A. WHAT IS AN EASEMENT?
An easement is the legal right of a non-owner to use a specific part of another persons land for a specific purpose.
B. WHAT ARE THE PURPOSES AND BENEFITS OF EASEMENTS?
Easements are used to provide non-owners with rights of ingress, egress, utilities, and drainage over a specific portion of another’s land. Ingress and egress are terms for the easement right to travel to and from a property over the lands of another they provide pedestrian and/or vehicular access. Utilities include electric power, telephone, cable television, internet, natural gas, water, wastewater, reclaimed water, and sewer services. Purchasing easement rights can be cheaper than purchasing title or ownership to the land itself. With all of Florida being relatively low land, and having a substantial rainy season, drainage easements are also important for the control of water. In addition to the benefit of these services, holders of easements do not have to pay real estate taxes on easements.
In subdivisions, easements in the subdivisions declaration of protective covenants are what provide homeowners with the rights to use the subdivisions common areas parks, clubhouses, pools, playgrounds, tennis courts, walking paths, horse trails, private roads, etc.
C. WHY ARE EASEMENTS NEEDED?
Often, easements are created for all of the preceding purposes ingress, egress, utilities, and drainage but often their most important purpose is for ingress and egress. The need for ingress and egress comes when a parcel of land does not adjoin a public, government-owned roadway, i.e., there is another property owned by another party between the subject parcel and the road. Therefore, buyers of homes and other land should always condition their purchase upon the property having ingress and egress to a public road, whether by virtue of the property adjoining a public road or by virtue of an easement connecting the property to a public road. (All of the contracts created by the Florida Realtors the association of Florida real estate agents and The Florida Bar the association of Florida lawyers have this requirement preprinted in them.)
How can a buyer be assured of having such access? A buyer should always have the property being purchased surveyed prior to closing on that purchase. To have access without an easement, at least one boundary of the property has to coincide exactly, without gap or deviation, with the edge of a roadway, known as the right-of-way line. In other words, one boundary of the parcel and the right-of-way line have to lie on top of one another, at least for a part of the distances of the boundary and right-of-way lines. If a boundary line of the property being purchased and a right-of-way line do not coincide, the buyer needs to be certain that the property being purchased has an easement giving the buyer the legal right to cross over whatever property lies between the property being purchased and the public road. Otherwise, the owner of the intervening property could erect a fence to prevent the buyer from accessing the buyers property. Of course, if the buyer, as normal, plans to live on the property being purchased, that ingress and egress easement should also include the right to have utility lines and pipes, and perhaps drainage swales (ditches) cross over the land upon which the easement lies.
Without a documented easement, land that does not have access to a public road loses a tremendous portion of its value, since being inaccessible, it is not usable. Even if a property has access to a public road, it still may be very important to have another type of access. For example, properties across the road from a private beach, which beach does not have a nearby public access way, will have much less value than properties which have an access easement across the privately-owned, beachfront property on the other side of the road.
Easements can also be used to remedy encroachments, i.e., when a structure or other improvement on one property intrudes over a boundary line onto another persons property. The owner of the property onto which a neighbors building, a fence, the eaves of a building, etc., encroaches may not wish to sell to his or her neighbor the portion of his or her property encroached upon, but may be willing to sell them an easement to allow them to use that portion of the property for the encroaching structure. In fact, sometimes because of zoning or building code requirements, the owner of the encroached-upon property cannot sell any portion of his or her property because it would make his or her property undersized for building purposes, so an easement is the only solution to the encroachment, other than tearing down the encroaching structure. (In this situation, a setback variance would also typically have to be obtained to rectify the encroachment.)
D. WHAT ARE THE TWO MAJOR TYPES OF EASEMENTS?
The two major types of easements are appurtenant easements and easements in gross. Both types of easements can be used for all of the aforementioned uses ingress, egress, utilities and drainage.
