into key years for first-time homebuying. At the same time, Gen Z buyers, who are 24 and younger in 2021, will continue their early foray into the housing market.
In early 2020, younger generations, including Millennials and Gen Z, were putting down smaller downpayments and taking on larger debts to take advantage of low mortgage rates despite rising home prices. In fact, only a quarter of respondents to a summer survey reported lowering their monthly mortgage budget or not changing their home search criteria in response to lower mortgage rates. The other three-quarters said low rates would enable them to make a change to their home search, and the most commonly cited change was buying a larger home in a nicer neighborhood.
We expect these trends to persist as rising home prices require larger upfront down payments as well as a bigger ongoing monthly payment due to the end of mortgage rate declines. Early in the pandemic period, there was concern that temporary income losses could prove to be particularly disruptive to younger generations? plans for homeownership, as these were the groups expected to face income disruptions that might require dipping into savings which would otherwise be used for a down payment. Thus far, these disruptions have not had an effect on overall home sales, and some home shoppers report an ability to save more money for a downpayment as a result of sheltering at home, but we are still not completely through the pandemic-related economic disruption.
- HOW REMOTE WORKING WILL EFFECT HOME SALES IN 2021
2021 TRENDS: Remote Work
The ability to work from home is not new. In fact, as long ago as 2018, roughly one-quarter of workers worked at home, up from just 15 percent in 2001. More recently, a scan of real estate listings on realtor.com in early 2020 showed that in the ten metro markets where they are most common, as many as 1-in-5 to 1-in-3 home listings mentioned an ?office.?
Remote working was already more common among home shoppers than the general working population, with more than one-third of home shoppers reporting that they worked remotely even before the coronavirus. Additionally, remote working has gained an unprecedented prominence in response to stay-at-home orders and continued measures to quell the spread of the coronavirus. Another 37 percent of home shoppers reported working remotely as a result of the coronavirus.
While a majority of home shoppers reported a preference for working remotely, three-quarters of workers expect to return to the office at least part-time at some point in the future. However, the ability to work remotely was a factor prompting a majority of respondents to buy a home in 2020. This was the case even when most expected to return to offices sometime in 2020.
As remote work extends into 2021 and in some cases employers grant employees the flexibility to continue remote work indefinitely, expect home listings to showcase features that support remote work such as home offices, zoom rooms, high-speed internet connections, quiet yards that facilitate outdoor office work, and proximity to coffee shops and other businesses that offer back-up internet and a break from being at home, which can feel monotonous to some, to become more prevalent
- GROCERY STORES AND REAL ESTATE VALUES
While it is no surprise that homeowners want to maximize the value of their property, it might come as an eye-opener that proximity to certain grocery stores can substantially improve the value of real estate.
According to a recent study from ATTOM Data Solutions, major grocery store chains like Trader Joe’s, Whole Foods, and ALDI, were found to increase home prices. In fact, across the country, the average home value near Trader Joe’s is $608,305, compared to $521,142 near Whole Foods and $222,809 near ALDI. The average home seller return on investment over a five-year span with these grocery stores was 37%, with homes near a Trader Joe’s having an average home seller ROI of 51%, compared to homes near a Whole Foods with an average home seller ROI of 41% and ALDI at 34%.
Why It Matters
The findings are compelling because homebuyers, whether they are solely looking to invest in real estate or simply seeking to raise a family, may count on their purchase paying off by just living near certain grocery store chains as those chains seem to provide a quality return on investment and secure higher home equity. For an investor, real estate near certain grocery store chains contributes to strong home flipping returns and attractive home price appreciation. In short, proximity to certain grocery stores can substantially improve the values of residential property nearby, particularly if the stores offer high quality service and products.
Historically, residential home buyers sought properties nearby schools that they wished for their children to attend. In terms of increasing home values, it almost seems as though purchasing real estate near certain grocery chains may have the same importance or may have usurped purchasing near desirable schools.
Among the core tenants of real estate is location ? location ? location! After all, residential real estate purchasers who choose the ?best? locations will have an asset that appreciates more than the norm. With that in mind, whether you are an investor looking for more bang for your buck or a homebuyer looking to purchase residential real estate near conveniences such as grocery chains, look for a well-branded chain like Trader Joe’s, Whole Foods, or ALDI as those grocery chains seem to have a significant statistical positive effect on property values.
- TOP 10 REAL ESTATE MARKETS POST COVID 2021
The National Association of REALTORS identified the top 10 markets that have shown resilience during this pandemic period and that are expected to perform well in a post-COVID-19 environment. In identifying these markets, NAR considered a variety of indicators that it views to be influential to a metro areas recovery and growth prospects in a post-pandemic environment in 2021-2022.
In alphabetical order, the Top 10 markets are:
Atlanta-Sandy Springs-Alpharetta, Georgia
Boise City, Idaho
Charleston-North Charleston, South Carolina
Dallas-Fort Worth-Arlington, Texas
Des Moines-West Des Moines, Iowa
Spokane-Spokane Valley, Washington
- WHAT IS A LIMITED PARTNERSHIP?
