Over the last 30 years, I have handled more residential closings than I can remember. I have grown pretty numb to the process that my buyers and sellers go through. While I like to think that I patiently answer all their questions, I know that deep down, it should be routine and obvious. How come, I subconsciously wonder, they don’t know how to transfer utility accounts, change addresses, deal with condo and home owner associations or obtain insurance? Why can’t they provide lenders and landlords with proper financial information?

During these 30 years, my family has moved only 2 times. The first time, it was just my wife and me, just before the birth of our first child, from a 2 bedroom apartment into our first house. This was not a big move as we didn’t have much. It was difficult only that my wife was 7 months pregnant. But, packing and unpacking was a breeze, and we had lots of help. The second time we moved was 5 years later, after we outgrew that house. Our 2nd child was 2. This move also was not so hard. We were still accumulating stuff and were more than doubling the living space. The grandparents watched the kids while we packed and unpacked and waited for new furniture. Actually, furniture arrived for many years after we made that move. I navigated the details of those 2 moves fairly effortlessly. Simple to do lists got me through it and our real estate agents and my secretary kept me on task.

Now, 23 years later, the kids are grown and left us with an empty nest. We have sold the house and have downsized. We decided to rent a much smaller townhouse to give us time to decide what is next. But this has been overwhelming. We have accumulated so much “stuff”. We are the definition of what downsizing is supposed to be. How to sort through and dispose was a tremendous challenge. We had only 6 weeks from signing the contract to closing in which to clean out closets and cabinets and donate furniture. Multiple pickups had to be arranged and coordinated. But the decisions….

To do lists were endless. Last time we moved, there was water, electricity, phone and cable. Now there is satellite, internet, alarms, gas and more to add to the list. Turn it on and turn it off. Insurance. Changing addresses on all kinds of accounts. Where did we get so many credit cards? And banks and other financial accounts? How many visits does it take to get the internet to work?

The packers and movers did a great job – right up until they got to the end of the truck. The new townhouse is an urban three story walk up. We never measured our furniture. The living room furniture is too big to make it up the narrow stairways (with a turn) as is the queen box spring for the second bedroom. Two hours of twisting, manipulating and cursing and the guys gave up and put it in the garage. So no furniture in the living room and no bed in the second bedroom.

The easiest parts of this process are the closing, which my assistant is handling expertly, and the lease, because we have been fortunate to have a very nice and helpful landlady. And, in both cases, our real estate agent has been a trouble shooter. But as a seller and a renter, I now truly understand and empathize with my clients. I see why they get stressed and sometimes ask obvious questions or forget to do simple things. After all, I am that guy right now. Someone has to keep me on the right track.

Investors in residential house flipping have made a big come back the last few years. Much of the popularity of this can be attributed to the many TV shows dedicated to renovation, repair, investment and flipping. I’ve written on this topic before (see post HERE). However, I did not focus on the other side of the transaction, the end buyer. There is risk that buyers of this type of property should be aware of and look for. These issues were prevalent in the foreclosure crisis and the bursting of the housing bubble in 2008-10. This is not to say that investors haven’t learned their lesson. But, some people are dishonest and greedy. Pay attention to these 6 potential risks.

  1. Financing – yours and your seller’s. Make sure that you are solely responsible for selecting your lender, completing your loan application and providing the lender with all requested documentation. The foreclosure crisis was caused, in part, by unscrupulous investors who falsified buyers’ loan applications without buyers’ knowledge, thus committing mortgage fraud. Also, look at the seller’s existing mortgage. This will show on your title commitment/report. Is it in the same name as the entity selling you the property? Is there only one mortgage? Is the mortgage for less than the purchase price? Any of these can be indicators of an earlier fraud. If you are paying cash, get an appraisal to assure that you aren’t over paying.
  2. Title – Review the title commitment carefully. Make sure that the seller owns the property. Look at the 24-month chain of title. Has there been an unusual amount of conveyances prior to the conveyance to the seller? Has the seller made other conveyances prior to your closing? Have all prior mortgages been satisfied? Do not allow the seller or the seller’s title company handling the title for you to close without allowing you AND your attorney to review before closing.
  3. Seasoning – Some Fannie Mae, Freddie Mac and FHA loans prohibit the sale of a property for a period of time (60-180 days) following the date of the mortgage. This would be in the seller’s existing mortgage. Make sure that all such provisions have expired.
  4. Redemption Rights – if seller purchased the property at foreclosure, make sure prior owners’ right of redemption has expired. In Florida, the right of redemption expires on sale, so if a certificate of title has been issued, there is no right of redemption.
  5. Permitting – make sure that all improvements made by the seller have been properly permitted and all permits have been properly closed and certificates of occupancy issued. This holds true for improvements made by prior owners.
  6. Other Issues Regarding Improvements – Inspect, inspect, inspect. Make sure all of seller’s improvements and repairs have been properly made. Although this goes with number 5 above, just because the work has been permitted and a certificate of occupancy issued (hopefully), you should assure the quality of the work. Warranties should be assigned and where possible, get warranties from the seller.