1. Appurtenant Easements.
These easements exist for the benefit of adjoining land a perfect example of which is an ingress, egress, utilities, and drainage easement that crosses over a parcel of land that separates the property being benefitted by the easement from a public road. Appurtenant easements, unless expressly stated otherwise, are automatically conveyed with the land they benefit when the land is sold or otherwise transferred. They are said to run with the land. Thus, appurtenant easements do not have to be mentioned in the deed that conveys the lands they benefit, although it is a better practice to do so. The property which is benefitted by the easement, and for which the easement was created, is called the dominant estate. The parcel over which an easement runs is known as the servient estate. The sale of the servient estate does not terminate the appurtenant easement, despite the deed conveying the servient estate not mentioning the easement.
2. Easements in Gross.
These easements are intended to benefit a particular person, which could be an individual or a company. A perfect example of an easement in gross is an easement given to a utility company by a county or state to run electric, telephone, or internet transmission lines. Such an easement is not intended to benefit a piece of property the utility company may not own any nearby lands. Instead, the easement is intended to benefit the utility company. Easements in gross can be given to a particular individual whom a landowner likes or wishes to help (but the landowner does not want to benefit an unfamiliar heir of, or unknown buyer from, the particular individual). An easement in gross is used rather than an appurtenant easement because, when the individual being benefitted by the easement dies, moves away, or otherwise does not need the easement, the landowner wants the easement to terminate. Therefore, easements in gross do not run with the land, even if the person being benefitted by the easement in gross owned adjoining land to that of the landowner who gave the easement. As such, easements in gross have servient estates, i.e., the parcel over which the easement runs, but not dominant estates, since they are not for the benefit of particular properties. Similar to appurtenant easements, the sale of the servient estate does not terminate the easement in gross, despite the deed conveying the servient estate not mentioning the easement.
E. HOW ARE EASEMENTS NORMALLY CREATED?
Most commonly, easements are created in documents. They can be created in deeds, easement agreements, subdivision declarations, and condominium declarations, all of which are recorded in the land records (the Public Records), just like deeds and mortgages. The better practice is to create an easement using an agreement or declaration, rather than a deed, because easements created in deeds typically do not adequately address all of the issues pertaining to easements. Whatever document is used, it must be executed before two witnesses and a notary public.
Another common mistake made when creating easements in deeds is the improper use of the term subject to. The same owner may own two parcels of land one in front adjoining a public road, and another parcel behind the parcel that adjoins the road, the latter parcel therefore not adjoining the road. If the owner sells the front parcel adjoining the road, the owner should ‘reserve? back, in the deed to the buyer, an ingress, egress, drainage, and utilities easement for the benefit of the owners remaining parcel that does not adjoin the public road. Often, however, the drafter of the deed follows the subject to language in the survey (which is correct as to the survey) and conveys the front parcel adjoining the road subject to an easement for the back parcel. Florida courts have held that the term subject to does not create an easement. The easement needs to be created by ‘reserving back the easement for the back parcel in the deed for the front parcel. This problem does not occur if the landowner by chance sells the back parcel first with a deed that describes the parcel and then states the parcel is together with the easement over the front parcel. If that deed for the back parcel is recorded first, the easement is created, and when the front parcel adjoining the road is sold, its legal description subject to the back parcels easement is correct.
As mentioned above, when properties adjoin each other, easements are often created when the adjoining properties are sold to separate buyers as a part of the sales transactions, whether the adjoining properties be two properties or a large tract of land that is being subdivided into lots or condominimized and sold to different buyers. In all other cases, however, where an easement is sought from a landowner, the easement must typically be purchased from the owner of the parcel that is to be the servient estate, i.e., the parcel over which the easement will run.
F. WHAT ARE THE DIFFERENT CHARACTERISTICS OF EASEMENTS?
1. Specific Purposes and Specific Locations.
As discussed above, an easement is given for a specific purpose rights of ingress, egress, utilities, drainage, etc. In addition, nearly all easement agreements, deeds, and declarations require those rights to be exercised only in a specific location on the servient estate for example, the north 50 feet or the south 25 feet of the servient estate. The easement rights cannot be exercised over the entire servient estate just in the area described within the easement.
