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VERY OFTEN NON-ATTORNEY CLIENTS ARE IN THE PROCESS OF DRAFTING OR SIGNING A LEASE OR PURCHASE/SALE AGREEMENT AND AT THE VERY LAST MINUTE REALIZE IT WOULD BE WISE TO HAVE AN ATTORNEY REVIEW THE CONTRACT FOR ANYTHING THEY MAY HAVE MISSED, OR IT BECOMES OBVIOUS THAT THERE ARE MATTERS IN THE CONTRACT OR LEASE THAT ARE PROBLEMATIC EITHER BECAUSE THEY CANNOT BE UNDERSTOOD OR ARE IN CONFLICT WITH OTHER AREAS OF THE SALE CONTRACT OR LEASE. WE ALSO DRAFT DOCUMENTS IN THE EVENT YOU DETERMINE AFTER THE APPOINTMENT IT IS BETTER TO HIRE A PROFESSIONAL TO ENSURE DOCUMENTS ARE DRAFTED PRECISELY TO AVOID DELAYS AND PROBLEMS DOWN THE ROAD. IN THOSE CASES WE NORMALLY CREDIT THE AMOUNT PAID FOR THE APPOINTMENT TOWARD FUTURE LEGAL SERVICES RENDERED.
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“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.[1] 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.[2]
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.
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
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.’
— Rep. Al Green, the Democratic chair of the House Financial Services Subcommittee on Oversight and Investigations
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.
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. Enforcement Action
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.
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.
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
In writing
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.
Deed specified
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
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
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.
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, especially the rates on interbank exchanges and Treasury bills, have as profound an effect on the value of the 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.
Valuation Fundamentals
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.
Capital Flows
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.
Discount Rates
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.
Conclusion
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.
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.
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 maintaining 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, 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
Pros
Beneficial when the co-owners can’t agree to terms
Possibility of recovering unreimbursed costs of major renovations conducted by one of the owners
Cons
Potentially expensive
Time-consuming
Property is normally lost through re-sale and the proceeds are split
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.
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.
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.
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.
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.
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.
Key Takeaways
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.
Special Considerations
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.
MULTIPLE STRUCTURES ON ONE PARCEL A PROBLEM FOR HOME SELLERS
MULTIPLE STRUCTURES ON ONE PARCEL A PROBLEM FOR HOME 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.
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 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. Delayed Exchange
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.
Summary
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.
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.
Solution
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.
Solution
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.
Solution
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.
Solution
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.
Solution
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.
Solution
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
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.
Net Lease
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.
Novating a contract
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
To 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.
When homeowners sell the family home to a loved one, they may wish to do so at a discounted rate. When this happens, the difference between the home’s market value and its sale price acts as a gift of equity from the seller to the buyer. A gift of equity is beneficial to the buyer, but there are certain requirements and potential tax implications that both parties should be aware of.
What Is A Gift Of Equity?
A gift of equity occurs when someone sells a property to a family member or close associate for a lower price than the current market value. The difference between the two prices represents the gift of equity.
The gift of equity generally serves as the homebuyer’s down payment. It makes it easier for them to get a mortgage by creating equity in the home.
A gift of equity is often used when a home sale occurs between family members. For example, parents might use a gift of equity when selling the family home to their child.
How Does A Gift Of Equity Work?
When parties plan to use a financial gift of equity, the homeowner sells the residence to the buyer at a rate below its market value. No money changes hands between the two parties. Instead, the gift creates equity in the home for the buyer. Then, when it comes time to get a mortgage, that equity serves as the buyer’s down payment rather than having to put down cash.
Suppose a retired couple was moving to a smaller home and decided to sell their family home to their son and his new wife. The home’s value is $200,000, but the parents wish to cover the 20% down payment for their son. Rather than writing their son a check for $40,000, they would simply sell the home to their son for $40,000 less than its market value.
The $40,000 difference is the gift of equity and serves as the son’s 20% down payment. The son is likely to have an easier time getting a mortgage since he’ll have 20% equity in the home. He’ll also avoid paying private mortgage insurance, which is often required for down payments less than 20%.
Gift Of Equity Requirements
There are a couple of specific requirements that the parties must meet to complete a gift of equity. Sellers should keep these in mind if they’re considering using this strategy to sell a home to a loved one.
Equity Letter
A gift letter is a document that summarizes all of the information about the gift, including the appraisal price and the sale price. Both the buyer and seller must sign the letter. A second letter will accompany other official documents at the home’s closing.
An Official Appraisal
To complete a gift of equity, the home’s seller must have an official appraisal done. Using the appraisal, the parties can determine the sale price and the gift of equity. The lender requires this appraisal, and the appraisal value will be included in the gift letter.
The Pros And Cons Of A Gift Of Equity
Pros Of A Gift Of Equity
Avoid paying real estate agent commissions: Because a gift of equity often happens between two family members, these home sales often don’t require a real estate agent or an agent’s commission. This benefits the seller, who typically pays commission for both agents.
Lower or no down payment for recipient: Because the gift of equity serves as the down payment, the buyer often doesn’t have to put down any additional money.
Faster home sale: A gift of equity can help to expedite a home sale. First, the buyer doesn’t need time to save a down payment and may have an easier time qualifying for a mortgage. And because the sale occurs between family members, the process can go more smoothly.
Potentially avoid paying private mortgage insurance: Buyers typically must pay private mortgage insurance (PMI) when they purchase a home with less than 20% down. Because the gift of equity often serves as a down payment, it can negate the need for PMI.
Keeping a home within the family: For many people, their family home is an important memento. A gift of equity can help to keep a home within the family even when the buyer may not be able to save enough for a down payment.
Cons Of A Gift Of Equity
Legal fees for both parties: A gift of equity requires a contract between the two parties. As a result, one or both parties may have fees to an attorney to draft the contract.
Potential trigger of the gift tax: The IRS requires that people file a gift tax return when they transfer more than $15,000 in gifts to another individual. If the gifted equity equals more than $15,000, then a seller would have to file this return.
Negative effect on home’s cost basis: When you sell a home for more than you bought it for, you may be subject to capital gains taxes on the profit. Because a gift of equity reduces the sale price of a home (aka the cost basis), it increases the chances that the buyer will end up paying those capital gains taxes.
Negative effect on local real estate market: A gift of equity reduces the sale price of a home. Doing so could impact the neighborhood’s real estate market because there’s a record of a property being sold below market value.
The Bottom Line
A gift of equity is a strategy that people can use to sell a family home to a relative for less than its market value. The lower sale price serves as the buyer’s down payment, making it easier for them to buy the home.
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A land patent is a form of letters patent assigning official ownership of a particular tract of land which has gone through various legally proscribed processes – such as surveying and documentation, followed by the letters signing, sealing, and publishing in public records – made by a sovereign entity.
It is the highest evidence of right, title, and interest to a defined area. It is usually granted by a central, federal, or state government to an individual, partnership, trust or private company.
The land patent is not to be confused with a land grant. Patented lands may be lands previously granted by a sovereign authority in return for services rendered or accompanying a title or otherwise bestowed gratis, or they may be lands privately purchased by a government, individual, or legal entity from their prior owners.
“Patent” is both a process and a term. As a process, it is somewhat parallel to gaining a patent for intellectual property, including the steps of uniquely defining the property at issue, filing, processing, and granting. Unlike intellectual property patents, which have time limits, a land patent is permanent.
In the United States, all claims of land ownership can be traced back to a land patent, first-title deed, or similar document regarding land originally owned by France, Spain, the United Kingdom, Mexico, the Kingdom of Hawaii, Russia, or Native Americans. Other terms for the certificate that grants such rights include first-title deed and final certificate.
A land patent is known in law as a “letters patent”, and usually issues to the original grantee and to their heirs and assigns forever. The patent stands as the supreme title to the land because it attests that all evidence of title existent before its issue date was reviewed by the sovereign authority under which it was sealed and was so sealed as irrefutable; thus, at law, the land patent itself so becomes the title to the land defined within its four corners.
In practice, the “irrefutability” of counter-claims is relative; however, once a patent is granted permanence of title is established.
History of land patents in the United States of America
Land in the United States of America was acquired by claim, seizure, annexation, purchase, treaty, or war from France, Great Britain, the Kingdom of Hawaii, Mexico, Russia, Spain and the Native American peoples.
As England, later to become Great Britain, began to colonize America, the Crown made large grants of territory to individuals and companies. In turn, those companies and colonial governors later made smaller grants of land based on actual surveys of the land. Thus, in colonial America on the Atlantic seaboard, a connection was made between the surveying of a land tract and its “patenting” as private property.
Many original colonies’ land patents came from the corresponding country of control (e.g., Great Britain). Most such patents were permanently granted. Those patents are still in force; the United States government honors those patents by treaty law, and, as with all such land patents, they cannot be changed.
Many early patents of lands originally granted by Native peoples were contested, occasionally in court, as a result of different understandings of “private property” and “ownership” between those people, who typically held land and its bounties communally, reinforced by oral tradition, and colonizers from Western Europe who held established and finite views on assets, their transfer, and their adjudication in a system of written laws, Crown rights and officials, courts, and permanent records.
After the American Revolution and the ratification of the Constitution of the United States, the United States Treasury Department was placed in charge of managing all public lands. In 1812, the General Land Office was created to assume that duty.
In accord with specific Acts of Congress, and under the hand and seal of the President of the United States of America, the General Land Office issued more than 2 million land grants made patent (land patents), passing the title of specific parcels of public land from the nation to private parties (individuals or private companies). Some of the land so granted had a survey or other costs associated with it. Some patentees paid those fees for their land in cash, others homesteaded a claim, and still, others came into ownership via one of the many donation acts that Congress passed to transfer public lands to private ownership. Whatever the method, the General Land Office followed a two-step procedure in granting a patent.
First, the private claimant went to the land office in the land district where the public land was located. The claimant filled out entry papers to select the public land, and the land office register (clerk) checked the local registrar records to make sure the claimed land was still available. The receiver (bursar) took the claimant’s payment because even homesteaders had to pay administrative fees.
Next, the district land office register and receiver sent the paperwork to the General Land Office in Washington. That office double-checked the accuracy of the claim, its availability and the form of payment. Finally, the General Land Office issued a land patent for the claimed public land and sent it on to the President for his signature.
The first United States land patent was issued on March 4, 1788, to John Martin. That patent reserves to the United States one-third of all gold, silver, lead and copper within the claimed land.
A land patent for a 39.44-acre (15.96 ha) land parcel in present-day Monroe County, Ohio and within the Seven Ranges land tract. The parcel was sold by the Marietta Land Office in Marietta, Ohio in 1834.
Usage restrictions (e.g., oil and mineral rights, roadways, ditches, and canals) placed on the land are spelled out in the patent. These are distinct from state and local statutory regulations relative to property appurtenant to the land, such as zoning and building codes, as well as property taxes applying to both land and property.
Private property rights accompanying land patents can also be thereafter negotiated in accord with the terms of private contracts. The rights inherent in patented land are carried from heir to heir, heir to the assignee, or assignee to assignee, and cannot be changed except by private contract (warranty deed, quitclaim deed, etc.). In most cases, the law of a particular piece of patented land will be governed by the Congressional Act or treaty under which it was acquired, or by terms spelled out in the patent. For example, in the United States, the laws governing the land may involve the Homestead Act or reservations placed on the face of the patent, or the Treaty of Guadalupe Hidalgo, which governs certain jurisdictional dicta relating to large amounts of land in California and adjoining territories.
Legal entities other than natural persons (such as trusts and corporations) cannot obtain land patents except by express act of the United States Congress. An example of Congress granting land through patents to corporate entities is the railroad grants made under the Pacific Railroad Acts to compensate the railroad companies for building a transnational railroad across America.
Former U.S. territories
When a territory agreed to enter the Union of the United States of America, an Enabling Act was agreed to as a condition precedent of statehood. The Enabling Act requires that all unappropriated (not yet privately owned) lands be forever disclaimed by the territory and the people of the territory, and the title ceded to the United States for its disposition.[2] For example, the enabling act of the Washington Territory declares, in part:
… that the people inhabiting said proposed States do agree and declare that they forever disclaim all right and title to the unappropriated public lands lying within the boundaries thereof, and to all lands lying within said limits owned or held by any Indian or Indian tribes; and that until the title thereto shall have been extinguished by the United States, the same shall be and remain subject to the disposition of the United States. ..
After the right and title to the land was disclaimed by the people of the territory, it was held in trust by the United States until someone proved a claim to it, typically by improving the homestead parcel for a certain period of time. Once a proper claim has been filed, the General Land Office (now the Bureau of Land Management) certifies that the claimant has paid for a survey, as well as depositing another sum of money. Then, pursuant to the various land acts of Congress, the land is granted to the private owner by letters patent under the signature and seal of the President of the United States of America.
When homeowners sell the family home to a loved one, they may wish to do so at a discounted rate. When this happens, the difference between the home’s market value and its sale price acts as a gift of equity from the seller to the buyer.
A gift of equity is beneficial to the buyer, but there are certain requirements and potential tax implications that both parties should be aware of.
What Is A Gift Of Equity?
A gift of equity occurs when someone sells a property to a family member or close associate for a lower price than the current market value. The difference between the two prices represents the gift of equity.
The gift of equity generally serves as the homebuyer’s down payment. It makes it easier for them to get a mortgage by creating equity in the home.