What Is a Limited Partnership (LP)
A limited partnership (LP) not to be confused with a limited liability partnership (LLP) is a partnership made up of two or more partners. The general partner oversees and runs the business while limited partners do not partake in managing the business. However, the general partner has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment.
A limited partnership exists when two or more partners go into business together, but one or more of the partners are only liable up to the amount of their investment.
The general partner of the LP has unlimited liability.
There are three types of partnerships: limited partnership, general partnership, and joint venture.
Most U.S. states govern the formation of limited partnerships, requiring registration with the Secretary of State.
Understanding Limited Partnerships
Generally, a partnership is a business owned by two or more individuals. There are three forms of partnerships: general partnership, joint venture, and limited partnership. The three forms differ in various aspects, but also share similar features.
In all forms of partnerships, each partner must contribute resources such as property, money, skills, or labor to share in the business’ profits and losses. At least one partner takes part in making decisions regarding the business’ day-to-day affairs.
All partnerships should have an agreement that specifies how to make business decisions. These decisions include how to split profits or losses, resolve conflicts, and alter ownership structure, and how to close the business, if necessary.
LPs are often formed to manage passively ran businesses and for raising money for investment purposes.
Types of Partnerships
An investment partnership is a type of business formation. Its a partnership that’s generally structured as a holding company that’s created by individual partners or companies for investing purposes. These investments can be other businesses, securities, and real estate, among other things.
A limited partnership is usually a type of investment partnership, often used as investment vehicles for investing in such assets as real estate. LPs differ from other partnerships in that partners can have limited liability, meaning they are not liable for business debts that exceed their initial investment. In a limited liability company (LLC), general partners are responsible for the daily management of the limited partnership and are liable for the company’s financial obligations, including debts and litigation. Other contributors, known as limited or silent partners, provide capital but cannot make managerial decisions and are not responsible for any debts beyond their initial investment.
A general partnership is a partnership when all partners share in the profits, managerial responsibilities, and liability for debts equally. If the partners plan to share profits or losses unequally, they should document this in a legal partnership agreement to avoid future disputes.
A joint venture is a general partnership that remains valid until the completion of a project or a certain period elapses. All partners have an equal right to control the business and share in any profits or losses. They also have a fiduciary responsibility to act in the best interests of other members as well as the venture.
Limited Liability Partnership
A limited liability partnership (LLP) is a type of partnership where all partners have limited liability. All partners can also partake in management activities. This is unlike a limited partnership, where at least one general partner must have unlimited liability and limited partners cannot be part of management.
LLPs are often used for structuring professional services companies, such as law and accounting firms. However, LLP partners are not responsible for the misconduct or negligence of other partners.
Special Considerations for a Limited Partnership
Almost all U.S. states govern the formation of limited partnerships under the Uniform Limited Partnership Act, which was originally introduced in 1916 and has since been amended multiple times. The most recent revision was in 2001.1
The majority of the United States 49 states and the District of Columbia have adopted these provisions with Louisiana as the sole exception.
To form a limited partnership, partners must register the venture in the applicable state, typically through the office of the local Secretary of State. It is important to obtain all relevant business permits and licenses, which vary based on locality, state, or industry. The U.S. Small Business Administration lists all local, state, and federal permits and licenses necessary to start a business.
- 13 NATIONWIDE HOUSING PREDICITIONS FOR 2021
13 Nationwide Housing Market Predictions for 2021
Unemployment rates will continue to improve
There will be a slight uptick in mortgage defaults
Lending standards will loosen
There will be a permanent shift working remotely
Low interest rates will stick around
There will be more government spending and increased national debt
People will continue to invest in more stable, cash flowing assets
The number of renters will rise
Consumers will leave big cities to buy or rent new homes
Inflation will increase
Home prices will continue rising, especially in the affordable range
Political certainty will calm the real estate market
Tariffs will continue to impact the cost of goods and services, driving prices up.
- 7 MOST COMMON REASONS A REAL ESTATE TRANSACTION GOES BAD
Every business decision is followed by a lot of anxiety. That’s because there is a variety of issues that may occur before, during and/or after it. Transactions are one of the most problematic fields when it comes to real estate. Some situations just can’t be avoided, while you can try to prevent others. Make sure to inform yourself about common situations that may occur during the buying and selling process. This way, you’ll be able to recognize if you’re in a bad situation. Here are the seven most common things that can go wrong during a real estate transaction.
Real estate transactions involve a lot of paperwork. If there’s any document missing, it can sabotage a deal. Many agents start marketing a property without even looking through its profile. This way, there’s a possibility that the transaction can go wrong due to missing documents. That’s usually because when they see a good title behind a property, they don’t see a need in doing any research. Therefore, be sure that both parties have prepared, read, and signed all the paperwork that’s required.
