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from Local Attorney, Michael H. Wasserman

Thursday, March 27, 2008

Should the Conducter Drive the Train?

Trulia has an interesting feature called Trulia Voices. Real Estate professionals and consumers can pose questions to each other about nearly every aspect of buying and selling property. I've been following the Chicago-centric discussions for the last couple of months and I am enjoying alot of what I am reading. Buyers and Sellers ask for "free advice." Agents self-promote. "Expert" real estate investors pontificate. Good Stuff.

This site is not without its problems. As always, the relative anonymity of the internet affords people who do not really know the answers or even understand the questions opportunity to give answers with an appearance of authority. Hapless consumers are at risk of getting some really bad, even dangerous advice. Its caveat emptor for anyone who uses the web site that is supposed to help them navigate the wacky caveat emptor world of real estate deals.

I am seeing a lot of agents trying to answer legal questions. Some are from out of state and are absolutely clueless when it comes to local custom or practice. The locals? sadly, a mixed bag there too.

Relying on legal advice from an agent is a bit like asking the conductor to drive the train. Sure, she may know the route, and all the stops along the way, but that doesn't mean she knows how to work all the buttons or levers that the engineer engages to run the thing. (Then again, in the Jesse Fuller ditty, Monkey and the Engineer - everything works out pretty well in the end.)

By way of example, a Trulia member asked yesterday whether or not her father would be able to get out of a real estate contract on the premise that he thinks he might loose his job before the contract closes.

Can he get out? Maybe, but how can anyone say for certain? Well one plucky agent can. She boldly states:

"There is always a way to get the earnest money back. If you're using a standard real estate contract in Illinois, there are a few clauses in there. One, if the buyer can't obtain financing ( and your father seems to fall under that due to maybe losing his job, he can't get the loan), another is the home inspection, and there are more".
We were told by the questioner that her father had signed the contract more than two and one half weeks earlier. In all probability, he would be well beyond the typical periods allowed for attorney review and inspection contingencies. No mention of a mortgage financing contingency at all. Even if there was a contingency (that had not expired) would a lender refuse to lend based on the applicant's fear of losing his job?

I sent this agent a private email to follow and she again insisted that a buyer can always get out of a contract, at any time, for any reason. I meant to ask her if that is a guaranty she offers all of her clients. I mean, what is the point of signing a contract at all if it is never enforceable? Why would any of us bother?

Sure that advice might make the buyer and daughter feel better. Maybe the seller will show compassion and let them out of the contract. Maybe there still is a way out. But to blindly rely on that bad/wrong advice - a train wreck waiting to happen.

Thursday, March 13, 2008

GOTCHA! sellers closing costs go up (again)

Well that didn't take long.

Chicago's City Council reconsidered yesterday, and by a 49-0 vote, passed a revised ordinance on the municipal transfer tax increase passing it off from buyers to sellers.

The new seller-paid $3/$1,000 transfer tax can be added on to increased recording fees, and water department full payment certification fees.

And, based on recent history anyway, stand by for title companies fee increases which seem to hit every spring....

Wednesday, March 12, 2008

On Talking Clients Off the Ledge

It stands to reason that most all of the professionals involved in a real estate transaction have a vested interest in seeing the deal through to a closing. From a distance, we lawyers "could" be included in this camp, understandably so. My buyers hire me (and many real estate agents refer them to me) because they want to buy. Sellers hire me because they want to sell. No one wants the deal to collapse.

But the truth runs a bit deeper, as my first loyalties run to my client, and a large part of my job is to try to keep my clients out of trouble. From time to time, my review of a contract leads me to an unfortunate, but inevitable conclusion: the deal stinks. In those instances, I try hard to talk my clients out of going forward on their contracts; "off the ledge," if you will. Some listen, some don't. At least I try.

I was reminded of all this earlier this week while reading about the problems at the Sterling Private Residences. Turns out that there is a rampant problem with foreclosures at that property and the values of units there have declined by as much 175 over the last three years. 95 foreclosure lawsuits in that time frame in a building of only 389 units! YIKES!

During that same time frame, I successfully persuaded a number of clients out of buying into that project and others offered on similar terms by the same developer, American Invsco. Its not that Invsco is a bad company or that they were dishonest in their marketing. Its just that the deals they were offering three years ago were highly speculative. In my estimation, just "too good to be true."