A gift of equity is often used when a home sale occurs between family members. For example, parents might use a gift of equity when selling the family home to their child. When parties plan to use a financial gift of equity, the homeowner sells the residence to the buyer at a rate below its market value. No money changes hands between the two parties. Instead, the gift creates equity in the home for the buyer. Then, when it comes time to get a mortgage, that equity serves as the buyer’s down payment rather than having to put down cash.
Suppose a retired couple was moving to a smaller home and decided to sell their family home to their son and his new wife. The home’s value is $200,000, but the parents wish to cover the 20% down payment for their son. Rather than writing their son a check for $40,000, they would simply sell the home to their son for $40,000 less than its market value.
The $40,000 difference is the gift of equity and serves as the son’s 20% down payment. The son is likely to have an easier time getting a mortgage since he’ll have 20% equity in the home. He’ll also avoid paying private mortgage insurance, which is often required for down payments of less than 20%.Gift Of Equity Requirements There are a couple of specific requirements that the parties must meet to complete a gift of equity. Sellers should keep these in mind if they’re considering using this strategy to sell a home to a loved one.
Equity Letter
A gift letter is a document that summarizes all of the information about the gift, including the appraisal price and the sale price. Both the buyer and seller must sign the letter. A second letter will accompany other official documents at the home’s closing.
An Official Appraisal
To complete a gift of equity, the home’s seller must have an official appraisal done. Using the appraisal, the parties can determine the sale price and the gift of equity. The lender requires this appraisal, and the appraisal value will be included in the gift letter.
The Pros And Cons Of A Gift Of Equity
Pros Of A Gift Of Equity
Avoid paying real estate agent commissions: Because a gift of equity often happens between two family members, these home sales often don’t require a real estate agent or an agent’s commission. This benefits the seller, who typically pays commission for both agents.
Lower or no down payment for recipient: Because the gift of equity serves as the down payment, the buyer often doesn’t have to put down any additional money.
Faster home sale: A gift of equity can help to expedite a home sale. First, the buyer doesn’t need time to save a down payment and may have an easier time qualifying for a mortgage. And because the sale occurs between family members, the process can go more smoothly.
Potentially avoid paying private mortgage insurance: Buyers typically must pay private mortgage insurance (PMI) when they purchase a home with less than 20% down. Because the gift of equity often serves as the down payment, it can negate the need for PMI.
Keeping a home within the family: For many people, their family home is an important memento. A gift of equity can help to keep a home within the family even when the buyer may not be able to save enough for a down payment.
Cons Of A Gift Of Equity
Legal fees for both parties: A gift of equity requires a contract between the two parties. As a result, one or both parties may have fees to an attorney to draft the contract.
Potential trigger of the gift tax: The IRS requires that people file a gift tax return when they transfer more than $15,000 in gifts to another individual. If the gifted equity equals more than $15,000, then a seller would have to file this return.
Negative effect on home’s cost basis: When you sell a home for more than you bought it for, you may be subject to capital gains taxes on the profit. Because a gift of equity reduces the sale price of a home (aka the cost basis), it increases the chances that the buyer will end up paying those capital gains taxes.
Negative effect on local real estate market: A gift of equity reduces the sale price of a home. Doing so could impact the neighborhood’s real estate market because there’s a record of a property being sold below market value.
The Bottom Line
A gift of equity is a strategy that people can use to sell a family home to a relative for less than its market value. The lower sale price serves as the buyer’s down payment, making it easier for them to buy the home.
Here are some of the most common HOA rules violations you should know about:
1. Landscaping HOAs are responsible for the community’s curb appeal, so expect yours to have rules about overgrown lawns, weeds and unkempt exteriors. Be sure to check your bylaws about what types of trees, plants and shrubs are allowed to be planted.
2. Vehicles HOAs often limit how many and what type of motor vehicles (RVs, boats and commercial vehicles, for example) can be kept on the property, as well as enforce speed limits and rules about parking in designated areas.
3. Rentals Some HOAs have rules about subletting homes, both because of security and because most communities’ insurance is dependent on the percentage of owners versus renters. Most HOAs require written permission to rent a home, which may require a homeowner to join a waitlist.
4. Trash Homeowners in an HOA can get into trouble for throwing certain items, like boxes that haven’t been broken down or pieces of furniture, into community dumpsters. It might also be against the rules to put trash cans out too early or not bring them in by a certain time, since they can attract pests and detract from the community’s appearance.
5. Exterior storage HOAs sometimes limit what types of equipment can be stored outside. For instance, you might have to keep bicycles or kayaks out of view, behind a fence. Your HOA might also have rules limiting or preventing the addition of storage structures that aren’t attached to the home.
6. Pets To keep their residents safe and comfortable, HOAs often have restrictions about where pets can and can’t walk, keeping dogs on leashes and picking up after your pet. You might also be limited to how many pets you can own, and specific breeds and sizes.
7. Noise Most HOAs have rules that restrict loud noises between certain hours. (Most cities and counties also have noise ordinances that must be followed, even if the HOA doesn’t have restrictions.)
8. Holiday decorations If you’re the neighbor who keeps Christmas lights up until Valentine’s Day, living in an HOA community might not be ideal. Some HOA rules include rules for how long before and after a holiday you can decorate your home’s exterior. Others might even regulate the size and type of decor allowed.
9. Design changes HOAs often have strict rules about changing the appearance or structure of your home. Simple things like painting your house, adding a patio or deck or even changing your mailbox usually require written approval from the HOA’s design review committee.
Can the police enforce HOA rules? The short answer is yes, police can enforce some HOA rules. That’s because HOA rules have to comply with state and local laws and ordinances. For instance, police could enforce speed limits, noise ordinances and pet leash laws because they are legal matters, but they wouldn’t enforce other HOA rules on landscaping or paint violations.
What happens if you violate HOA rules? An HOA can’t force a homeowner to sell a home for not following the HOA rules; however, it can enforce the rules and initiate reasonable fines for violations.
Just ask Atlanta homeowner Parker Singletary. Before Atlanta hosted the Super Bowl in 2019, one of Singletary’s neighbors mentioned that residents were allowed to rent their homes just for that weekend. Singletary cleaned his house, took photos and posted them on a popular property rental site.
“Nobody ended up taking my house for the weekend, so I thought I was done with the situation,” Singletary says. Instead, he received a cease-and-desist letter from a local law firm for breaking the HOA rules, along with a $1,000 fine.
As Singletary discovered, whether you knowingly break the HOA rules or overstep them by mistake, the consequences can be costly. If a bylaw is broken, it’s the association’s responsibility to notify the offending resident to allow them to comply, or assign a fine.
In Singletary’s case, he didn’t receive a warning. Instead, he received a $1,000 fine, which he appealed. The fine was later reduced to $300 to cover legal fees.
If a homeowner doesn’t pay a fine for a violation, late fees can pile up, and the HOA can put a lien against their home (even if it has a mortgage). The HOA can opt to foreclose on the lien, too, so it’s best to avoid that outcome if possible.
How to respond to HOA rules violations Address it. Ignoring a violation won’t make it go away, and can actually make the situation much worse. Once you’ve received a violation notice, take steps to understand and correct the violation, and either pay or appeal the fine, if there is one. Don’t take it personally. Remember that the HOA’s rules were created to keep the community safe and comfortable for residents, including you. You also agreed to abide by the rules when you bought your home. Communicate. While friendly face-to-face communication can address minor infractions or warnings, written communication and documentation helps create clarity for everyone involved. When you’ve been accused of an HOA rule violation, it’s best to address it in writing. If there are extenuating circumstances — like a family emergency that causes you to fall behind on lawn care — communicate that to your HOA property manager. You don’t know if an exception can be made until you ask. Get involved. “There is usually a correlation between the level of homeowner involvement and the long-term success of a community,” Bauman says. So, if you want to improve your community, volunteer for a board position or attend meetings to see how you can contribute. Bottom line Living in an HOA community isn’t for everyone, but if you’re interested in joining one, be sure to do your homework and understand the rules before making an offer on a home. How an HOA enforces its rules and handles violations can vary between communities, so obtain a copy of the association’s CC&Rs to ensure you understand what you’re buying into and agreeing to.
“Homeowners have the right to receive all documents that address rules and regulations governing the community association,” Bauman says, adding that “since association rules vary from community to community, common HOA violations also differ.”
KC Real Estate Lawyer in Kansas City MO HOA RESTRICTIONS ON SHORT TERM RENTALS
What are Short term HOA Rental Restrictions?
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 enforcement of rental restrictions against owners if the restriction was not already in effect at the time of purchase, and the owner did not vote to adopt the restriction. Fla. Stat. §718.110(13), Cal. Civ. Code §4740(a), (b). Similarly, Arizona’s law will not let an HOA enforce a rental restriction against an owner who purchased a property before the restriction’s enactment unless the restriction was approved by a unanimous member vote. A.R.S. §33-1227.
So far, this all seems straight-forward enough, but there is a curveball coming. Under California’s HOA law, existing owners are generally protected against later-adopted HOA rental restrictions. However, HOAs can enforce “reasonable” limitations, if not outright prohibitions. Laguna Royale Owners Assn. v. Darger, 119 Cal.App.3d 670, 174 Cal. Rptr. 136 (Cal. Ct. App. 1981). What that practically means is that an owner protected against rental restrictions, in general, might nonetheless be prevented from engaging in short-term rentals.
California courts have recognized that short-term rentals can negatively affect a community beyond what results from ordinary, long-term rentals. With that in mind, the courts reasoned that a minimum lease period (or similar rule preventing short-term rentals) does not offend California’s grandfathering law because the owner still has the right to rent the property. The right has been limited, but the owner can still rent to a long-term tenant. Watts v. Oak Shores Community Assn., 235 Cal.App.4th 466 (2015), Mission Shores Assn. v. Pheil, 166 Cal.App.4th 789, 83 Cal. Rptr. 3d 108 (Cal. Ct. App. 2008)
But that raises a question: what is so different about short-term rentals compared to long-term rentals?
Residential vs. Commercial Use Restrictions
Residential use restrictions are one of the most common restrictions included in HOA declarations, and they have been consistently upheld by reviewing courts throughout the country. Essentially, a declaration says that properties in the community are intended to be used as homes, not as businesses or farms. And, by accepting a deed to a property subject to the HOA, owners covenant that they will not use their properties for commercial (i.e., business-related) purposes.
It is similar to a single-family residential zoning ordinance—just adopted by an HOA instead of a local government. Some HOAs have tried to prohibit short-term rentals, relying on commercial-use restrictions. The argument is that if you are using your property as a short-term rental, you are effectively using it for a commercial purpose.
Before looking at this question further, it is worth emphasizing two points. First, state courts are not consistent in how they have interpreted the issue. Second, a short-term rental prohibition based on a residential-use covenant is distinct from an ordinary rental restriction. If an association can rely on an enforceable restriction prohibiting rentals, it does not need to argue that short-term rentals are a commercial use. The argument generally comes up when an HOA wants to prevent short-term rentals but does not have a rental restriction—or it has a rental restriction that it cannot enforce against a specific homeowner due to (for example) a grandfathering clause.
When considering this issue, an appeals court in Michigan held that an HOA that prohibited short-term rentals based on a commercial-use restriction did not exceed its authority. Eager v. Peasley, 911 N.W.2d 470, (Mich. Ct. App. 2017). Noting that “provid[ing] temporary housing” to vacationers is a “profit-making enterprise,” the court concluded that “the act of renting property to another for short-term use is a commercial use, even if the activity is residential in nature.”
Thus, under the Eager Court’s reasoning, a Michigan HOA with a commercial-use restriction could adopt and enforce a policy against short-term rentals, even if the HOA did not have an express rental restriction in its declaration.
On the other hand, states that afford greater deference to individual homeowners’ property rights have come down the other way. In North Carolina, for example, courts typically interpret unclear restrictions in favor of homeowners. Based on that principle, a North Carolina court held that a generalized restriction against non-residential use by itself was insufficient authority for an HOA to prohibit short-term rentals. Wise v. Harrington Grove Cmty. Ass’n, 584 S.E.2d 731 (2003).
Unsurprisingly, the Texas Supreme Court likewise came down in favor of the property owner in Tarr v. Timberwood Park Owners Ass’n, 61 Tex. Sup. Ct. J. 1174 (2018). In that case, the HOA relied on a restriction that only allowed properties in the community to be used as single-family residences. According to the Tarr Court, the provision did not plainly forbid short-term rentals because, as long as renters used the home for residential purposes, the covenant was satisfied.
Unfortunately, the question as to whether a residential use provision provides adequate grounds to prohibit short-term rentals is inconsistent from state to state. Accordingly, the most sure-fire way for HOAs to prevent short-term rental of properties within the community is to amend their declarations to unambiguously forbid short-term rentals.
Adopting and Enforcing Short-Term Rental Restrictions
As we have seen, an HOA cannot just decide one day that it wants to prohibit short-term rentals. The prohibition must be grounded in some authority derived from the community declaration. For the most part, a community with an existing rental restriction in its declaration will have the right to enforce the restriction.
If it doesn’t, the HOA will need to amend its declaration following the amendment process provided under state law and the declaration itself. Usually, the amendment requires the approval of at least a majority of homeowners in the community.
When proposing language for a rental restriction, an HOA board should clearly define what rentals will be prohibited. A common approach is to establish a minimum lease period (such as 30 days), with any rental period below that threshold forbidden. If there will be any exceptions to the general prohibition, they need to be spelled out, too.