A lot of people depend on mortgage companies when purchasing a property. This is, of course, a common thing if someone has enough income to support the mortgage. But, if someone gets denied, it can cause the deal to turn sour. In order to avoid this from happening, make sure to acknowledge the amount of money that a buyer has direct access to.
There are situations where the seller refuses to make repairs that were agreed upon beforehand. In this case, there’s not much you can do about it. If all parties agree, you can try hiring someone to fix those issues, but remember to include the renovation pricing in the paperwork. Unfortunately, buyers usually back off when they see that the seller was dishonest at any given moment. So, it’s best to get to know the seller before you start marketing a property.
Some people are really stubborn when it comes to negotiating. Regardless of the fact whether a buyer might come across their dream house or not, there’s a possibility that he or she might not get along with the seller. In order to make a deal, both parties should keep in mind that they should compromise a bit. Parties can disagree on a lot topics, starting from pricing to who will cover the repair costs. In order to avoid these situations, get to know the seller before you introduce him to the potential buyer. This way you’ll be able to give some tips to the person that’s willing to buy the property.
It is a common procedure for a home inspection to arrive after the deal is set. This way, the buyer assures himself that there are no hidden issues with the property. If a home inspector finds something that’s problematic enough to postpone the closing date, there’s a big possibility that the buyer will pull out. So this doesn’t happen, make sure to get a pre-inspection and see if there’s anything that needs to be fixed. If so, consider hiring a contractor that will fix these issues beforehand.
There are people who just can’t make up their mind like sellers who aren’t sure if they want to sell the property and buyers who make realtors show them bunch of properties without committing to any of them.
Outside the Control of any Principal Parties
Transactions may go wrong even if both parties did everything right. There are various reasons why this can occur. For instance, a land transaction may have already been concluded and after a few days, the government acquired the land due to a major construction project.
- THE IMPACT OF COVID ON COMMERCIAL REAL ESTATE
Foster Swift Collins & Smith PC – Robert A Hamor
With no end in sight to the public health and economic crises resulting from the COVID-19 pandemic, businesses across all sectors of the economy continue to grapple with the fallout. Those who own and manage commercial real estate face unique obstacles, and must plan strategically and act aggressively in order to navigate the challenges they face.
If you own and/or manage commercial real estate, there are a number of issues to consider and actions to implement that will help bolster the health and longevity of your business. The path forward may be rocky, but as with past cyclical downturns, there are steps you can take to protect yourself as well as opportunities for those who emerge on the other side.
What Has Led Us Here?
COVID-19 has sent shockwaves through commercial real estate markets worldwide. In the United States, various state executive orders forced the closure of many consumer-facing businesses and the mass exodus of white-collar workers from office space in favor of working from home. While many presumed during the early days of the pandemic that the disruption would be relatively short-lived, those hopes were misplaced.
For example, in Michigan, most restaurants are still severely restricted in terms of indoor dining capacity, event venues remain shuttered, and significant numbers of office workers remain at home. Nationally, many large employers such as Google, Microsoft and JPMorgan Chase have announced their intentions to allow workers to continue working from home, in some cases, well into 2021. Investments in communication technology have helped make remote work possible, and this ?grand experiment? in distributed work has many businesses fundamentally rethinking how much square footage they need in the future.
Working from home, of course, is not the only catalyst of change in commercial real estate. The shift from physical retail toward online shopping has negatively impacted mall traffic and brick-and-mortar stores. The lack of business and leisure travel has hit hotels.
All of these events and others have conspired to make 2020 a particularly challenging year for commercial real estate. Some estimates have shown that commercial real estate investment fell nearly 30% globally in the first six months of 2020 compared to the year-earlier period. However, consistent with the old adage that opportunity lies in every crisis, there are bright spots to be optimistic about. For instance, demand for warehousing, distribution, and logistics centers is growing, fueled by the e-commerce boom.
Ongoing Issues of Importance for Commercial Real Estate.
There are myriad issues that commercial real estate owners and/or managers must continue to grapple with moving forward. The challenges ahead include a blend of business and legal issues that require equal parts strategic planning and risk mitigation, and in many instances will call for the support and counsel of trusted advisors. A proactive, rather than a wait-and-see, approach is critical to strengthen your business.
Dealing with Tenants.
Most commercial landlords are dealing with tenants who are slow-paying rent or not paying altogether. At the beginning of the COVID-19 crisis, in anticipation of a relatively short-term business disruption, many landlords and tenants engaged in discussions and struck agreements for rent accommodations that were intended to help tenants preserve cash flow, and allow landlords to plan accordingly, until business picked back up over the summer. As the crisis has dragged on, those short-term lease modifications need to be revisited; unfortunately, many parties are avoiding having these difficult conversations. Therefore, its critical that landlords take it upon themselves, either directly or through legal counsel, to re-engage with their tenants and address the issue head on.
When engaging with tenants, insist on an honest, open-book evaluation. Getting all the facts on the table is the only way to craft effective solutions, be they further lease modifications or a more creative approach. For example, in the course of my negotiations with a tenant who had a strong business but no cash flow or borrowing capacity, we negotiated the sale of the business to the landlord. This was a win-win situation, allowing the tenant to get out from under debt and giving my client an asset they could sustain.