Invsco sold units on a promise that they would pay buyer's property taxes, assessments and rental incomes for these units for the first two years. That come-on attracted many would-be investor/speculators. By using adjustable rate loans with teaser rates, woiuld-be buyers were enticed by notions of property value appreciation and an opportunity for easy "flips" as the incentive terms ended. Buyers tended to look past all possibility that market prices would not appreciate, or that mortgage payments could increase, or assessments, or that tenants might move out. Or for that matter, that they would all be competing with each other two years later when it came to sell. Those startling foreclosure numbers cited in the Crains piece seem to bear those miscalculations out.

I wish I could say that I am always this prescient in my contract evaluations, or that I was able to talk everyone I represented out of these schemes. But at least, my clients were given fair warning of the potential perils. The ones who went forward did so with that additional knowledge. I wonder how many of those others of the 95 foreclosures (or the others who are distressed, but not yet foreclosed) had legal counsel, or had anyone on their side trying to warn them of the risks they took on?

Tuesday, March 11, 2008

CHICAGO TRANSFER TAX - let the games begin!

As of yesterday, it looks as though the City Council's Department of Finance did a 180 degree turn and is now going to lay off the $3.00 transfer tax increase on sellers and not buyers.

The tax increase goes into effect on April 1.

So it was to be expected that Buyers would rush their deals forward and try to close on March 28th or on the 31st to beat the increase.

Turns out that might not work out as planned. See, the tax gets paid when Deeds are filed with the Cook County Recorder of Deeds. Its usually the title company's job to handle the recording of documents and since they have to record so many, they do not always get recorded the same day as your closing. Sometimes it can take days or weeks (or months) to get done. Title company's dont want to be left holding the bag for the fee increase. As a precaution many will start collecting additional funds to cover the tax increase as early as March 25th or 26th.

So all those end of month closings we took pains to schedule? Guess we're gonna reschedule a whole slew of them again, a few days sooner....

Thursday, March 6, 2008

Lawyering - Its Not Always as Easy as It Looks!

Nothing should be simpler than a real estate transaction. The buyer giver the seller some money. The seller gives the buyer a deed and some keys. Everyone shakes hands and goes home. Seldom is life so simple. Take for example what is going on with my clients Brigham and Leslie, and how careful lawyering will save them from near disaster.

This delightful couple is trying to buy a one million dollar home from a bank. The bank, sorry to say, owns the house because it foreclosed the former owner’s mortgage. After weeks and weeks of negotiations and preparation, we are supposed to close this week, tomorrow, actually. Only we won’t. Not yet anyway.

In foreclosure cases, the Banks tend to call all of the shots. They require buyers to sign special contract riders that limit the Bank’s liabilities. Buyers take these properties “as is.” The Banks refuse to pay certain customary seller charges. They impose penalties on Buyers who are not ready to close on the appointed date, and then more often than not, closings are delayed when the bank’s representatives are slow to sign or return paperwork their lawyers need to convey title.
Brigham and Leslie love the house and they have been very patient with the Bank, knowing that in the end they will get this dream home. I am not as patient, but I have been doing this long enough to know that eventually, just like blind squirrels finding acorns, bank rep.s sign and return paperwork.

So, in this case, the bank refused to pay for a survey of the property. Surveys are two dimensional line drawings that represent any given parcel of land. The surveyor compares a home’s street address against its “Legal Description” as it is set out in the title report and then measures all of the lot dimensions and improvements on the land. This helps assure us that, for example, there are no encroachments and helps to assure that the buyers are getting what they pay for. The bank did not want to incur the expense. Few buyers want to either. But I insisted that Brigham and Leslie get their own survey. Happily, they took my advise and allowed me to arrange for one.

The bank’s title report came to us late, so the surveyor not get started on this until this week. They completed their field work yesterday. The closing is tomorrow.

This morning I called the surveyor to make sure everything was alright. This gang is rock solid. My surveyors-of-choice. On time, On budget. Accurate. Pleasant. Never a disappointment or a surprise. Until this morning.

It was the WRONG PROPERTY!!!


They went to the address we asked them to. Seems that the title report legal description is really for an adjacent property. My clients nearly bought a set of million dollar keys - to the house next door to the one they would have ended up owning.

That means, of course, that the bank loaned money to their former borrower and secured it against the wrong property too; And that poor fellow bought and lost the wrong house; And for that matter, who that the folks who think they own the other house actually own the house we thought we were going to buy -that Brigham and Leslie would almost have moved into. But for that survey, none of this would have been revealed. Score one for the good guys!

In time, all of this is going to be worked out and I am confident that my clients will receive exactly what they set out for. In the mean time, hooray for MM Surveying Company, and for due diligence in even the “simple” transactions.