To avoid challenges from existing homeowners, it can be a good idea to include a grandfathering clause within a proposed amendment restricting rentals. Remember, multiple states have laws that prohibit enforcement of a rental restriction against a homeowner if the restriction was not in place when they acquired the property—unless the owner consents to the restriction. Even in states without these statutory protections, affected owners can argue that a newly adopted restriction deprives them of a vested property right.
A “grandfather” clause might let an owner currently engaged in short-term rentals continue doing so. Or an amendment could establish a cap on the number of homes in the community that can be used as short-term rentals. Rental restrictions should include an enforcement mechanism that can be used against non-compliant owners. For example, fines might be imposed on violative owners, or access to common facilities could be limited for so long as a violation continues. State HOA laws vary with regard to permissible penalties, so an HOA needs to make sure its enforcement mechanism is statutorily compliant.
When all else fails, an HOA can seek recourse via civil litigation. In that case, the board (on behalf of the HOA) files suit against the non-compliant owner and requests an order from a judge directing the owner to cease short-term rentals. Of course, litigation is often expensive and time-consuming, so it is usually better to resolve things out of court if possible.
Importantly, an HOA should consult with an experienced attorney when attempting to amend its declaration. An attorney familiar with HOA law can help create an enforceable policy that complies with state law and ensures the amendment process is properly observed—mitigating the risk of future challenges to the policy.
As a general matter, an HOA’s enforcement of rental restrictions (or any other restrictions, for that matter) needs to be “procedurally fair and reasonable.” Enforcement should be consistent and proportional and never “arbitrary and capricious.” Saunders v. Thorn Woode Partnership, L.P., 265 Ga. 703, 462 S.E.2d 135 (Ga., 1995). Inconsistent or arbitrary enforcement can provide homeowners with a defense against enforcement actions. White Egret Condo., Inc. v. Franklin, 379 So.2d 346 (Fla. 1979).
In many jurisdictions, courts have found that an association that attempts to enforce a restriction that it has not previously enforced consistently or enforced against some owners but not others—has effectively abandoned or waived its right to enforce the restriction. Liebler v. Point Loma Tennis Club, 40 Cal. App. 4th 1600, 1610-11 (4th Dist. 1995); Prisco v. Forest Villas Condominium Apartments, Inc., 847 So 2d 1012 (Fla.App. Dist.4, 2003).
Similarly, enforcement aimed only at homeowners that fall within certain groups is subject to challenge by the singled-out homeowners. See, e.g., Bloch v. Frischholz, 533 F.3d 562 (7th Cir. 2008).
Fair Housing Act Implications
Like with any other policies, an HOA’s short-term rental restriction policies need to comply with the federal Fair Housing Act. The FHA prohibits housing discrimination based on race, color, religion, sex, familial status, national origin, or disability. 42 U.S.C. §3604(a). Blatantly discriminatory policies are obviously banned. For instance, an HOA cannot adopt a policy that prohibits short-term rentals to Episcopalians or prevents Episcopalians (but only Episcopalians) from renting their properties.
The FHA can also cover policies and actions that are unintentionally discriminatory. If a policy results in a disproportionately “disparate impact” on a protected class, the policy may violate the FHA. Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., 135 S.Ct. 2507 (2015).
“Familial status” discrimination can be a potential FHA tripwire for HOAs. Under federal court decisions interpreting the FHA, “familial status” does not just mean things like whether a person is married, single, or divorced. The term has also been interpreted to include most age-based discrimination. See, Iniestra v. Cliff Warren Investments, Inc., 886 F. Supp. 2d 1161, 1164 (C.D. Cal. 2012). Restrictions against families with children—or restrictions that appear designed to prevent rentals to families with children—can likewise amount to familial status discrimination in violation of the FHA.
So, for instance, an HOA that tries to enforce a validly adopted blanket prohibition on short-term rentals will probably be upheld. But an HOA that allows some short-term rentals—but not to renters who have children—may find itself subject to an FHA complaint.
HOA laws can be complex, with many variations between states. Homeowners who have questions about how their association’s rules affect their rights—and associations that are unsure of the breadth of their restrictions or are considering an amendment to covenants—should consult with an experienced attorney familiar with the HOA laws of the state in which the community is situated.
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A tenancy in common is a popular way for co-owners to take title to a home. This way of vesting offers an alternative to joint tenancy, in which a home is co-owned, but the owners split their interests evenly. Here, we talk about what a tenancy in common is, and why its allowance for co-owning in unequal shares can be a benefit.
The Tenancy in Common: A Popular Choice for Co-Owners
When people acquire a property together, they should be ready to specify what form of vesting will appear on the deed. In some states, the tenancy in common is the default vesting mode for married couples. In some states, it’s the default mode for unmarried co-owners, so these owners become tenants in common unless they affirmatively pick another form of vesting.
Tenants in common can be a pair of owners or a group. They can be related to each other or unrelated. They can be spouses, siblings, partners, or friends.
When they decide to hold title to a home in a tenancy in common, can these co-owners divide ownership unequally? Can each co-owner pitch in for maintenance in different amounts?
On both counts, yes:
The co-owners need to state their specific share percentages. This is sometimes overlooked by title companies — but the co-owners should have their own plan. Equal shares might not be optimal. Each owner can hold any percentage of the whole, and the deed will show each co-owner’s ownership percentage.
Unless otherwise agreed, co-owners share expenses in proportion, too. When two or more people buy a house together, they’ll likely have different reasons and capacities for investing. We’ll take a look at some scenarios in the next section.
Do the co-owners need to inhabit the home together? Only if that’s the plan. No one, legally speaking, is allowed to keep any part of the home off-limits to the other co-owner(s). In other words, the co-owners, even if they hold unequal portions of the property, enjoy a right to of access to all of it. But they can buy a home together without any intention to physically share it.
Scenarios: Why Co-Buy
Many people decide to share equity in their homes. Payments and expenses can be collaborative investments.
Co-buying with a friend, business colleague, or sibling as tenants in common may help one or more of the co-buyers become homeowners. One owner might be on firmer financial ground than the other, and offer to be a co-buyer in order to help the other buy. The plan might involve refinancing later, in order to transfer the title into sole ownership, without the benefactor.
A lender may want the additional co-signer on the loan to be a co-owner, so the financially stronger person has a stake in the asset. In this case, the primary buyer will live in the house, pay for the house, make all mortgage and tax payments, and take full responsibility for repairs, homeowner’s association dues, landscaping, and so forth. “Owner B” will pay nothing, and is only in the tenancy in common to help “Owner A” buy and have real estate. “Owner B” may take the lower percentage of ownership the lender allows. Later, when “Owner A” achieves sole ownership, only the smaller portion needs to be conveyed from B to A, so the new sole owner will have a lower transfer tax.
These co-owners should think through every what-if scenario. What if “Owner B” passes away before the refinancing and transfer to sole ownership is complete? Did the co-owners create a legal agreement, explaining what should happen to the property if one co-owner dies during a temporary co-ownership? By default, the house will go into probate.
Another reason for co-buying with a small ownership percentage could involve a condo purchase. Condo properties generally limit the renting of units and restrict owner-investors to some extent. A tenancy in common with unequal interests can be a workaround for the investor—if the mortgage lender approves of the ownership disparity on the deed.
How the Mortgage Works for a Tenancy in Common
If co-owners are taking title without having to finance the home, their unequal ownership percentages are up to them. They could have 99% and 1% interests; they tenancy in common allows for it. But if the house is financed, a lender is unlikely to let one borrower have minimal rights to the asset’s value. The point of requiring co-owners is to have everyone on the loan share responsibility for paying it back.
Ultimately, the lender wants the option to claim the whole property in the event of default—thus, banks like co-signers to be co-owners. In reality, though, just one person might be paying the mortgage, and the other is on the deed in name only. “Owner B,” the Good Samaritan co-borrower, should be aware that no one is exempt from responsibility for paying off the mortgage and prepare for that unintended possibility.
Selling: What Happens When a Co-Owner Wants Out
When co-owners buy a home in a mutually beneficial agreement, they can later sell and divide the proceeds according to their share percentages. But tenants in common do not need to all be on board with selling at the same time. The co-owners in a tenancy in common:
Can sell or take a loan out against their own share.
Can sell their own interests in the property without the other owners’ consent.
Cannot sell the entire property (forcing the others to sell) without the others’ consent.
People can come into, as well as leave, the agreement. At any time, a new co-owner may come on board. At this time, the current group will need to convey their deed to the new, larger group—while leaving their original agreement intact.
Unmarried tenants in common must pay tax when selling the property in whole or in part. Yet owners who make capital gains from the sale are eligible to exclude up to $250,000 of that profit from income tax, if they meet the IRS requirements.
Last Wishes: What Happens When a Co-Owner Passes
A tenancy in common differs from a joint tenancy with rights of survivorship. Should one of the owners pass away during the tenancy in common, that property interest winds up in probate, in the deceased homeowner’s estate. Put in another way, tenants in common may leave their portions of the property to any beneficiaries they designate in their wills.
Upon any co-owner’s death, the living co-owners could wind up sharing ownership of the home with a beneficiary they do not know. This problem can be averted through a consultation with a wills and estates lawyer early in the process.
In short, co-owners:
Can pass their ownership shares to their named beneficiaries; and
Cannot automatically pass the right of survivorship when they pass away.
The Co-Ownership Agreement
It can be well worth the time to hammer out a co-ownership agreement so the owners agree on how they will behave in certain situations. If the state in which the home exists allows it, co-owners in the tenancy in common may forge a written agreement to let one co-owner live in the house exclusively. They can also allocate responsibility for repairs and expenses.
It helps to lay out in writing:
What percentages in ownership shares the co-owners hold.
Who will live in the house.
How the rooms will be allocated if more than one owner will live in the house.
Who is responsible for various up-front costs during the buying process.
Who will cover the monthly mortgage loan payments, insurance, association fees, taxes, and other normal expenses.
Who will handle other responsibilities desired by the group.
A date by which refinancing and title transfer must occur if, for example, one owner is expected to achieve improved financial footing and become the sole owner.
How the parties intend to bequeath their interests should one of them pass away.
Quitclaim Deeds can be complicated legal documents. They are commonly used to add/remove someone to/from real estate title or deed (divorce, name changes, family and trust transfers).
Last updated: April 9, 2021
The quitclaim deed is a legal document (deed) used to transfer interest in real estate from one person or entity (grantor) to another (grantee). Unlike other legal conveyance deeds, the quitclaim conveys only the interest the grantor has at the time of the deed’s execution and does not guarantee that the grantor actually (legally) owns the property.
Without warranties, the quitclaim deed offers the grantee little or no legal recourse against the seller if a problem with the title arises in the future. This lack of protection makes a quitclaim unsuitable when purchasing real property from an unknown party in a traditional sale. It is, however, a useful instrument when conveying property from one family member or spouse to another, and it is commonly used in divorce proceedings or for estate planning purposes.
Title companies may require a person to execute a quitclaim document in order to clear up what they consider to be a cloud on the title prior to issuing title insurance. Similarly, prior to funding a loan, lenders may ask someone who is not going to be on a loan, such as a spouse, to complete and record a deed quit claiming their interest.
Warranty Deed, the Most Common Deed in Real Estate
Of all the real estate deeds, General Warranty Deeds provide the most protection to the grantee (buyer). This type of deed guarantees that the grantor (seller) holds a clear title to a piece of real estate and has a right to sell it to the grantee. The guarantee is not limited to the time the grantor owned the property as with a special warranty deed; rather, it extends back to the property’s earliest title. As such, earlier grantors occasionally find themselves confronted by issues from future grantees. The grantors also guarantee that, during their period of ownership, they did not encumber the property in any way that prohibits its transfer. Incorporate express references to any easements, restrictions, or other agreements of record that relate to the specific parcel of land, into the text of the deed. Providing this information puts the grantee on notice of the warranty’s limitations and upholds the covenant against encumbrances.
Traditionally, general warranty deeds include six common law covenants of title. Those six covenants can be separated into two categories: present covenants and future covenants.
Present Covenants:
Covenant of seisin: the grantor promises that he/she holds valid title to and possession of the property
Covenant of right to convey: the grantor guarantees that he/she may legally convey both title to and possession of the property
Covenant against encumbrances: the grantor legally declares the property to be free of any liens (encumbrances) unless stated in the deed
Future Covenants:
Covenant of warranty: the grantor will protect and defend the buyer against anyone who claims a superior title to the property
Covenant of quiet enjoyment: the grantee will be able to access and use the property without restrictions
Covenant of further assurances: the grantor will take reasonable actions necessary to resolve defects in the title
A grant deed is a legal document that is used to transfer (convey) rights in real property from one entity or person (the grantor) to another (the grantee).
A grant, or bargain and sale deed, contains no express warranties against encumbrances. It does, however, imply that the grantor holds title and has possession of the property. The language used in the granting clause is usually “ABC grants and releases,” or “XYZ grants, bargains, and sells,” and is often dictated by statute. Because the warranty is not specifically stated, the grantee has little recourse if title defects appear later.
In some states, this deed is used in foreclosures and tax sales. Each party transferring an interest in the property, or the grantor, is required to sign it. Then, the document must be acknowledged before a notary public (notarized) or other official authorized by law to administer oaths. The notary public or other official then places a seal and marks the document accordingly. The grant deed must be notarized in order to provide evidence that the instrument is genuine, as transaction documents are sometimes forged.