Unfortunately, despite best efforts, sometimes it is clear that there is no path forward. In such instances, its incumbent on landlords to take aggressive action. Once the facts are clear, there is no benefit from delay and procrastination, which will result in landlords potentially getting stuck behind other creditors who may take more decisive action to collect debts they are owed.
Regardless of the path forward, any agreement struck with a tenant should be documented in writing and reviewed by legal counsel.
Dealing with Lenders.
Just as tenants have financial obligations to landlords, most commercial real estate owners have obligations to lenders. The fact that many commercial real estate owners are dealing with slow-pay or no-pay tenants means that they may be struggling to keep up with their own debt obligations. As a result, they may need to restructure the loans secured by their properties in order to avoid loan defaults, foreclosures and the loss of their properties.
While the constraints of this article do not allow for a full discussion of all of the issues involved in a commercial loan workout, there are several important principles to keep in mind when dealing with lenders.
First, understand your lenders perspective. Lenders are reevaluating their lending models based on the fallout from COVID-19. They are repricing loans based on new expectations regarding occupancy levels and borrower risks which have changed since early 2020. At the same time, most lenders do not want to be in the business of owning commercial real estate, so while they may drive a harder bargain, most are willing to engage in reasonable negotiations with borrowers to avoid foreclosure.
Second, be fully prepared. Understand the root causes of distress and be ready to present a complete picture of your business to the lender. Your objective should be to fully address all issues so that any loan modification or restructuring can comprehensively address outstanding issues. If an agreement cannot be reached, know what your other options are with other lenders or investors.
Third, engage legal counsel. When dealing with a sophisticated commercial lender, its imperative to have experienced legal counsel on your side you can be sure the lender will be similarly represented. You may only get one shot at striking an agreement that allows you to remain in control of your asset(s), so be sure to take all precautions to protect your interests.
Dealing with Executive Orders. The COVID-19 pandemic has created many unprecedented challenges related to the ownership and management of commercial real estate, and one of the most significant has been the impact of the flurry of executive orders intended to protect the health and safety of citizens. For commercial real estate owners and managers, these executive orders have created a great deal of confusion and forced them to incur significant costs.
One of the main reasons the executive orders, such as those that have affected foreclosures, limitations on business operations, sanitation and social distancing, have been problematic is that they are broadly applicable and therefore are often ambiguous. For example, defining an indoor space can lead to a dozen different interpretations with the wrong ones opening the offender up to financial or criminal sanction. Accordingly, its important to work with legal counsel in order to try as best as possible to bring clarity to the ambiguities and remain compliant.
Further complicating the matter, Michigan’s Supreme Court recently held that Gov. Whitmer did not have authority after April 30, 2020, to issue or renew any executive orders related to the COVID-19 pandemic (more information here). Accordingly, while next steps and timing are still unclear, landlords should prepare for a mishmash of local orders, imposing varying obligations, until the Legislature sets forth a particular plan which the Governor will adopt.
There is no escaping the challenges commercial real estate owners and/or managers will face over the coming months. Those who succeed (or, in particularly hard hit sectors, merely survive) will pivot in the moment and plan strategically for the future.
- WHAT IS A REAL ESTATE ATTORNEY AND WHEN DO I NEED ONE?
Buying a home isn’t just a simple purchase; its also a legal transfer of a property from one entity to another. Because the legal side of this transaction can be so complex, sometimes it makes sense (or is even required) for home buyers or sellers to enlist an attorney who can look out for their best interests.
While you will likely already be dealing with a myriad of costs as you work to close on your house, and probably arent keen to add another, having a lawyer on your side can be an expense that ends up paying for itself.
What Is A Real Estate Attorney?
A real estate attorney is someone who is licensed to practice real estate law, meaning they have the knowledge and experience to advise parties involved in a real estate transaction, such as a home sale.
What Does A Real Estate Attorney Do?
Real estate attorneys know how to and are legally authorized to prepare and review documents and contracts related to the sale and purchase of a home. In some cases, a real estate attorney is also the person who will be in charge of your closing.
In a home purchase transaction, both the buyer and seller can hire an attorney to represent their interests during the process. Or, in the case where an attorney is overseeing a closing where the home is being purchased with a mortgage loan, the attorney may actually represent the mortgage lender.
When Do I Need A Real Estate Attorney?
Depending on your state and locality laws and the exact nature of the transaction, you may need to enlist the services of a real estate attorney (and have the cost included in your closing costs), whether you like it or not.
If you end up needing an attorney, whether youve decided you want one or your state or lender requires it, there are a few different points during the home buying process where they can come in and provide assistance. This can include drafting and finalizing purchase contracts, writing amendments to a standard contract utilized by your real estate agent, completing a title search or conducting the closing.