Wednesday, March 5, 2008

TAX RELIEF ON THE SALE OF (SOME) VACATION HOMES

A lot of attention these days is being focused on the struggles many, many people are enduring selling real estate at a loss, whether the result of mortgage woes or declining market prices, or both. Deservedly so. This is a big problem. This is reflected in a significant number of the contracts I am working on right now; short sales, properties in foreclosure; post-foreclosure bank sales; sellers paying money at closing to cover liabilities in order to sell. I am helping clients on all sides of these types of deals. Not a happy time at all for these sellers.

But still and all, many sellers are profiting handsomely when their deals close. And when they profit, the tax man takes interest. Fortunately, the Internal Revenue Code provides two very powerful protections for sellers. And now, as of March 10, there will be a significant expansion of one, to benefit some vacation property owners.

The Section 121, Principal Residence Exclusion, shelters up to $500,000 of capital gains on a Primary Residence, provided that certain guidelines are met.

Section 1031, delays capital gain liabilities on Investment Properties when taxpayers swap or exchange one investment property for another. Again, certain (strict) guidelines must be followed.

But what about vacation / second homes? Since they aren't principal residences, they don't qualify for section 121 treatment. But they aren't really "pure" investments either, or at least so sayeth the IRS. Revenue has historically opposed the use of 1031 exchanges, arguing that personal use and enjoyment negates the investment property requirements of section 1031.

The IRS position was most recently successful in a tax court case titled "Moore v. Commissioner." That decision however described several consideration that the Tax Court used to decide whether or not this is a qualifying investment property.

And, as a result, the IRS has actually spelled out the circumstances in which 1031 exchanges will work for some vacation home-owners; Revenue Procedure 2008-16.

The IRS now recognizes that even if you occasionally use your second home for personal use, you still might be able to utilize a 1031 swap when it is time to sell. To do so, you must be able to satisfy these "safe harbour" requirements:

Both the "old" and "new" properties must meet

  1. A Two Year "Ownership" test. (you have to own them for at least 24 months before the exchange); and
  2. A "Use" Test for both properties for two years. For each of the prior two 12-month periods, the properties must be either (i) rented out at fair market rates for 14 or more days and (ii) not used for personal use for more than either 14 days or 10% of the number of days that it was actually rented - whichever is greater. The same terms must apply for the new place too.
There are other considerations too, but this is a land mark change as it really opens up significant tax relief to anyone who wants to use the lakeside summer shack or ski town villa every once in a while.

Section 1031 exchanges are tricky matters. No one should try this alone. Seek out a reputable 1031 intermediary and get yourself competent legal and tax advice first.

Monday, March 3, 2008

More New Pending Legislation for Property Owners

I guess that there just is no limit to what lawmakers can think up - or to their collective genius, to wit:

HB5160 would amend the Mortgage Act to make anyone (buyer or mortgage lender) who is required to deliver funds to complete a real estate closing do so at the closing. (Seems obvious right?) A person who fails to make any required payment at closing would be liable to any party involved in the closing who incurs a loss or expense because of the delay, plus costs and reasonable attorney's fees.

HB5189 would amend the Condominium Property Act to prohibit Condominium Associations and other "common interest communities" from barring unit owners from leasing up to one fifth of the units. Sure hope you dont mind if your neighbor wants to rent his unit out....

HB5896 would amend the Code of Civil Procedure to add one more hoop for mortgage lenders to jump through (one more "safeguard" for borrowers behind on their mortgage payments) before they can start a foreclosure: The bank would have to contact the borrower advising that it is about to start a foreclosure in the near future that the borrower could ask for an in-person meeting to review refinancing the mortgage loan. (What, the past-due notice is threatening enough yet?) Provides the notice must also contain a list of HUD-certified credit counselors. Provides that the bank must wait at least 30 days after the date of the in-person meeting, or 30 days after the notice was served before the action to foreclose could be commenced.

SB2131 would also amend the Code of Civil Procedure, to BAR all residential forecloses until January 1, 2010 if the mortgagor borrower pays the current interest and reserves or escrow payments for property taxes and insurance (!) Wow - that arm or fixed rate loan Uncle Gus took out five years ago just turned into an 18 month, interest only loan - how cool is that?

HB4352 will require landlords to give at least 2 days advance notice before entering a tenants unit for anything but an emergency or an unexpected/necessary repair and that the access can only be made between 9:00 a.m. and 8:00 p.m. or at any other time requested by the tenant (which would be presumed to be a reasonable request).