The grant deed must also include a legal description of the property, which includes boundaries and/or parcel numbers.
In most cases Grant deeds do not need to be recorded to be valid; however, it is in the grantee’s best interest to record the deed at the country recorder’s office in the county where the property is located.
The law recognizes a grant deed in writing. Hence, it must be an original and filed with the proper government authority. The deed must indicate the involved parties, which is both the grantor (seller) and the grantee (buyer). It must clearly state a legal description of the property being transferred. Guarantees and responsibilities must be stated in the deed as well. These guarantees indicate that the grantor owns the property free and clear, and the seller assumes the responsibility for settling any future claims. If there is a time limit on the guarantees, it must also be incorporated in the deed. The finished copy of the deed must be duly signed by the parties and notarized according to law.
The grantor settling any future claims on the property is the main criterion of writing a grant deed. However, this depends on the stipulated period, i.e., for the duration of time when the grantor maintains the rights to the property before the deed comes into effect. This clause is akin to general warranty deeds in some states, while a limited warranty deed for others.
The seller is obliged to prove the falsehood of any claim challenge, and if the grantor fails to prove the claim fraudulent then he/she must pay the amount to settle the claim. Further, if the claim remains unsettled and the grantee must forgo the ownership, the grantor must return the amount to the buyer. The amount also involves the cost of renovating or improving the property.
Once a deed has been recorded, it is part of the public record and cannot be changed. It is possible, however, to amend that record by adding a newly executed deed, usually called correction or corrective deed, deed of correction, or, in some states, deed of confirmation. As a confirmatory instrument, it perfects an existing title by removing any defects, but it does not pass title on its own.
A correction deed confirms the covenants and warranties of the prior deed. It needs to refer to that instrument by indicating its execution and recording date, the place of recording, and the number under which the document is filed. It also must identify the error or errors by type before supplying a correction. The body of this new deed contains the same information as the original deed and thus confirms the conveyance of title. Generally, all parties who signed the prior deed must sign the correction deed in the presence of a notary, who will acknowledge its execution.
A corrective deed is most often used for minor mistakes, such as misspelled or incomplete names, missing or wrong middle initials, and omission of marital status or vesting information. It can also be used for obvious errors in the property description. For example, errors transcribing courses and distances; errors incorporating a recorded plat or deed reference; errors in listing a lot number or designation; or omitted exhibits that supply the legal description of the property. A correction deed can also amend defects in the execution or acknowledgment of the original deed.
Resolving material errors often causes confusion. A material correction constitutes an actual change in the substance of the deed, such as changing the legal description, adjusting the amount of consideration, and adding or removing names. Some states allow a corrective instrument to address these flaws, but others require an entirely new deed.
Non-material changes are generally typographical in nature and may be adjusted with a less involved correction. For example, some states accept a re-submission of the original deed with corrections, along with a cover page that contains a correction statement, error identification, and clear reference to the previously recorded deed. Depending on the error type and gravity, re-acknowledgment may not be required under such circumstances.
In some states, an affidavit of correction or a scrivener’s affidavit may be recorded and serve as notification of an error in a recorded deed. It is usually reserved for minor corrections and typographical mistakes, and it can often be given by persons other than the parties of the original instrument, as long as reasons for the correction and knowledge of the facts corrected are stated and evidence of notification of the original parties or their heirs are provided. However, it does not constitute an actual correction of the original deed in the way a corrective deed does.
Changes affecting the legal description of the property are often sensitive in nature and best handled by a new corrective deed, signed by the original grantor. Some states generally recommend that both parties, that is, the grantor and grantee, sign a corrective instrument to assure valid title. For larger errors or to include/omit a name from the existing deed, a new standard conveyance, such as a warranty or quitclaim deed, may be more appropriate than a correction deed.
Setting up real estate to be transferred upon your death.
Real estate is often one of the most significant assets to consider in a comprehensive estate plan. There are a number of ways to distribute the property after the owner’s death. Some of the more common options are wills, trusts, joint ownership, or transfer on death (TOD) deeds. Note: unless identified otherwise, all definitions originated with Black’s Law Dictionary, Eighth Edition.
Wills are probably the first thing people think of when considering how to handle their assets. More specifically known as a last will and testament, this is the most recent document by which a person directs his or her estate to be distributed upon death. Regardless of other available tools, almost everyone should have something in place for this purpose. A well-constructed will reinforces other estate planning strategies, such as a trust or a transfer on death instrument.
On the surface, wills appear simple, and they can be, but their complexity tends to increase quickly. In addition, changes demand a review of the entire document and can incur legal and filing fees associated with every update. Real property distributed by a will must pass through probate, which adds time and expense to the process. Provisions exist to simplify things for smaller estates, but otherwise, both wills and probate can be tricky and are best approached by an attorney.
A trust is a property interest held by one person (the trustee) at the request of another (the settlor) for the benefit of a third party (the beneficiary). The structure and purpose can vary — there are dozens of different kinds of trusts, and variations within each type. They can exist independently from a will (nontestamentary), or be triggered by provisions found in a will (testamentary). It is important to seek legal guidance when arranging a trust because the wrong choice can have serious financial consequences. Because of these and other issues, it makes sense to consult an attorney to construct, administer, and modify a trust.
Survivorship tenancy is a form of shared ownership that identifies the joint owner’s right to the whole title upon the death of the other joint owner. The remaining owner(s) gains the title as a function of law, meaning it happens almost automatically (in theory). Three primary forms of property ownership support the right of survivorship: most joint tenancy, tenancy by the entirety, and some community property. Note that tenancy by the entirety and community property are only available to couples who are either married or in a legal civil union. For clarity, the right of survivorship must be written into the portion of the deed that identifies how the owners will hold title to the property. The exact format and wording may vary by state, but something along the lines of “John Doe and Jane Doe, as joint tenants with right of survivorship, and not as tenants in common.”
Survivorship tenancies can lead to potential complications. For example, the property could be at risk if one owner has credit problems or other financial issues. Real estate held this way cannot be included in a will except by the last surviving owner. Any sale or transfer of the property requires participation from all co-tenants or the joint tenancy is broken and changes to tenancy in common.
Life is unpredictable, and sometimes the best way to handle an unexpected situation is to change or even revoke (cancel) a beneficiary designation. The established tools discussed above can be cumbersome and expensive to modify, and savvy clients needed more flexibility in their estate planning.
Enhanced life estate, or “Ladybird” deeds, originated as the earliest direct answer to those demands. These deeds provided landowners with a responsive, non-probate option to direct the distribution of their real estate after death. They build on the premise of the life estate, which immediately transfers ownership of the property to the grantee/beneficiary, but allows someone else named in the document to live there for the remainder of his/her life.
Traditional life tenants have little or no control over what happens to the property after they die. The “enhanced” part comes in with the reservation of powers to the grantor/owner on an otherwise standard warranty, grant, or quitclaim deed. When executed, grantors transfer the property to one or more grantees/beneficiaries but convey a life estate back to themselves, and reserve the power to sell the property outright, change or revoke the future transfer, or otherwise use the real estate as they wish, with no restrictions other than the requirement to formally record the changes during their natural lives.
This reservation of powers enables landowners to retain full title rights, preserving their homestead status (if claimed) as well as any deductions, protections, and tax exemptions associated with the real estate during their lifetimes. The remainder, if any, goes to the named grantees/beneficiaries after the owner’s death, thereby avoiding the probate process. Ladybird deeds are most common in Michigan, Florida, California, and Rhode Island. Even though they have been used and accepted for years, enhanced life estate deeds are not generally statutory (Rhode Island is one exception. See R.I.G.L. 34-4-2.1).
Some states decided to take the concept of an enhanced life estate a step further and include laws for real property transfers on death (TOD) in their statutes. For example, Arizona (A.R.S. section 33-405) and Colorado (C.R.S. 15.15.401, et seq.) offer statutory beneficiary deeds. Ohio codified its transfer on death designation affidavit at ORC 5302.22 et seq. While Ladybird and beneficiary deeds, as well as other state-specific instruments, are still in use, a newer, but related, approach is gaining popularity — a transfer on death deed under the Uniform Real Property Transfer on Death Act (URPTODA).
Unlike wills, trusts, or survivorship tenancies, which tend to follow the same rules across the US, TOD instruments vary according to each state’s interpretation and application of the law. Completed in 2009, the URPTODA describes the Uniform Law Commission’s process to unify and standardize the use of these non-probate transfers. In addition to the associated definitions and rules, the Act contains model forms for both a deed and a revocation instrument. So far, Alaska, Hawaii, Washington, Oregon, Nevada, North Dakota, South Dakota, Nebraska, New Mexico, Illinois, West Virginia, Virginia, the District of Columbia, and most recently, Texas have chosen to enact the URPTODA, modified as needed to incorporate existing state laws and customs.
Variations exist among the different transfer on death instruments, but they include specific common features:
All initial and subsequent documents related to the transfer on death must be executed and recorded, in the county where the property is situated, during the owner’s natural life or they have no effect.
Executing transfer on death instruments requires the same competency as a will does.
Transfers on death only convey the owner’s interest in the property, if any, present at the time of death.
Owners retain full title and absolute control over the real estate, its use, and its distribution until death.
Beneficiaries have no rights to or interest in the property during the owner’s lifetime.
The form must state that the transfer is revocable.
The power to revoke is at the heart of transfer on death instruments. Because of this feature, there is no obligation for the owner to provide notice to or collect consideration from the beneficiary (consideration implies a transfer of ownership that is not present here). Even so, many grantors inform beneficiaries about the potential transfer in order to save confusion later.
The property is taken with all restrictions, easements, and debts in place, including mortgages.
TOD instruments must meet state and local content and format requirements for real estate deeds.
There are three primary ways to revoke a recorded transfer on death instrument:
Execute and record an instrument of revocation
Execute and record a new transfer on death instrument, explicitly revoking any previously recorded transfers on death related to the same property
Convey all interest in the property to someone who is uninvolved with the original transfer. This option is possible because the owner retains full ownership of the property, and also because there is no consideration associated with TOD instruments.
The procedure to collect the property transferred at death often differs from state to state. Generally, the beneficiary records an official copy of the owner’s death certificate, accompanied by an affidavit containing details about the interest conveyed and the recorded TOD instrument. Some states simplify the situation and include a specific affidavit form in their statutes.
Transfer on death deeds have some potential drawbacks, though. For example, recorded transfers on death might interfere with eligibility for state and federal assistance programs, and could trigger an estate recovery process for recipients of Medicaid’s long term care benefits. In addition, some people might encounter difficulty obtaining title insurance or mortgaging the property when such documents appear in a title search.
In most cases, beneficiaries take the property with no warranties of title, which could leave them at risk from outside claims against the property if there were any irregularities in the ownership history (chain of title). Two or more beneficiaries vest as tenants in common, meaning that they each get an individual share of the title. There are some exceptions, though, especially with enhanced life estate deeds, so consult a local attorney with specific questions.
Property held jointly requires both owners to join in the TOD deed to ensure transfer to the named beneficiary. Otherwise, the transfer could be invalidated because the property is automatically distributed to the remaining co-owners. Survivorship tenants wishing to execute TOD deeds should review state laws concerning joint tenancy, or seek legal advice.
Transfer on death instruments are flexible and convenient, and offer owners of real property a responsive tool for estate planning. Even so, they are not necessarily appropriate for everyone. Each circumstance is unique, so take the time to review and understand the relevant laws and customs. Finally, don’t hesitate to contact an attorney with specific questions or for complex situations.
Protect Yourself from Unrecorded Real Estate Transfers
In general, a real estate deed must be delivered to and accepted by the grantee(s) to be properly executed or valid. Since most states do not require the grantee’s signature on a deed, the grantor may find it difficult to prove delivery and acceptance. With the Affidavit of Deed form, grantors in a transaction can verify the date of the completed conveyance and protect themselves from future claims or questions when applying for Medicaid or other asset-based benefit programs.
An affidavit is a sworn statement, made in front of a notary or other officer authorized to administer oaths. An affidavit of deed confirms delivery and acceptance of a deed by the grantee, and thereby its validity. It is a useful document because most states only require the grantor’s signature on a deed, so it can be difficult to prove delivery and acceptance, both of which are required to have a properly executed deed in many states.
With a correctly executed affidavit of deed, grantors in a transaction are able to prove the date of the completed conveyance and protect themselves from future claims regarding ownership of their former property. In addition, Medicaid and other asset-based benefit programs often uncover title problems when processing applications. If the grantor is protected by an affidavit of deed, these issues are generally easier to resolve.
Unsuspecting homeowners have found their wages garnished, their credit destroyed, and their tax refunds seized, all because of unrecorded deeds for property they thought they sold. They’ve opened their mail to find bills for back taxes, graffiti-scrubbing services, demolition crews, and trash removal. They answered their front doors to encounter bailiffs brandishing summonses to appear in court. In some cities, people in this situation can be sentenced to probation with the threat of jail if they don’t bring their houses into compliance.
There has been much talk about so-called Zombie Titles in the wake of the recent foreclosure crisis. While an affidavit of deed will not directly help in these situations unless the foreclosing lender accepts a deed in lieu of foreclosure and signs an affidavit, it will help in similar situations caused by unrecorded deeds.