Here are a few reasons you might need or want an attorney to be part of your home buying team:
State or lender requirement: Every state has slightly different laws regarding real estate transactions, and some states consider certain actions that are part of the process to be practicing law. These regulations are often meant to prevent real estate agents from acting in a legal capacity that they aren’t trained or licensed for. For example, in many areas only a licensed attorney can put together legal documents related to the sale of a home, because they consider that to be within the realm of the practice of law. (However, in many areas, real estate agents now use standardized form contracts for home purchases that non-lawyers can legally fill out on their own.) Certain states may also consider performing a home closing to be a practice of law, and as such, an attorney may be required to be present during closing. If you are getting a mortgage with Rocket Mortgage by Quicken Loans, we require you to have an attorney conduct your closing if the subject property is located in any of the following states: Connecticut, Delaware, Georgia, Massachusetts, New York, South Carolina or West Virginia.
Contractual issues with the purchase: If your home purchase involves any out-of-the-ordinary elements that could complicate your purchase contract, a good real estate attorney can make sure that all your contracts take into account the complexity of your situation as well as help you out if contractual issues arise during the process.
Peace of mind: If you just have a feeling that something could go wrong or you want to be sure all your bases are covered, having a lawyer on your side can help give you the confidence that even if the transaction does go awry, you have a legal professional who is looking out for your best interests and can help you work through a tricky situation.
How Much Does A Real Estate Attorney Cost?
How much you will spend paying your real estate attorney (or attorneys) will depend on what services they have provided for you and who is responsible for that particular closing cost. If your mortgage lender requires an attorney to be present at closing, whether the buyer or seller covers the cost of the closing attorney will depend on how your contract was negotiated.
If you want your own attorney in addition to the one required by your lender, you will also pay for any services they provide you. How and how much a real estate attorney charges will vary, but here are some basic ranges to give you an idea of what you will spend:
Fixed hourly rate: A real estate attorney who charges an hourly rate may charge $150 ? $350 per hour, but this can vary a lot depending on how experienced the attorney is and what area you are in.
Fixed rates for specific services: They may also charge a flat fee for the particular services they provide. For example, a real estate attorney might charge $500 $1,500 to conduct a home closing. Their fees may also depend on the sale price of the property in question.
How Can I Find A Real Estate Attorney Near Me?
Since buying a home is such a large, important purchase, you want to make sure that the professionals you work with know what they are talking about and are good at what they do. If you are not sure where to look to find a reputable real estate attorney, here are some places to start:
Ask for recommendations from friends and family: If someone in your social circle recently purchased or sold a home and had an attorney, you might consider asking them who they used and what their experience was like.
Utilize your states Bar association directory: Your state Bar associations website can help you locate lawyers in your area who practice real estate law. Use the American Bar Associations directory to help you find your states website.
Use an online legal review site: There are many online review websites that will give you information on attorneys in your area, including their specialties, fee structures and any reviews left by former clients.
- EVICTION PROTECTIONS WILL END ON DEC 31, 2020
Eviction protections will end on Dec. 31, leaving as many as 19 million people at risk
A nationwide ban on evictions will expire Dec. 31 with no replacement in sight. Even still, landlords are finding creative ways to get around it.
Dale Smith, Shelby Brown
The national eviction moratorium is running out.
Starting Jan. 1, 2021, landlords will once again be able to legally evict tenants for failure to pay rent. Dec. 31 is the last day of protection from evictions and from a handful of other coronavirus relief measures that will expire on Dec. 31 if there’s no new stimulus bill or executive action to renew them. The National Low Income Housing Coalition estimates as many as 19 million people in 6.7 million households are at risk of being evicted when the calendar flips to 2021.
In the meantime, even the protections that are currently in force are not necessarily enough to save everyone from being turned out. Some judges have refused to accept the current moratorium and allowed evictions to proceed anyway. In other situations, landlords have figured out loopholes by filing evictions for infractions other than not paying rent, like barking dogs or smoking, or by not renewing tenants’ leases.
It doesn’t help that the current eviction ban requires renters who’ve fallen behind on their rent to submit a signed declaration form to their landlord stating they’ve lost income due to the coronavirus pandemic and have made an effort to look for financial assistance, as well as a few other conditions. (This part is critical, more below.) Landlords can challenge the truthfulness and accuracy of those statements and some landlords’ lawyers have gone so far as to challenge tenants with perjury charges.
Some states and cities continue to have their own eviction bans on the books ( here’s an up-to-date list). A few offer more protection than the federal eviction moratorium, but many have let their laws expire. We’ll dig into the national eviction moratorium to unpack who is covered, what might not be covered and what you need to do now if you’re worried about getting evicted. Plus, we’ll take a look at what other resources and options are available to help you stay in your home. This story was recently updated.
If you’re worried about making rent, you aren’t alone.
What the national eviction ban does and doesn’t protect
The current national eviction moratorium was ordered by the Centers for Disease Control and Prevention using a 1944 public health law intended to curb the spread of a pandemic. Because homelessness can increase the spread of COVID-19, the order halts evictions across the US for anyone who has lost income due to the pandemic and has fallen behind on rent.