2. Easement Holder Rights vs. the Rights of the Servient Estate Owner.
Thus far, the rights of the easement holders to use, for various purposes, the easement over the servient estate, have been discussed. What about the rights of the owner of the servient estate over which the easement runs? The owner has a right to use the easement area just like any other part of the owners property as long as the owner does not materially interfere with the easement holders use of the easement. For example, as long as an ingress and egress easement does not state that the easement holder has unobstructed access or an open way, the owner of the servient estate may put in fences and gates over the easement area. However, the owner would likely have to install automatic openers, operable by the easement holder, so as not to materially burden, hinder, or delay the passage of the easement holder, since locked gates, even if the easement holder has keys, are often deemed by courts to overly burden and delay the easement holders passage.
On the other hand, the easement holder cannot increase the burden or increase or expand the use of the easement on the servient estate beyond what was contemplated at the time the easement was created. For example, if an owner of lands used for agricultural purposes was given an ingress and egress easement by an adjoining landowner to a public road, but then the owner of that dominant estate (the benefitted agricultural lands) decided to subdivide the lands into a large subdivision, that subdividing would greatly increase the usage or burden of the ingress and egress easement upon the servient estate over which it ran, and the servient estate owner could obtain an injunction to prevent that increased usage.
In addition, an easement holder cannot extend the right to other adjoining landowners to ?piggy-back? on and use the easement holders easement. Those adjoining landowners would have to obtain, at their own cost, their own easements from the owner of the servient estate over which the easement runs.
3. Maintenance and Repair.
The right to construct, maintain, and repair the easement in conjunction with the usage rights given is implied and does not have to be expressly stated in the easement agreement. Thus, an easement holder may construct and improve a driveway in the area of an ingress and egress easement and can likewise install power lines and water and sewer pipes in the area of a utility easement, unless the easement has specific restrictions or limitations in these regards. Moreover, unless the easement states otherwise, the easement holder is responsible for paying the costs of all construction, maintenance, and repair of the easement areas improvements, even though the owner of the servient estate uses the driveway or connects into the utility lines (as long as the owner pays the utility company for the utility services used by the owner). The owner of the servient estate over which the easement runs has no duty or obligation to maintain or repair the easements improvements.
4. Other Characteristics.
Most appurtenant easements are perpetual and continue forever. Easements in gross, however, unless they are utility easements given to companies that provide such services, typically only last as long as the individual benefited by them is alive or otherwise uses the easement. However, all easements can be limited to a certain period of time, according to their terms.
Most all easements are non-exclusive, i.e., the owner of the servient estate over which they run reserves the right to give other persons easements for the same or different purposes over the same area at the same time. In other words, you can think of non-exclusive easements as stackable on top of each other, with different easement holders being able to use the same area at the same time for different or similar purposes.
5. Affirmative vs. Negative Easements.
Thus far, all of the easements which we have discussed are affirmative easements. They give the easement holder an affirmative right the right to travel over the easement or the right to have utilities or swales on the easement. In areas of the country with high density high rises or expensive beachfront properties, there are easements which give the easement holder view, solar, light, and air rights over and across the properties of others. In these areas, an aesthetic view overlooking a city skyline or a beach is of great intrinsic and extrinsic value, so a seller of an adjoining property in these areas may wish to protect his or her view from being obstructed by the new building that will be constructed by the buyer of the property being sold. Similarly, in the downtown areas of large metropolitan cities, skyscrapers can significantly obstruct sunlight or the free flow of air, and in this era in which solar power is increasingly desired and used, solar, sunlight, and air easements are being sought and given. View, solar, sunlight, and air easements are often referred to as negative easements, since they prevent the owners of the servient estates over which the easements run from constructing buildings or other structures that would obscure views, sunlight, or the movement of air. Given the location of the areas in which these easements are found, they can be extremely expensive to purchase.