For example, Tom Homeseller inherited a vacant house and no longer wants it. He sells the house to a company that specializes in managing low-end rental properties. Mr. Homeseller prepares the deed, signs it, and delivers it to the company buying the property. Despite the fact that the company placed tenants in the house (and collected rent from them), they never bothered to record the deed. The company also failed to provide suitable property insurance, to pay the real estate taxes, or even to cover the water and sewer bills. A few years go by and the house catches fire. The company walks away from the property.
The tax collectors come after Mr. Homeseller since the deed was never recorded and his name still appears on the title as the owner the property. For the same reason, he is also obligated to pay the removal and cleanup costs of the property as required by local codes. He could even be held responsible for any loss the tenants suffered if the fire was a result of poor maintenance. Without an affidavit of deed, signed by the grantee, Mr. Homeseller will have a difficult time proving that he ever sold the property.
These are just a few reasons why the grantor should require the grantee to sign an affidavit attesting to the deed whenever ownership of or interest in real property is transferred from one party to another.
Information deemed reliable but not guaranteed, you should always confirm this information with the proper agency prior to acting. The materials available at this web site are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. These materials are intended, but not promised or guaranteed to be current, complete, or up-to-date.
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An Estoppel Certificate (or Estoppel Letter) is a document often used in due diligence in Real estateandmortgage activities. It is a document often completed, but at least signed, by a tenant used in their landlord’s proposed transaction with a third party. A mortgage lender intending to collateralize a tenant-occupied property or a purchaser intending to purchase such a property will often want to verify certain representations made by the landlord.
An estoppel certificate provides confirmation by the tenant of the terms of the rental agreement, such as the amount of rent, the amount of security deposit, and the expiration of the agreement. Further, the estoppel certificate may give the opportunity to the tenant to explain if they may have any claims against the landlord, which may affect a buyer’s or lender’s decision to complete the proposed transaction.
Some lease agreements require the tenant to complete such a certificate or to waive their responses by allowing the landlord to complete the estoppel certificate under certain circumstances.[
If the language in the lease so provides, a tenant can be in default under a lease after failing to comply with a request from the landlord for an estoppel certificate. The majority of commercial leases include a provision establishing the requirements for the provision of a tenant estoppel certificate following the landlord’s request.
At the coronavirus pandemic’s onset in March 2020, millions of people saw cuts to their work hours, and millions more were laid off. The result of this was an inability to pay rent, and in response to lost wages, the federal government offered rental assistance through the CARES Act, while a September executive order directed federal agencies to halt evictions for some renters.
One year later, the pandemic’s persistence threatens to expose the cracks in federal and state policy designed to absorb renter shock and prevent landlords from evicting tenants who cannot pay rent. Expiring eviction moratoriums raise the question that housing justice advocates have long wondered: How will we face a potential eviction cliff?
Advocates are worried that tens of billions in rent debt coupled with an expiring eviction moratorium will lead to mass evictions. Rent debt (the unpaid rent between the months of March 2020 and April 2021) plagues as many as 14.2 million renter households across the country. There are about 43 million renting households in the U.S., accounting for nearly one-third of the country’s housing market. And much like the pandemic itself, rent debt — and a potential eviction — is a crisis that also disproportionately burdens the least resourced in the country, like poor people, people of color, disabled people, and immigrants.
An eviction crisis was brewing even before the pandemic struck, prompted by multiple forms of income inequality and socioeconomic class stratification. According to the non-partisan Economic Policy Institute, wages for low-earning people have not risen in recent decades while income for the very rich has skyrocketed. Taken together, this led to a widening income gap between low-wage workers (who tend to be renters) and those in the top 10 percent of earners (who are likely to be salaried white-collar workers).
Because of a system that increases profits for business owners while keeping wages low for workers, renters have only saved 2.4 percent of their income in the past two decades, or about $440 in today’s dollars, according to the Urban Institute. While wages have plateaued, the cost of rent has continued to increase across the country in the past decade — as much as 90 percent in large cities. In some cases, renters are paying over 70 percent of their income on housing costs, leaving little money for food and other expenses while making saving extraordinarily difficult, if not impossible.
Behind the economics of the situation are the political conditions: The federal government has never guaranteed affordable home purchases and there is no federal right to housing. American social and legal structures don’t have adequate backstops and protections for renters, and generational wealth is built and sustained through property ownership.
Renters who do face eviction see a ripple of negative effects. Landlords are less likely to rent to those who’ve faced eviction proceedings, which means that renters might be forced into choosing homes in neighborhoods with under-resourced schools, fewer hospitals, fewer grocery stores, and less public transportation, meaning that a home isn’t just a home: neighborhoods can be determinative of life outcome.
“There are so many renters who are basically facing homelessness,” says Shanti Singh, the communications and legislative director of Tenants Together, a California-based coalition of tenant’s rights organizations. Without state or federal legislative action and broad cultural change, Singh says that California’s 18 million renters could be headed for the eviction cliff.
In California, renters face $2.4 billion in rent debt, which Singh explains will remain with families long after individuals are vaccinated. While we know that the economic fallout of the pandemic will persist, it’s unclear if state and federal protections will. Singh says that at the very least, California needs to pass a legislative extension of protection against evictions and institute policies that achieve a just recovery where renters are able to find work again without having to shoulder the burden of repaying thousands of dollars of rent debt.
Other than legislative proposals to forgive debt increase wages, and allow renters to save money and build wealth, Singh says that broad cultural shifts are needed to value renters in the ways homeowners are. “Renters blame themselves for what’s happened to them [and] for their inability to pay rent, [but] they did not lose their jobs on purpose,” Singh says. “When you see the ways people take it out on themselves, it speaks to [the] culture that we have to change where we blame the most vulnerable people in our society.”
At the coronavirus pandemic’s onset in March 2020, millions of people saw cuts to their work hours, and millions more were laid off. The result of this was an inability to pay rent, and in response to lost wages, the federal government offered rental assistance through the CARES Act, while a September executive order directed federal agencies to halt evictions for some renters.
One year later, the pandemic’s persistence threatens to expose the cracks in federal and state policy designed to absorb renter shock and prevent landlords from evicting tenants who cannot pay rent. Expiring eviction moratoriums raise the question that housing justice advocates have long wondered: How will we face a potential eviction cliff?
Advocates are worried that tens of billions in rent debt coupled with an expiring eviction moratorium will lead to mass evictions. Rent debt (the unpaid rent between the months of March 2020 and April 2021) plagues as many as 14.2 million renter households across the country. There are about 43 million renting households in the U.S., accounting for nearly one-third of the country’s housing market. And much like the pandemic itself, rent debt — and a potential eviction — is a crisis that also disproportionately burdens the least resourced in the country, like poor people, people of color, disabled people, and immigrants.
An eviction crisis was brewing even before the pandemic struck, prompted by multiple forms of income inequality and socioeconomic class stratification. According to the non-partisan Economic Policy Institute, wages for low-earning people have not risen in recent decades while income for the very rich has skyrocketed. Taken together, this led to a widening income gap between low-wage workers (who tend to be renters) and those in the top 10 percent of earners (who are likely to be salaried white-collar workers).
Because of a system that increases profits for business owners while keeping wages low for workers, renters have only saved 2.4 percent of their income in the past two decades, or about $440 in today’s dollars, according to the Urban Institute. While wages have plateaued, the cost of rent has continued to increase across the country in the past decade — as much as 90 percent in large cities. In some cases, renters are paying over 70 percent of their income on housing costs, leaving little money for food and other expenses while making saving extraordinarily difficult, if not impossible.
Behind the economics of the situation are the political conditions: The federal government has never guaranteed affordable home purchases and there is no federal right to housing. American social and legal structures don’t have adequate backstops and protections for renters, and generational wealth is built and sustained through property ownership.
Renters who do face eviction see a ripple of negative effects. Landlords are less likely to rent to those who’ve faced eviction proceedings, which means that renters might be forced into choosing homes in neighborhoods with under-resourced schools, fewer hospitals, fewer grocery stores, and less public transportation, meaning that a home isn’t just a home: neighborhoods can be determinative of life outcome.
“There are so many renters who are basically facing homelessness,” says Shanti Singh, the communications and legislative director of Tenants Together, a California-based coalition of tenant’s rights organizations. Without state or federal legislative action and broad cultural change, Singh says that California’s 18 million renters could be headed for the eviction cliff.
In California, renters face$2.4 billion in rent debt, which Singh explains will remain with families long after individuals are vaccinated. While we know that the economic fallout of the pandemic will persist, it’s unclear if state and federal protections will. Singh says that at the very least, California needs to pass a legislative extension of protection against evictions and institute policies that achieve a just recovery where renters are able to find work again without having to shoulder the burden of repaying thousands of dollars of rent debt.
Other than legislative proposals to forgive debt increase wages, and allow renters to save money and build wealth, Singh says that broad cultural shifts are needed to value renters in the ways homeowners are. “Renters blame themselves for what’s happened to them [and] for their inability to pay rent, [but] they did not lose their jobs on purpose,” Singh says. “When you see the ways people take it out on themselves, it speaks to [the] culture that we have to change where we blame the most vulnerable people in our society.”
Buying subject-to means buying a home subject to the existing mortgage. It means the seller is not paying off the existingmortgage. Instead, the buyer is taking over the payments. The unpaid balance of the existing mortgage is then calculated as part of the buyer’s purchase price.
Under a subject-to agreement, the buyer continues making payments to the seller’s mortgage company. However, there’s no official agreement in place with the lender. The buyer has no legal obligation to make the payments. Should the buyer fail to repay the loan, the home could be lost to foreclosure. However, it would be in the original mortgagee’s name (i.e., the seller).
Reasons a Buyer May Purchase a Subject-To Property
The biggest perk of buying subject-to real estate is that it reduces the costs to buy the home. There are no closing costs, origination fees, broker commissions, or other costs. For the real estate investor who plans to rent or re-sell the property down the line, that means more room for profits.
For most homebuyers, the primary reason for buying subject-to properties is to take over the seller’s existing interest rate. If present interest rates are at 7% and a seller has a 5% fixed interest rate, that 2% variance can make a huge difference in the buyer’s monthly payment. For example:
A $200,000 mortgage at a 5% interest rate is amortized at a payment of $1,073.64 per month
A $200,000 mortgage at a 7% interest rate is amortized at a payment of $1,330.60 per month
The monthly savings to a buyer under these circumstances is $256.96 or $3,083.52 per year
Another reason certain buyers are interested in purchasing a home subject-to is they may not qualify for a traditional loan with favorable interest rates. Taking over the existing mortgage loan may offer better terms and fewer interest costs over time.
Buying subject-to homes is a smart way for real estate investors to get deals. Often, investors will use county records to locate borrowers who are currently in foreclosure. Making them a low, subject-to offer can help them avoid foreclosure (and its impact on their credit) and result in a high-profit property for the investor.
Three Types of Subject-To Options
A subject-to sale does not necessarily involveowner financing, but it could. Whether the seller carries any type of financing depends on whether they wrap the mortgage or the amount of the down payment versus the purchase price.
There are three types of subject-to options:
A Straight Subject-To Cash-To-Loan
The most common type of subject-to is when a buyer pays in cash the difference between the purchase price and the seller’s existing loan balance. For example, if the seller’s existing loan balance is $150,000 and the sales price is $200,000, the buyer must give the seller $50,000.
A Straight Subject-To With Seller Carryback
Seller carrybacks, also known as seller or owner financing, are most commonly found in the form of a second mortgage. A seller carryback could also be a land contract or alease option sale instrument. For example, let’s say the home’s sales price is $200,000, with an existing loan balance of $150,000. The buyer is making a down payment of $20,000. The seller would carry the remaining balance of $30,000 at a separate interest rate and terms negotiated between the parties. The buyer would agree to make one payment to the seller’s lender and a separate payment at a different interest rate to the seller.
Wrap-Around Subject-To
A wrap-around subject-to gives the seller an override of interest because the seller makes money on the existing mortgage balance. For example, an existing mortgage carries an interest rate of 5%. If the sales price is $200,000 and the buyer puts down $20,000, the seller’s carryback would be $180,000. At a rate of 6%, the seller makes 1% on the existing mortgage of $150,000 and 6% on the balance of $30,000. The buyer would pay 6% on $180,000.
The Difference Between a Subject-To and a Loan Assumption
In a subject-to transaction, neither the seller nor the buyer tells the existing lender that the seller has sold the property. The buyer is now making the payments. The buyer did not obtain the bank’s permission to take over the loan. Lenders put special verbiage into their mortgages and trust deeds that give the lender the right to accelerate the loan and invoke a “due-on” clause in the event of a transfer. This clause simply means the loan balance is due in full.
Not every bank will call a loan due and payable upon transfer. In certain situations, some banks are simply happy that somebody—anybody—is making the payments. But banks can exercise their right to call a loan due to the acceleration clause in the mortgage or trust deed, which is a risk for the buyer. If the buyer can’t pay off the loan upon the bank’s demand, it couldinitiate foreclosure.
If a buyer makes a loan assumption, the buyer formally assumes the loan with the bank’s permission. This method means the seller’s name is removed from the loan, and the buyer qualifies for the loan, just like any other kind of financing. Generally, banks charge the buyer an assumption fee to process a loan assumption. The fee is much less than the fees to obtain aconventional loan.FHA loans and VA loans allow for a loan assumption. However, most conventional loans do not.
Pros and Cons of Buying Subject-To Real Estate
Subject-to properties mean a faster, easier home purchase, no costly or hard-to-qualify-for mortgage loans, and potentially more profits if you’re looking to flip or resell the home.