The federal mandate doesn’t prohibit late fees (although some local ordinances do), nor does it let tenants off the hook for any back rent they owe. It also doesn’t establish any kind of financial assistance fund to help renters get caught up, a safeguard some say is critical to preventing a massive wave of evictions when the ban eventually lifts. (Many cities and states, however, have set aside money to help with rent — keep reading for how to find assistance where you live.)
The order only halts evictions for not paying rent. Lease violations for other infractions — criminal conduct, becoming a nuisance, etc. — are still enforceable with eviction. And it only protects renters who earn less than $99,000 per year or $198,000 for joint filers. Finally, renters must print and sign an affidavit declaring their eligibility for protections (the next section breaks down those requirements).
For most people, the payment they make on their home is the biggest bill they pay each month, whether they rent or own.
Qualifying for the eviction moratorium requires paperwork
The CDC’s order requires renters facing eviction to meet five requirements, which they must declare, under penalty of perjury, by copying or printing, signing and delivering an affidavit to their landlord.
The five qualifications are, in brief:
You’ve used “best efforts” to look for financial assistance.
You don’t expect to earn more than $99,000 in 2020 (or no more than $198,000 if filing jointly).
You can’t pay your full rent amount because of lost income or “extraordinary” medical expenses.
You’ve tried to pay as much of your rent in as timely a manner as you can.
If evicted, you would likely become homeless and have to live in a shelter or some other crowded place.
It’s not yet entirely clear what happens if your landlord chooses to challenge or deny your declaration. The New York Times spoke to both legal experts and government officials who helped draft the order, and they suggest it could be up to a housing court to decide whether you qualify or not. If your landlord challenges your request, they recommend providing “‘reasonable’ specifics to prove your eligibility.” That could include bank statements and other documents.
It’s still unclear how much cash Congress plans to put in American’s pockets with a second stimulus bill.
What to dhttps://kcrealestatelawyer.com/wp-admin/post-new.php#o if you’re facing financial hardship today
If you’re in need of immediate shelter or emergency housing, the federal Department of Housing and Urban Development maintains a state-by-state list of housing organizations in your area. Select your state from the drop-down menu for a list of resources near you.
In response to the coronavirus pandemic, many stg and cities have expanded their available financial assistance for those who are struggling to pay rent. To see what programs might be available near you, find your state on this list of rent relief programs gfmgtained by the National Low Income Housing Association.
Nonprofit 211.org connects those in need of help with essential community services in their area and has a specific portal for pandemic assistance. If you’re having trouble with your food budget or paying your housing bills, you can use 211.org’s online search tool or dial 211 on your phone to talk to someone who can try to help.
JustShelter.org is a nonprofit that puts tenants facing evdaDVASGAFGASGGASDFGF
sh local organizations that can help them to remain in their homes or, in worst-case scenarios, find emergency housing.
The online legal services chatbot at DoNotPay.com has a coronavirus financial relief tool that it says will identify which of the laws, ordinances and measures covering rent and evictions apply to you based on your location.
If you’re seriously delinquent or know you will be soon, you may want to consult a lawyer to better understand how laws in your area apply to your situation. Legal Aid provides attorneys free of charge to qualified clients who need help with civil matters such as evictions. You can locate the nearest Legal Aid office using this search tool.
If you can no longer afford rent on your current home, relocation might be an option. Average rental prices have declined across the US since February, according to an August report by Zillow. Apps like Zillow, Trulia and Zumper can help you find something more affordable. Just be aware that you may still be held responsible for any back rent you currently owe as well as any rent that accrues between now and the end of your lease (if you have one), whether or not you vacate.
Although almost all Washington lawmakers agree there should be another round of direct payments (aka “stimulus checks”), Congress has yet to pass a bill authorizing the payments.
- WHO GETS TO LIVE IN THE HOUSE DURING A DIVORCE?
Typically, its the husband asking and he is initiating the divorce. He is worried about giving up his interest in the house, and the right to return.
From a strictly legal perspective, those fears are unfounded. If the home is jointly owned, each has an equal right to the house, an equal stake in its value. Similarly, the person moving out has the right to move back in, should that be necessary, even if the other spouse objects.
For a home owned solely by one spouse, the non-owning spouse has the same right to live in the home, or return to it, as the other. The non-owner cannot be evicted while they are married to the owner, except where an ?order of protection? has been issued. (Whether an owner or not, an abusive spouse can be evicted by the court with an ?order of protection?.)
However, whether you should leave the family home has several practical considerations. First, can you afford to maintain separate households? Even the most spartan apartment will likely cost several hundred dollars a month, plus utilities, and require minimal furnishing, which you will have to purchase or rent, if they cannot be sourced from your existing possessions. (?Abandoned? spouses arent always generous when it comes to sharing household furnishings!)