G. BUT WHAT IF YOU NEED, BUT DO NOT HAVE, A WRITTEN EASEMENT?
If one needs an easement but does not have a documented, written easement, and one cannot afford one or the owner of the servient estate does not want to give one, there are three types of easements that may be possibly obtained. These easements are known as common law ways of necessity, statutory ways of necessity, and prescriptive easements. A person seeking any of these easements must bring a legal action in court and will have the burden of proving the requirements for establishing such an easement have been met.
1. Common Law Ways of Necessity. A common law way of necessity is an easement which arises when an owner sells a portion of his or her land and either (a) the portion sold has no practical access to a public road except over the remaining lands of the seller, or (b) the remaining lands retained by the seller have no practical access to a public road except over the land sold. It is said that the parcel which does not have access is landlocked. Even if there is physical access, a parcel is considered landlocked if the access is not reasonable and practicable. For example, if the access is not available during a large part of the year due to flooding, the parcel is considered to be landlocked. Either the first or any subsequent owner of a landlocked parcel can apply to a court to have the common law way of necessity recognized. Not only is this doctrine a part of the common law (the law that the United States adopted or inherited from Great Britain when it declared its independence), but now this doctrine is codified as Section 704.01(1) of the Florida Statutes. The common law way of necessity easement is given to the owner of the landlocked parcel always over the other parcel which has access to a public road and which previously had a common owner with the landlocked parcel. The way of necessity easement is recognized for the benefit of the landlocked parcel only if (a) the landlocked parcels owner owns no other reasonable and practicable way of ingress and egress, and (b) it is reasonably necessary for the beneficial use or enjoyment of the landlocked parcel. The recipient of the common law way of necessity does not have to pay for the easement.
2. Statutory Ways of Necessity. A statutory way of necessity easement exists pursuant to Florida Statutes Section 704.01(2) if a parcel is landlocked and a prior common owner of that parcel and an adjoining parcel with access to a public road cannot be found. However, a statutory way of necessity easement is recognized by a court only if the landlocked parcel is used, or is desired to be used, for one of the following purposes: (a) as a dwelling, (b) for farming, ranching, or other agricultural purposes, or (c) for timber raising or cutting. A court can give a statutory way of necessity easement over any adjoining property, as long as it is the nearest practicable route to a public road. As with a common law way of necessity easement, even if there is physical access, a parcel is considered landlocked if the access is not reasonable and practicable. Unlike a common law way of necessity easement, the owner of the servient estate over which the statutory way of necessity easement runs must be compensated for the easement encumbering his or her property. Also, unlike a common law way of necessity, statutory ways of necessity can also be for utility purposes (again, however, this right must be purchased).
3. Prescriptive Easements. Prescriptive easements are recognized by a court when a person and his or her predecessors have (a) actually, continuously used without interruption, (b) a specific area of land owned by another, (c) for 20 years, with (d) the actual knowledge of that owner, or in such an open, notorious, and visible way that the owner must have or should have known of the use, plus (e) that use has been adverse to the owner, i.e., without the owners permission, or at least inconsistent with the owners rights, and (f) the owner has taken no legal action to prevent the use. The owner of the servient estate over which the prescriptive easement is recognized is not compensated for the easement, just like an owner whose land is adversely possessed by another.
H. HOW ARE EASEMENTS TYPICALLY TERMINATED?
1. By the Easement Holder. The easement holder may unilaterally terminate the easement by executing, delivering, and recording a written release of the easement or a quit claim deed conveying the easement back to the owner of the servient estate.
2. By Mutual Agreement. If both the easement holder and the owner of the servient estate agree, they may execute and record a termination of the easement, but once again, it should contain a written release of the easement or a quit claim deed by the easement holder conveying the easement back to the owner of the servient estate.
3. By the Doctrine of Merger. When one of the owners of either the dominant estate which an easement benefits or the servient estate over which the easement runs becomes the owner of both properties, then there is a ?unity of the two titles,? and since an owner does not need an easement over the owners own property, according to Florida law, the easement merges out of existence and into the owners title. A subsequent sale of one of the two parcels does not revive an easement that has merged out of existence.
- 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.”