On the downside, subject-to homes do put buyers at risk. Since the property is still legally the seller’s liability, it could be seized should they enter bankruptcy. Additionally, the lender could require a full payoff if it notices the home has transferred hands. There can also be complications with home insurance policies.
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Have you claimed the first-time homebuyer tax credit? For some buyers, it’s time to start repaying Uncle Sam.
Introduced in 2008, the first-time homebuyer tax credit originally was a type of interest-free loan. Anyone who purchased a house in 2008 and claimed the credit the following spring on their tax return would have to repay the sum starting two years later.
That means the first payment is due in April.
The government waived the payback rule for homes purchased in 2009 and after unless the home ceases to be the taxpayer’s main residence within a three-year period following the purchase.
Still, the Internal Revenue Service maintains specific rules for getting the full benefit of the tax credit.
Here’s what you need to know:
The repayment plan
If you claimed the first-time homebuyer tax credit in 2008, you have to start paying it back this tax-filing season. Repayment is made in equal installments over 15 years. So, if you claimed the maximum $7,500 credit, you’ll owe $500 per year.
To make the payment, you have to file Form 5405, which is available in the free and basic versions of most tax-prep software, including those offered through the Internal Revenue Service’s Free File program.
Don’t know how much you owe? Check your mail: The IRS sent letters outlining the amount of credit you received and what you owe this year.
Exceptions to the rule
There are few ways to avoid repaying the credit, unfortunately.
“You can’t get around this,” said Mark Luscombe, principal federal tax analyst for CCH, a provider of tax-prep software. “Even though Congress eliminated the repayment requirement in 2009, they didn’t do it retroactively.”
Some exceptions exist, however.
For one, if you’ve since gotten divorced and transferred the house to your ex as part of the settlement, you are no longer responsible for payments. Your ex-spouse is. Or, if you’ve sold the home, you owe only up to the amount of gain you made on the sale. In other words, if you pocketed $5,000 from selling your home, you’re on the hook for only $5,000, not the full $7,500, if you claimed the maximum credit.
If you incurred a loss, your debt to the IRS gets erased.
To see a complete list of exceptions, visit tinyurl.com/co4sng.
You could owe the lump sum
If you sell your home or stop using the property as your main residence, the 15-year repayment plan goes out the window, and the full credit (or balance) is due in full that tax-filing season.
A similar rule applies if you claimed the first-time homebuyer’s credit in 2009 or 2010: For those buyers only, you owe the full credit if the home no longer serves as your principal residence within 36 months of buying the property.
Sell after that three-year period, and you don’t owe the credit.
The maximum credit in 2009 and 2010 was $8,000 if you were buying a principal home for the first time, or $6,500 if you had been a homeowner. The government considers first-time homebuyers those “taxpayers who have not owned another principal residence at any time during the three years prior to the date of purchase,” according to IRS.gov.
An assignment and assumption agreement is used after a contract is signed, in order to transfer one of the contracting party’s rights and obligations to a third party who was not originally a party to the contract. The party making the assignment is called the assignor, while the third party accepting the assignment is known as the assignee.
In order for an assignment and assumption agreement to be valid, the following criteria need to be met:
The initial contract must provide for the possibility of assignment by one of the initial contracting parties.
The assignor must agree to assign their rights and duties under the contract to the assignee.
The assignee must agree to accept, or “assume,” those contractual rights and duties.
The other party to the initial contract must consent to the transfer of rights and obligations to the assignee.
A standard assignment and assumption contract is often a good starting point if you need to enter into an assignment and assumption agreement. However, for more complex situations, such as an assignment and amendment agreement in which several of the initial contract terms will be modified, or where only some, but not all, rights and duties will be assigned, it’s a good idea to retain the services of an attorney who can help you draft an agreement that will meet all your needs.
The Basics of Assignment and Assumption
When you’re ready to enter into an assignment and assumption agreement, it’s a good idea to have a firm grasp of the basics of assignment:
First, carefully read and understand the assignment and assumption provision in the initial contract. Contracts vary widely in their language on this topic, and each contract will have specific criteria that must be met in order for a valid assignment of rights to take place.
All parties to the agreement should carefully review the document to make sure they each know what they’re agreeing to, and to help ensure that all important terms and conditions have been addressed in the agreement.
Until the agreement is signed by all the parties involved, the assignor will still be obligated for all responsibilities stated in the initial contract. If you are the assignor, you need to ensure that you continue with business as usual until the assignment and assumption agreement has been properly executed.
Filling in the Assignment and Assumption Agreement
Unless you’re dealing with a complex assignment situation, working with a template often is a good way to begin drafting an assignment and assumption agreement that will meet your needs. Generally speaking, your agreement should include the following information:
Identification of the existing agreement, including details such as the date it was signed and the parties involved, and the parties’ rights to assign under this initial agreement
The effective date of the assignment and assumption agreement
Identification of the party making the assignment (the assignor), and a statement of their desire to assign their rights under the initial contract
Identification of the third party accepting the assignment (the assignee), and a statement of their acceptance of the assignment
Identification of the other initial party to the contract, and a statement of their consent to the assignment and assumption agreement
A section stating that the initial contract is continued; meaning, that, other than the change to the parties involved, all terms and conditions in the original contract stay the same
In addition to these sections that are specific to an assignment and assumption agreement, your contract should also include standard contract language, such as clauses about indemnification, future amendments, and governing law.
Sometimes circumstances change, and as a business owner you may find yourself needing to assign your rights and duties under a contract to another party. A properly drafted assignment and assumption agreement can help you make the transfer smoothly while, at the same time, preserving the cordiality of your initial business relationship under the original contract.
An assignment and assumption agreement is used after a contract is signed, in order to transfer one of the contracting party’s rights and obligations to a third party who was not originally a party to the contract. The party making the assignment is called the assignor, while the third party accepting the assignment is known as the assignee.
In order for an assignment and assumption agreement to be valid, the following criteria need to be met:
The initial contract must provide for the possibility of assignment by one of the initial contracting parties.
The assignor must agree to assign their rights and duties under the contract to the assignee.
The assignee must agree to accept, or “assume,” those contractual rights and duties.
The other party to the initial contract must consent to the transfer of rights and obligations to the assignee.
A standard assignment and assumption contract is often a good starting point if you need to enter into an assignment and assumption agreement. However, for more complex situations, such as an assignment and amendment agreement in which several of the initial contract terms will be modified, or where only some, but not all, rights and duties will be assigned, it’s a good idea to retain the services of an attorney who can help you draft an agreement that will meet all your needs.
The Basics of Assignment and Assumption
When you’re ready to enter into an assignment and assumption agreement, it’s a good idea to have a firm grasp of the basics of assignment:
First, carefully read and understand the assignment and assumption provision in the initial contract. Contracts vary widely in their language on this topic, and each contract will have specific criteria that must be met in order for a valid assignment of rights to take place.
All parties to the agreement should carefully review the document to make sure they each know what they’re agreeing to, and to help ensure that all important terms and conditions have been addressed in the agreement.
Until the agreement is signed by all the parties involved, the assignor will still be obligated for all responsibilities stated in the initial contract. If you are the assignor, you need to ensure that you continue with business as usual until the assignment and assumption agreement has been properly executed.
Filling in the Assignment and Assumption Agreement
Unless you’re dealing with a complex assignment situation, working with a template often is a good way to begin drafting an assignment and assumption agreement that will meet your needs. Generally speaking, your agreement should include the following information:
Identification of the existing agreement, including details such as the date it was signed and the parties involved, and the parties’ rights to assign under this initial agreement
The effective date of the assignment and assumption agreement
Identification of the party making the assignment (the assignor), and a statement of their desire to assign their rights under the initial contract
Identification of the third party accepting the assignment (the assignee), and a statement of their acceptance of the assignment
Identification of the other initial party to the contract, and a statement of their consent to the assignment and assumption agreement
A section stating that the initial contract is continued; meaning, that, other than the change to the parties involved, all terms and conditions in the original contract stay the same
In addition to these sections that are specific to an assignment and assumption agreement, your contract should also include standard contract language, such as clauses about indemnification, future amendments, and governing law.
Sometimes circumstances change, and as a business owner you may find yourself needing to assign your rights and duties under a contract to another party. A properly drafted assignment and assumption agreement can help you make the transfer smoothly while, at the same time, preserving the cordiality of your initial business relationship under the original contract.
When dealing with the distribution of an estate after a person dies, you will likely either hear the term executor’s deed and administrator’s dee d. Both are documents designed to officially distribute property and transfer it to the decedents, but an executor’s deed is used when the deceased left a will behind. An administrator’s deed is the document of someone who died without official notification of how he or she wanted their property distributed.
An executor is the person appointed by the deceased to see to it that property is distributed according to the will. The executor may be named in the will itself, or may have been officially given the role before the person in question passed away. The executor may also be an official, such as a lawyer – or it may be a family member, spouse, or friend. This depends entirely on the wishes of the deceased. Should a person die with property left behind and no will stating how to distribute it, the probate court will take responsibility for the property and appoint an administrator. This person is then given the official power to distribute the property. Legally, none of the family of the deceased has the right to this property until it has been officially handled by the probate court and released to them by the administrator. Both executors and administrators must prepare official deeds to transfer property titles into the names of those receiving them. The deeds generally must be officially worded and state the process by which the decision to transfer the property was made, whether it is in accordance with a will or by the judgment of the court-appointed administrator. The deed must be witnessed and notarized, and then becomes a legal and binding document.
In any case, after a death, you should strongly consider speaking with a lawyer to handle the distribution of assets and other legal complexities that arise.
What is the difference between an executors deed and an administrators deed?
When dealing with the distribution of an estate after a person dies, you will likely either hear the term executor’s deed and administrator’s dee d. Both are documents designed to officially distribute property and transfer it to the decedents, but an executor’s deed is used when the deceased left a will behind. An administrator’s deed is the document of someone who died without official notification of how he or she wanted their property distributed.
An executor is the person appointed by the deceased to see to it that property is distributed according to the will. The executor may be named in the will itself, or may have been officially given the role before the person in question passed away. The executor may also be an official, such as a lawyer – or it may be a family member, spouse, or friend. This depends entirely on the wishes of the deceased. Should a person die with property left behind and no will stating how to distribute it, the probate court will take responsibility for the property and appoint an administrator. This person is then given the official power to distribute the property. Legally, none of the family of the deceased has the right to this property until it has been officially handled by the probate court and released to them by the administrator. Both executors and administrators must prepare official deeds to transfer property titles into the names of those receiving them. The deeds generally must be officially worded and state the process by which the decision to transfer the property was made, whether it is in accordance with a will or by the judgment of the court-appointed administrator. The deed must be witnessed and notarized, and then becomes a legal and binding document.
In any case, after a death, you should strongly consider speaking with a lawyer to handle the distribution of assets and other legal complexities that arise.
IS AN ORAL AGREEMENT FOR THE SALE OF REAL ESTATE ENORCEABLE?
Generally, a verbal contract is binding in Missouri. However, there are certain circumstances in Missouri when a verbal contract is not enforceable. Those circumstances are described in Missouri’s “statute of frauds”. According to the statute, the following verbal contracts are not binding.
EXECUTOR OR ADMINISTRATOR
Any administrator of an estate will not bind the estate to pay for a claim against the estate unless the agreement is in writing and signed by the administrator.
PROMISE TO PAY THE DEBT OF ANOTHER
In Missouri, a guaranty to pay the debt of another person must be in writing and signed by the guarantor. A guaranty is a contract whereby the guarantor agrees to pay the debt of another in the event of a default. In Capital Group, Inc. v. Collier, defendant was the President of a company. The company entered into a credit agreement with plaintiff. The agreement signed by the defendant said that the undersigned will be liable for the payment “of any and all goods and/or services furnished by [plaintiff]”.
Plaintiff contended that defendant was personally liable for the debt of the company, because he signed the agreement without indicating his title. The court disagreed, holding that the agreement did not clearly show that defendant intended to guaranty payments owed under the agreement.
AGREEMENT IN CONSIDERATION OF MARRIAGE
In the Estate of Kilbourn, Wayne and Marjorie Kilbourn entered into an antenuptial agreement stating that they relinquished all rights to the property of the other. Marjorie then died, and Wayne asserted that her estate owed him for labor and other things he provided to her property when she was alive. The court denied his claim and said that any modification of the antenuptial agreement must have been in a writing signed by Marjorie, as the antenuptial agreement had been made in consideration of the marriage.
CONTRACT FOR THE SALE OF LAND
In Shaffer v. Hines, the administrator of an estate obtained an order from the probate court to sell certain land owned by the estate. Defendant was the high bidder at the auction. Defendant tendered a check to the attorney for the administrator, made payable to the estate. He later stopped payment on the check. The administrator then sued the defendant, claiming that he breached his verbal contract to purchase the land. Both parties agreed that the check was not a written agreement to purchase the land. The court of appeals held that the verbal contract was not enforceable pursuant to Missouri’s statute of frauds.
LEASE LONGER THAN ONE YEAR
A lease for more than one year must be in writing and signed by the party against whom a breach is asserted. A lease for more than one year that is not in writing and signed is not a lease. Rather, the tenants are tenants at will. In fact, pursuant to Section 432.050 RSMo., any lease not in writing and signed creates a tenancy at will. A tenant at will may be terminated with one month’s notice. Missouri courts have interpreted the one month period to encompass one rent period. For example, if rent is due March 1st, the notice must be served on the tenant before March 1st. The tenancy will then terminate on April 1st.