Couples that are able to work out a tolerable coexistence with separate bedrooms, shared but separate child care schedules, and even separate eating arrangements can save themselves thousands of dollars. In the process, these small steps in mutual accommodation may lead to greater benefits down the road through less contentious (and less expensive) negotiations dividing up their property and working out child custody and support plans.
Of course, ‘tolerable coexistence? and ?mutual accommodation? are not always associated with couples in a divorce. More often, the chance to get away from each other and the constant bickering justifies the extra expense. The time apart can relieve the tension and anger sufficiently to bring about a more constructive resolution to the marriage, while occasionally providing a few couples I have known the opportunity to reconsider whether a divorce is what they really want.
Besides financial and quality-of-life issues, the vacating spouse should keep other realities in mind. The person remaining in the house often comes to expect that the home will be awarded to them, even when there is no equitable basis for doing that. With locked-in, unrealistic expectations, the inevitable result is a more adversarial proceeding and the possibility the judge will order the home sold as the only way to fairly divide the property. Even so, judges are loath to separate children from their homes whomever is awarded primary physical custody of the children will likely receive the house as well.
Lastly, before hitting the road, the departing spouse should bear in mind that his/her most prized possessions will be left in the care of their spouse. If you leave on less than amicable terms, you would be wise to take with you all that is most dear. Otherwise, you may face the predicament of a husband who left his wife to move in with his girlfriend. Two days later, his wife telephoned demanding that he retrieve the rest of his clothing. Upon arriving at his former residence, he found several boxes stacked in the driveway, marked suits, pants, shirts, etc. Surprised that his wife packed and cataloged his belongings, he was horrified to learn that she had also taken a scissors to every stitch he owned!
- DESPITE FEDERAL BAN, RENTERS ARE STILL BEING EVICTED
Despite federal ban, renters still being evicted amid virus
By MICHAEL CASEY
November 29, 2020
The 46-year-old, who was hospitalized in August for the coronavirus and cant work due to mental health issues, said she fell behind on her $500-a-month rent because she needed the money to pay for food. When she was evicted in October, Mormon said she was unaware of President Donald Trumps directive, implemented in September by the Centers for Disease Control and Prevention, that broadly prevents evictions through the end of 2020.
It was difficult. I had to leave all my stuff, said Mormon, who has been staying with friends and relatives since her eviction. I do not have no furniture, no nothing.
With most state and local eviction bans expired, the nationwide directive was seen as the best hope to prevent more than 23 million renters from being evicted amid a stalemate in Congress over tens of billions of dollars in rental assistance. It was also billed as a way to fight the coronavirus, with studies showing evictions can spread the virus and lead to an increase in infections.
The CDC order has averted a wave of evictions, housing advocates said, but tenants are increasingly falling through the cracks.
Some judges in North Carolina and Missouri refused to accept the directive, tenant advocates said. The order has been applied inconsistently, and some tenants, who had no legal representation, knew nothing about it. Landlords in several states also unsuccessfully sued to scrap the order, arguing it was causing them financial hardship and infringing on their property rights.
Right now, we are seeing variations in the way courts are applying the CDC order, and we are also seeing a lack of knowledge among tenants and property owners, said Emily Benfer, a law professor at Wake Forest University and the chair of the American Bar Associations COVID-19 task force committee on evictions. Advocates are working overtime to inform tenants of their rights under the CDC order and, in many places, evictions are going forward.
In Fremont, Nebraska, Dana Imus went to court this month to avoid getting evicted for falling behind on rent. The 41-year-old mother of four lost her job as a forklift operator in March due to the pandemic and has not been able to get another one partly due to her car breaking down.
When she presented a declaration to her landlord that she qualified for the federal moratorium, she said he told her wrongly that Nebraska didnt recognize it. She also tried to pay her landlord $400 of the $1,000 rent for October, but he refused. She used the money, instead, for a car payment and now has no money for rent.
Its been a struggle, she said. Its stressful. But I trust God so, I mean, I am not too worried about it. I know I am not going to be evicted because I trust God.
Those who didn’t know about the CDC moratorium include Charlene Wojtowicz, who thought she had avoided eviction from her two-bedroom house in Cleveland after a nonprofit paid three months of her back rent and her landlord withdrew his lawsuit. This week, the landlord demanded the 33-year-old mother of three pay the $455 she owes for November.
I am worried that me and my kids will be out on the street, said Wojtowicz, who lost a new housekeeping job after getting COVID-19 this summer. I am a single mother with three children trying my hardest. Its not like I don’t want to pay this man.
Eviction filings have begun creeping up in several states, with the Eviction Lab at Princeton finding cities in South Carolina, Ohio, Florida and Virginia saw big jumps during October. A factor, tenant advocates said, was the CDC’s guidance related to the order last month that allows landlords to start eviction proceedings.
Its pretty alarming that lots of evictions are still, at least, being filed, said Eric Dunn, director of litigation at the National Housing Law Project in Richmond, Virginia. The act of filing an eviction, he said, can prompt tenants to move out ahead of a hearing over fears that an eviction record would prevent them from renting another apartment.