AGREEMENT NOT TO BE PERFORMED WITHIN ONE YEAR
An agreement that cannot be performed within one year must be in writing and signed. In Sales Service v. Daewoo, plaintiff agreed to provide consultation services to defendant over three years in exchange for $40,000 per year. Plaintiff was also to receive a percentage of defendant’s sales during the three years. Plaintiff sent a memo to defendant to this effect, but defendant never signed it. Defendant sent numerous signed memos to plaintiff related to the agreement, but none of them stated that the agreement was for three years. After 23 months, defendant informed plaintiff that defendant would no longer perform the services of the agreement. Plaintiff sued defendant for the amount plaintiff would have received under the rest of the contract. However, the agreement had to be in a signed writing, because it could not be performed within one year.
TAKE-AWAY
Most rules have exceptions. Such is true with Missouri’s statute of frauds. In Missouri, if a party committed a fraud in the formation of a verbal contract covered by the statute of frauds, then the courts nonetheless have the discretion to enforce such verbal contract. However, the verbal contract must still conform to all of Missouri’s other requirements for the formation of a contract.
IS AN ORAL AGREEMENT FOR THE SALE OF REAL ESTATE ENORCEABLE?
Generally, a verbal contract is binding in Missouri. However, there are certain circumstances in Missouri when a verbal contract is not enforceable. Those circumstances are described in Missouri’s “statute of frauds”. According to the statute, the following verbal contracts are not binding.
EXECUTOR OR ADMINISTRATOR
Any administrator of an estate will not bind the estate to pay for a claim against the estate unless the agreement is in writing and signed by the administrator.
PROMISE TO PAY THE DEBT OF ANOTHER
In Missouri, a guaranty to pay the debt of another person must be in writing and signed by the guarantor. A guaranty is a contract whereby the guarantor agrees to pay the debt of another in the event of a default. In Capital Group, Inc. v. Collier, defendant was the President of a company. The company entered into a credit agreement with plaintiff. The agreement signed by the defendant said that the undersigned will be liable for the payment “of any and all goods and/or services furnished by [plaintiff]”.
Plaintiff contended that defendant was personally liable for the debt of the company, because he signed the agreement without indicating his title. The court disagreed, holding that the agreement did not clearly show that defendant intended to guaranty payments owed under the agreement.
AGREEMENT IN CONSIDERATION OF MARRIAGE
In the Estate of Kilbourn, Wayne and Marjorie Kilbourn entered into an antenuptial agreement stating that they relinquished all rights to the property of the other. Marjorie then died, and Wayne asserted that her estate owed him for labor and other things he provided to her property when she was alive. The court denied his claim and said that any modification of the antenuptial agreement must have been in a writing signed by Marjorie, as the antenuptial agreement had been made in consideration of the marriage.
CONTRACT FOR THE SALE OF LAND
In Shaffer v. Hines, the administrator of an estate obtained an order from the probate court to sell certain land owned by the estate. Defendant was the high bidder at the auction. Defendant tendered a check to the attorney for the administrator, made payable to the estate. He later stopped payment on the check. The administrator then sued the defendant, claiming that he breached his verbal contract to purchase the land. Both parties agreed that the check was not a written agreement to purchase the land. The court of appeals held that the verbal contract was not enforceable pursuant to Missouri’s statute of frauds.
LEASE LONGER THAN ONE YEAR
A lease for more than one year must be in writing and signed by the party against whom a breach is asserted. A lease for more than one year that is not in writing and signed is not a lease. Rather, the tenants are tenants at will. In fact, pursuant to Section 432.050 RSMo., any lease not in writing and signed creates a tenancy at will. A tenant at will may be terminated with one month’s notice. Missouri courts have interpreted the one month period to encompass one rent period. For example, if rent is due March 1st, the notice must be served on the tenant before March 1st. The tenancy will then terminate on April 1st.
AGREEMENT NOT TO BE PERFORMED WITHIN ONE YEAR
An agreement that cannot be performed within one year must be in writing and signed. In Sales Service v. Daewoo, plaintiff agreed to provide consultation services to defendant over three years in exchange for $40,000 per year. Plaintiff was also to receive a percentage of defendant’s sales during the three years. Plaintiff sent a memo to defendant to this effect, but defendant never signed it. Defendant sent numerous signed memos to plaintiff related to the agreement, but none of them stated that the agreement was for three years. After 23 months, defendant informed plaintiff that defendant would no longer perform the services of the agreement. Plaintiff sued defendant for the amount plaintiff would have received under the rest of the contract. However, the agreement had to be in a signed writing, because it could not be performed within one year.
TAKE-AWAY
Most rules have exceptions. Such is true with Missouri’s statute of frauds. In Missouri, if a party committed a fraud in the formation of a verbal contract covered by the statute of frauds, then the courts nonetheless have the discretion to enforce such verbal contract. However, the verbal contract must still conform to all of Missouri’s other requirements for the formation of a contract.
So, what kind of paperwork will you have to sign when you close? While the process can vary from one borrower to the next, there are some commonalities that apply to most situations. Here’s a checklist of common documents that are needed for the mortgage closing process.
1. The Mortgage Promissory Note
This is one of the most important documents home buyers sign on closing day, and you’ll soon understand why. This doc is also referred to as the “mortgage note” for short, and sometimes just “the note.”
By signing this document, you are agreeing to repay the mortgage loan as outlined within the document itself. The promissory note will contain important details relating to your loan, such as the total amount you owe, the interest rate assigned, the length of the repayment period (e.g., 30 years), and other key details.
It also specifies where the payments are to be sent, and what happens in the even of default (where the borrower fails to repay the debt).
As a home buyer and borrower, it’s crucial that you read this mortgage document at closing and ask questions about anything you don’t understand. The promissory note obligates you to repay the debt in the manner specified. So you want to make sure you understand it prior to signing.
2. The Mortgage / Deed of Trust / Security Instrument
When you sign the previous closing document above (the promissory note), you’re agreeing to repay the loan in the manner outlined within that document. The actual mortgage or deed of trust, on the other hand, is what gives the lender a legal right to take the home back through foreclosure — should you fail to repay the debt.
This closing document is also referred to as the “security instrument.” What you need to know is this: When you hear your lender talk about “the mortgage,” they’re most likely referring to this document in particular.
The deed of trust is a fairly lengthy form, and most of it is boilerplate. As a borrower, you’ll want to pay particular attention to the fill-in-the-blank portions of the deed of trust / security instrument. Those are the sections that will contain information specific to your loan.
3. The deed (for property transfer).
You’ll notice there are two closing documents on this list with “deed” in the title. They’re actually two separate things. Bear with me.
The deed of trust mentioned earlier (a.k.a., “the mortgage”) gives the lender the right to foreclose on the home if you don’t make your payments. The “deed” covered here is the document that transfers ownership of the property from the seller to the buyer.
The terminology here is confusing. So let’s clarify it again:
Deed: Document used to give the new owner rights to the property.
Deed of trust: Document that allows the lender to take the home in default scenarios.
4. The Closing Disclosure
This is another important document home buyers sign at closing. Actually, you should receive this disclosure before the day you close. Federal law requires mortgage lenders to give borrowers a Closing Disclosure document three days prior to the scheduled close. This gives you time to review the disclosure and, if necessary, resolve any issues.
As its title suggests, the Closing Disclosure shows how much money you’ll have to pay on the day you close. This includes whatever down payment is due, along with all of your other closing costs. Collectively, these items are referred to as your “cash to close” amount.
In a typical home-buying scenario, the borrower will bring this amount to the closing in the form of a cashier’s check. A wire transfer is another option, but most people bring a check.
Home buyers should review this mortgage closing document as soon as they receive it. If something looks different from what you expected, be sure to ask your loan officer and/or escrow agent about it. The idea is to get your questions answered and resolve any issues prior to the closing day, to avoid unwanted delays.
5. The initial escrow disclosure statement.
This document, which home buyers usually sign at closing, shows the specific charges you will pay into your escrow account each month (in accordance with the terms of your mortgage agreement).
An escrow account is a special kind of account used to pay property-related expenses. As a homeowner, you pay money into the account. And your mortgage lender or bank then uses those funds to pay your property taxes and home insurance premiums on your behalf.
When you sign the initial escrow disclosure document at closing, you are basically agreeing to the terms of that arrangement.
6. The transfer tax declaration (in some states)
This is a regional closing document that’s required in some states but not in others. So, depending on where you live, you might have to sign this document when you close on a home as well.
It’s primarily used in states (and counties) that charge a property transfer tax. Both the home buyer and seller have to sign the transfer tax declaration, at or before closing.
So, what kind of paperwork will you have to sign when you close? While the process can vary from one borrower to the next, there are some commonalities that apply to most situations. Here’s a checklist of common documents that are needed for the mortgage closing process.
1. The Mortgage Promissory Note
This is one of the most important documents home buyers sign on closing day, and you’ll soon understand why. This doc is also referred to as the “mortgage note” for short, and sometimes just “the note.”
By signing this document, you are agreeing to repay the mortgage loan as outlined within the document itself. The promissory note will contain important details relating to your loan, such as the total amount you owe, the interest rate assigned, the length of the repayment period (e.g., 30 years), and other key details.
It also specifies where the payments are to be sent, and what happens in the even of default (where the borrower fails to repay the debt).
As a home buyer and borrower, it’s crucial that you read this mortgage document at closing and ask questions about anything you don’t understand. The promissory note obligates you to repay the debt in the manner specified. So you want to make sure you understand it prior to signing.
2. The Mortgage / Deed of Trust / Security Instrument
When you sign the previous closing document above (the promissory note), you’re agreeing to repay the loan in the manner outlined within that document. The actual mortgage or deed of trust, on the other hand, is what gives the lender a legal right to take the home back through foreclosure — should you fail to repay the debt.
This closing document is also referred to as the “security instrument.” What you need to know is this: When you hear your lender talk about “the mortgage,” they’re most likely referring to this document in particular.
The deed of trust is a fairly lengthy form, and most of it is boilerplate. As a borrower, you’ll want to pay particular attention to the fill-in-the-blank portions of the deed of trust / security instrument. Those are the sections that will contain information specific to your loan.
3. The deed (for property transfer).
You’ll notice there are two closing documents on this list with “deed” in the title. They’re actually two separate things. Bear with me.
The deed of trust mentioned earlier (a.k.a., “the mortgage”) gives the lender the right to foreclose on the home if you don’t make your payments. The “deed” covered here is the document that transfers ownership of the property from the seller to the buyer.
The terminology here is confusing. So let’s clarify it again:
Deed: Document used to give the new owner rights to the property.
Deed of trust: Document that allows the lender to take the home in default scenarios.
4. The Closing Disclosure
This is another important document home buyers sign at closing. Actually, you should receive this disclosure before the day you close. Federal law requires mortgage lenders to give borrowers a Closing Disclosure document three days prior to the scheduled close. This gives you time to review the disclosure and, if necessary, resolve any issues.
As its title suggests, the Closing Disclosure shows how much money you’ll have to pay on the day you close. This includes whatever down payment is due, along with all of your other closing costs. Collectively, these items are referred to as your “cash to close” amount.
In a typical home-buying scenario, the borrower will bring this amount to the closing in the form of a cashier’s check. A wire transfer is another option, but most people bring a check.
Home buyers should review this mortgage closing document as soon as they receive it. If something looks different from what you expected, be sure to ask your loan officer and/or escrow agent about it. The idea is to get your questions answered and resolve any issues prior to the closing day, to avoid unwanted delays.
5. The initial escrow disclosure statement.
This document, which home buyers usually sign at closing, shows the specific charges you will pay into your escrow account each month (in accordance with the terms of your mortgage agreement).
An escrow account is a special kind of account used to pay property-related expenses. As a homeowner, you pay money into the account. And your mortgage lender or bank then uses those funds to pay your property taxes and home insurance premiums on your behalf.
When you sign the initial escrow disclosure document at closing, you are basically agreeing to the terms of that arrangement.
6. The transfer tax declaration (in some states)
This is a regional closing document that’s required in some states but not in others. So, depending on where you live, you might have to sign this document when you close on a home as well.
It’s primarily used in states (and counties) that charge a property transfer tax. Both the home buyer and seller have to sign the transfer tax declaration, at or before closing.
A final walkthrough is just like it sounds—it’s a walk through the house you’re about to buy. It’s an opportunity for you and your real estate agent to spend a few hours looking over the place—room by room, inside and out—to check that everything works as it should.
Here’s what to know:
The final walkthrough gives you time to confirm that the seller made agreed upon repairs, and to check that no new issues have cropped up since the home inspection (which happens earlier in the house-buying journey).
It’s really rare (and often really awkward) for the seller and buyer to meet on final walkthrough day. But if the seller does hang around, they should have their realtor there, too.
A final walkthrough is never a waste of time—even if you feel great about the house. Buying a home is probably the biggest purchase you’ll make in your lifetime, and you want to make the most of this chance to give it one more look before you commit!
When Does a Final Walkthrough Happen?
The walkthrough happens as close to closing day as possible—usually a few days before. It can sometimes happen on closing day itself.
This part is important: Having the walkthrough near closing day means the house should be empty, giving you a good look at the whole place as a blank canvas. The seller should have moved out their stuff and hopefully not damaged floors and walls in the process.
Be sure to clarify this with your real estate agent to make sure the timing of the walkthrough is after the seller moves out and not before. Otherwise, you’ll be left wondering if the movers are going to accidentally knock a dent in the wall between the time you last saw the house and the closing that makes it legally yours. You don’t want any nasty surprises on closing day!
How Long Does a Final Walkthrough Take?
It could take one hour. It could take four hours. It all depends on the size of the property you’re walking through! Let’s pretend you’re closing on a three bedroom, two bathroom detached home in five days.
For your final walkthrough, you should set aside at least three hours from beginning to end.
What Should You Take to the Final Walkthrough?
Want to be prepared for anything? Bring these things:
Home purchase agreement: This legally binding contract lays out the terms agreed upon by the seller and the buyer. It covers everything from the appliances included in the purchase to repairs that should be carried out before the final walkthrough.
Home inspection report: This report contains the results of the home inspection. You can use it to review the issues the inspector flagged, then check that the seller made the necessary repairs.
Pen, paper and sticky notes: These are handy to make notes and mark any areas in the house that need further attention—like drywall or mold.
Camera: You’ll want to take photos of anything that concerns you in and around the house.
Something to test outlets: A night-light or phone charger is useful when testing electrical outlets—especially if the seller agreed to fix specific ones around the house.
What to Look For During a Final Walkthrough
Your final walkthrough day has arrived! What do you need to look out for? And let’s not forget the seller. What should they do in the days up until the final walkthrough?
For the Buyer
Outside the Home
The first thing you should do during your walkthrough is go through the agreed upon repairs. Did the seller need to replace a faulty smoke alarm? Was the HVAC overdue for a tune-up? The seller should make all the agreed upon repairs by final walkthrough (and have receipts for everything to give to you.)
Next, is anything missing from the house that you expected to remain? For example, is the flower bed missing a row of shrubs that were there before? You could withhold money from the seller for the shrubs you assumed would stay put.
Here are a few other items to check for:
Do the roof and gutters look okay from ground level?
Is there any debris around the home that the seller should’ve cleared? (You don’t want to be responsible for disposing of tins of paint or bags of cement.)
Are there any signs of pests—like rodent droppings or rotting wood from termites?
Check that the garage door openers are available and work correctly.
Make sure the doorbell works and that the mailbox is in good shape.
Keep in mind, this is not necessarily the time to bring up new issues you didn’t cover in the contract or after the home inspection. It’s more of a final check to make sure there aren’t any glaring issues or unexpected red flags—like a back door that may have been broken since you last viewed the home.
Inside the Home
You should first check that the utilities (water, electricity and gas) are all on. Run major appliances like the washing machine and dishwasher to ensure that they work and don’t cause any leaks. You should also do a brief test of the dryer.
Here are other items to check:
Run the heating and cooling using the HVAC system regardless of the temperature outside!
Is the refrigerator switched on and working as it should be in all compartments?
Run hot and cold water through all the faucets in the home, and check that sinks drain properly and don’t leak.
Briefly test all the showers and bathtubs.
Look for any mold that wasn’t there before. Check in the corners of rooms and in places where there used to be furniture.
Flush all the toilets a few times to ensure they work and fill correctly. Check for leaks.
Run the garbage disposal.
Test all the stove burners.
If there’s an extractor fan above the stove or any bathroom extractor fans, check them.
Test any outlets the inspector flagged for repair and make sure they work.
Test all the light switches and ceiling fans in every room.
Open and shut all the doors and windows and make sure they lock correctly. Are there any sticky doors or missing window screens?
Look at all the walls, ceilings, floors, crown molding and baseboards. Are there caulking and painting repairs the seller agreed to make but hasn’t done? Are there signs of new damages after they moved out?
Are all the fixtures present and in place? Fixtures are items like doorknobs, blinds and ceiling fans. They’re usually fixed into the home and shouldn’t be removed (unless agreed upon). And they’re different from personal property like table lamps or drapes that can be easily moved from room to room. If it looks like the Grinch has been through the house and unscrewed every fixture and light bulb, it can cost you a lot of unexpected cash to replace them.
Finally, is the house broom clean? In other words, does it look like it’s been swept and roughly cleaned? You should expect a basic level of cleanliness from the seller, even if you choose to do further work on the house or give some areas a deeper scrub yourself.
Pay extra attention if it’s a new construction. With new homes, plumbing and HVAC units haven’t had a lot of time to “settle in.” Kitchen cupboards might be misaligned or the laundry room could be missing a shelf. Surprises can (and often do) crop up during a final walkthrough, even with a brand-new home.
For the Seller
Now, the seller also has some key responsibilities by the time the final walkthrough happens. The seller should:
Empty and clean the entire house. It doesn’t need to gleam. It’s okay just to sweep with a broom. Give the bathrooms a quick clean, too.
Make sure you’ve made all the repairs you agreed to in the contract. You should have receipts and records of the repairs for the buyer in case they need to follow up on anything.
Make sure any appliances you’ve agreed to include in the purchase are functioning, clean and empty. Don’t surprise the buyer with leftovers from last night’s takeout in the fridge!
Fill in and paint over holes in walls after you’ve removed items like TV mounts and photos.
Finally, review the purchase agreement so you’re reminded of what you agreed to leave behind. After all, you’re busy moving out and have a lot going on—just like the buyer!
Problems During the Final Walkthrough
These days, the contract between a buyer and a seller will usually give the seller up to a few days before closing to make repairs. Any problems after that deadline should be resolved before closing day. But life happens!
Let’s say you discover the seller didn’t fix the electrics in the basement even though it was one of their agreed upon repairs. What happens next? Here are some options:
You could ask for money due to the seller to be held in escrow (a neutral third party) until the problem is fixed. This is a good option for expensive repairs. If the repairs would only cost a small amount (like $100 or so), then you could agree to a concession. This means the seller pays the buyer to fix the issue and closing day can go ahead as planned.
You could ask for closing to be delayed until the seller arranges to fix the problem. Some title companies and attorneys might also push for a delay until the seller makes the repair.
If the closing timeline can’t be altered, both parties could sign a summary of the walkthrough and note any faults the seller agrees to fix after closing day.
Closing day is so important in the house-buying process. Nobody wants to delay it! So it’s usually in everyone’s best interest to resolve any issues ahead of time.
A final walkthrough is just like it sounds—it’s a walk through the house you’re about to buy. It’s an opportunity for you and your real estate agent to spend a few hours looking over the place—room by room, inside and out—to check that everything works as it should.
Here’s what to know:
The final walkthrough gives you time to confirm that the seller made agreed upon repairs, and to check that no new issues have cropped up since the home inspection (which happens earlier in the house-buying journey).
It’s really rare (and often really awkward) for the seller and buyer to meet on final walkthrough day. But if the seller does hang around, they should have their realtor there, too.
A final walkthrough is never a waste of time—even if you feel great about the house. Buying a home is probably the biggest purchase you’ll make in your lifetime, and you want to make the most of this chance to give it one more look before you commit!
When Does a Final Walkthrough Happen?
The walkthrough happens as close to closing day as possible—usually a few days before. It can sometimes happen on closing day itself.
This part is important: Having the walkthrough near closing day means the house should be empty, giving you a good look at the whole place as a blank canvas. The seller should have moved out their stuff and hopefully not damaged floors and walls in the process.
Be sure to clarify this with your real estate agent to make sure the timing of the walkthrough is after the seller moves out and not before. Otherwise, you’ll be left wondering if the movers are going to accidentally knock a dent in the wall between the time you last saw the house and the closing that makes it legally yours. You don’t want any nasty surprises on closing day!
How Long Does a Final Walkthrough Take?
It could take one hour. It could take four hours. It all depends on the size of the property you’re walking through! Let’s pretend you’re closing on a three bedroom, two bathroom detached home in five days.
For your final walkthrough, you should set aside at least three hours from beginning to end.
What Should You Take to the Final Walkthrough?
Want to be prepared for anything? Bring these things:
Home purchase agreement: This legally binding contract lays out the terms agreed upon by the seller and the buyer. It covers everything from the appliances included in the purchase to repairs that should be carried out before the final walkthrough.
Home inspection report: This report contains the results of the home inspection. You can use it to review the issues the inspector flagged, then check that the seller made the necessary repairs.
Pen, paper and sticky notes: These are handy to make notes and mark any areas in the house that need further attention—like drywall or mold.
Camera: You’ll want to take photos of anything that concerns you in and around the house.
Something to test outlets: A night-light or phone charger is useful when testing electrical outlets—especially if the seller agreed to fix specific ones around the house.
What to Look For During a Final Walkthrough
Your final walkthrough day has arrived! What do you need to look out for? And let’s not forget the seller. What should they do in the days up until the final walkthrough?
For the Buyer
Outside the Home
The first thing you should do during your walkthrough is go through the agreed upon repairs. Did the seller need to replace a faulty smoke alarm? Was the HVAC overdue for a tune-up? The seller should make all the agreed upon repairs by final walkthrough (and have receipts for everything to give to you.)
Next, is anything missing from the house that you expected to remain? For example, is the flower bed missing a row of shrubs that were there before? You could withhold money from the seller for the shrubs you assumed would stay put.
Here are a few other items to check for:
Do the roof and gutters look okay from ground level?
Is there any debris around the home that the seller should’ve cleared? (You don’t want to be responsible for disposing of tins of paint or bags of cement.)
Are there any signs of pests—like rodent droppings or rotting wood from termites?
Check that the garage door openers are available and work correctly.
Make sure the doorbell works and that the mailbox is in good shape.
Keep in mind, this is not necessarily the time to bring up new issues you didn’t cover in the contract or after the home inspection. It’s more of a final check to make sure there aren’t any glaring issues or unexpected red flags—like a back door that may have been broken since you last viewed the home.
Inside the Home
You should first check that the utilities (water, electricity and gas) are all on. Run major appliances like the washing machine and dishwasher to ensure that they work and don’t cause any leaks. You should also do a brief test of the dryer.
Here are other items to check:
Run the heating and cooling using the HVAC system regardless of the temperature outside!
Is the refrigerator switched on and working as it should be in all compartments?
Run hot and cold water through all the faucets in the home, and check that sinks drain properly and don’t leak.
Briefly test all the showers and bathtubs.
Look for any mold that wasn’t there before. Check in the corners of rooms and in places where there used to be furniture.
Flush all the toilets a few times to ensure they work and fill correctly. Check for leaks.
Run the garbage disposal.
Test all the stove burners.
If there’s an extractor fan above the stove or any bathroom extractor fans, check them.
Test any outlets the inspector flagged for repair and make sure they work.
Test all the light switches and ceiling fans in every room.
Open and shut all the doors and windows and make sure they lock correctly. Are there any sticky doors or missing window screens?
Look at all the walls, ceilings, floors, crown molding and baseboards. Are there caulking and painting repairs the seller agreed to make but hasn’t done? Are there signs of new damages after they moved out?
Are all the fixtures present and in place? Fixtures are items like doorknobs, blinds and ceiling fans. They’re usually fixed into the home and shouldn’t be removed (unless agreed upon). And they’re different from personal property like table lamps or drapes that can be easily moved from room to room. If it looks like the Grinch has been through the house and unscrewed every fixture and light bulb, it can cost you a lot of unexpected cash to replace them.
Finally, is the house broom clean? In other words, does it look like it’s been swept and roughly cleaned? You should expect a basic level of cleanliness from the seller, even if you choose to do further work on the house or give some areas a deeper scrub yourself.
Pay extra attention if it’s a new construction. With new homes, plumbing and HVAC units haven’t had a lot of time to “settle in.” Kitchen cupboards might be misaligned or the laundry room could be missing a shelf. Surprises can (and often do) crop up during a final walkthrough, even with a brand-new home.
For the Seller
Now, the seller also has some key responsibilities by the time the final walkthrough happens. The seller should:
Empty and clean the entire house. It doesn’t need to gleam. It’s okay just to sweep with a broom. Give the bathrooms a quick clean, too.
Make sure you’ve made all the repairs you agreed to in the contract. You should have receipts and records of the repairs for the buyer in case they need to follow up on anything.
Make sure any appliances you’ve agreed to include in the purchase are functioning, clean and empty. Don’t surprise the buyer with leftovers from last night’s takeout in the fridge!
Fill in and paint over holes in walls after you’ve removed items like TV mounts and photos.
Finally, review the purchase agreement so you’re reminded of what you agreed to leave behind. After all, you’re busy moving out and have a lot going on—just like the buyer!
Problems During the Final Walkthrough
These days, the contract between a buyer and a seller will usually give the seller up to a few days before closing to make repairs. Any problems after that deadline should be resolved before closing day. But life happens!
Let’s say you discover the seller didn’t fix the electrics in the basement even though it was one of their agreed upon repairs. What happens next? Here are some options:
You could ask for money due to the seller to be held in escrow (a neutral third party) until the problem is fixed. This is a good option for expensive repairs. If the repairs would only cost a small amount (like $100 or so), then you could agree to a concession. This means the seller pays the buyer to fix the issue and closing day can go ahead as planned.
You could ask for closing to be delayed until the seller arranges to fix the problem. Some title companies and attorneys might also push for a delay until the seller makes the repair.
If the closing timeline can’t be altered, both parties could sign a summary of the walkthrough and note any faults the seller agrees to fix after closing day.
Closing day is so important in the house-buying process. Nobody wants to delay it! So it’s usually in everyone’s best interest to resolve any issues ahead of time.
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