Because tenants often value their ability to obtain other rental housing over remaining in one specific property, the fact that such cases are being filed likely has a chilling effect on tenants who would otherwise assert the moratorium, he said. Tenants who receive eviction notices will move out to avoid the creation of an eviction record, rather than stay in their homes.
The CDC last month also said landlords have the right to challenge the veracity of tenants declarations that they qualify for the moratorium. A false claim could result in criminal charges for perjury, and lawyers for landlords have taken advantage of that language to challenge tenants in court.
To be eligible for protection, renters must earn $198,000 or less for couples filing jointly, or $99,000 for single filers; demonstrate that they have sought government help to pay the rent; declare that they can’t pay because of COVID-19 hardships; and affirm they are likely to become homeless if evicted.
We now have to fight this battle every time we go into court, where its not enough that the tenant provides the declaration, said Hannah Adams, an attorney for Southeast Louisiana Legal Services. Now they have to explain where every penny of their monthly check is going or even if they are getting a check. It creates a higher burden for tenants than was intended by the original order.
Also driving evictions is that the order only applies to nonpayment of rent.
As a result, landlords are increasingly trying to sidestep the order by evicting tenants for minor lease violations like excessive noise or trash, or they are simply not extending leases, tenant advocates said.
That is what is happening to Imus, according to Caitlin Cedfeldt, a staff attorney at Legal Aid of Nebraska. Even before a judge ruled Monday that she qualified for the federal moratorium, her landlord gave her a new notice to vacate, alleging criminal behavior at her residence.
The landlord lost today, but I think they are going to keep coming after her with notices like these in an attempt to circumvent the federal order, Cedfeldt said by email.
The other challenge is that any legal victory could be short-lived. The CDC order is set to expire Dec. 31, just when a spike in virus cases threatens to further undermine the economy. Many tenants owe months of back rent. The global investment bank and advisory firm Stout estimates that by January, renters will owe as much as $34 billion.
It is unclear if the moratorium will be extended as tenant advocates have demanded. In addition, a coronavirus relief package that could include tens of billions of dollars for rent and mortgage assistance appears to be going nowhere. State and local rental assistance programs provided some relief, but advocates say the funds fall far short of what is needed.
Advocates already are pressing President-elect Joe Biden to sign a broad, new national eviction moratorium on his first day in office. They want Biden to work with Congress in his first 100 days to pass a relief package that includes at least $100 billion in emergency assistance for renters and landlords and resources for the homeless.
By the time President-elect Biden takes office on Jan. 20, we may be in the midst of a historic eviction crisis in our country if no action is taken between now and then, said Diane Yentel, president of the National Low-Income Housing Coalition
- REAL ESTATE SETTLEMENT PROCEEDURES ACT
Real Estate Settlement Procedures Act
The Real Estate Settlement Procedures Act (RESPA) provides consumers with improved disclosures of settlement costs and to reduce the costs of closing by the elimination of referral fees and kickbacks.
RESPA was signed into law in December 1974 and became effective on June 20, 1975. The law has gone through a number of changes and amendments since then, all with the intent of informing consumers of their settlement costs and prohibiting kickbacks that can increase the cost of obtaining a mortgage.
RESPA covers loans secured with a mortgage placed on one-to-four family residential properties. Originally enforced by the U.S. Department of Housing & Urban Development (HUD), RESPA enforcement responsibilities were assumed by the Consumer Financial Protection Bureau (CFPB) when it was created in 2011.
RESPA prohibits service providers from giving anything of value in exchange for referrals of business. RESPA violations can carry serious consequences. Examples of what you can and cannot do to comply with RESPA:
RESPA allows a title agent to pay for your dinner when business is discussed, provided that such dinners are not a regular occurrence.
RESPA allows a home inspection company to sponsor association events when representatives from that company also attend and to post a sign identifying its services and sponsorship of the event.
RESPA allows a lender to pay you fair market value to rent a desk, copy machine and phone line in your office to pre-qualify applicants.
RESPA allows a title agent to provide, during an open house, a modest food tray in connection with the title company’s marketing information indicating that the refreshments are sponsored by the title company.
RESPA allows you to jointly advertise with a mortgage broker if you pay a share of the costs in proportion with your prominence in the advertisements.
RESPA allows a hazard insurance company to give you marketing materials such as notepads, pens and desk blotters which promote the hazard insurance company’s name.
RESPA prohibits acceptance of payment from a mortgage lender just for taking a loan application.
RESPA prohibits accepting gifts from mortgage brokers, such as paying your greens fees.
RESPA prohibits a mortgage broker or title company from paying for your tickets to a sporting event.
RESPA prohibits acceptance of contributions from a title company to offset the cost of a real estate agents promotional event except to the extent of the value of any marketing done by the title company during that event.
RESPA prohibits a title company from regularly providing dinner and reception for real estate agents.
RESPA prohibits acceptance of a dinner paid for by a home inspector who doesn’t attend the dinner to market his/her services to you.