 

If all house flippers were like the ones on TV, none of this would be necessary and every house bought from a flipper would look like a celebrity’s mansion. But that is not the case. There are many good, even great flippers. But there are many poor and dishonest ones as well. Beware.

This past August, my wife decided to take my 96 year old mother in law, Evelyn, to Washington, DC to visit our son. We thought that Evelyn would enjoy seeing where Steven lived and worked.  He works on Capitol Hill as an aide to a Congresswoman.  Steven planned a tour of his office and the Capitol for his grandmother.  All went well.  Evelyn enjoyed everything and was very proud to see Steven at work.  After the tour, they said their goodbyes so that Evelyn could rest up for dinner.  Steven went back to his office.  My wife began to walk Evelyn out of the Rayburn House Office Building when Evenly stumbled and fell.  Paramedics were called and she was transported to the hospital.  The diagnosis was a separated shoulder.

Two nights later my wife and Evelyn came home and we began to worry. What were we going to do now?  Fortunately, Evelyn, upon recovery, made everything easy for us when she told us that she no longer wanted to live alone.  We decided to begin to look for an Assisted Living Facility.

My wife is super organized, but this process is an unknown.  She did her research.  I, however, knew that we first had legal steps to take and I suggested that we retain an elder care attorney to guide us.  My wife and Evelyn agreed and we retained an attorney I know an have worked with.  Everyone was and is very comfortable with him and his staff.  He is great at explaining things in language that my wife can understand.  Evelyn trusts us to carry the ball.  If I have questions, our attorney answers me in the type of attorney shorthand and language I expect.  Unfortunately, my wife doesn’t understand that shorthand.  So, when she had questions about process and I answered her, she did not believe that I was correct.  She heard or understood answers differently than I did and she didn’t factor in my years of legal experience to answer her questions.  It began to dawn on me that the client here was not Evelyn, but my wife.  However, this was our elder care attorney’s problem, not mine.

UNTIL – it came time to sell the condo. Evelyn and my wife wanted to list the condo immediately and the attorney needed to transfer the condo to my wife for planning purposes.  We decided that Evelyn would not move to the ALF until some time in January.  Therefore, I determined that we would not list the condo or retain an agent until January, nor would we transfer the unit to my wife until after the first of the year.  Evelyn, the client, said ok.  My wife asked me why and I explained my reasons, both business and legal.  The elder care attorney concurred.  My wife acquiesced but changed her mind often until the end of the year.  She just wanted to get things done.

I had an agent whom I wanted to sell the condo and whom I knew well and trusted. My wife, not Evelyn, through out the holiday season, made suggestions as to how and when I should contact the agent.

When we met with the agent, Evelyn and my wife were very pleased. The agent sent me all the standard forms, all of which I have reviewed hundreds of times.  I assured my wife all was ok,  yet she remains nervous about the listing.

So far this experience is teaching me that when your mother in law is your client, your spouse is the defacto client. No matter the size of the deal or case, the matter becomes a 24-hour a day concern and you will be 2nd guessed more than any other client  you have ever had.  Maybe this case is more emotional because Evelyn is older and has moved to an ALF and we are dealing with everything in her life; but I don’t think so.  Whenever it’s Mom, hers or mine, there has to be an emotional investment and it becomes a team effort.  Mom isn’t really a client.  She’s just Mom.

The holiday season is supposed to be a joyful time. Beginning at the start of November, as thoughts turn towards Thanksgiving turkey, cooler temperatures, family gatherings, Christmas, Chanukah, New Years and shopping, a certain contentment begins to settle in all around.  Or does it?

Certainly not in offices where real estate closings take place. Holiday season brings panic.  As year end approaches, the calendar is the enemy.  Everybody wants to close and everything is a rush.  A feeding frenzy has begun.

Why does this happen? I remember when I first began practicing, we always had to get 1 or 2 last big deals finished before the end of the year.  My senior partners always told me we had to do this for “tax reasons”.  The first couple of years, I assumed that this was because the client had tax planning reasons for closing by December 31.  I then came to realize that it was really for the firm’s cash flow needs that December 31 was critical.  Close the deals, collect large fees, partners get bonuses, don’t close, no fee, partners don’t get bonus.  Simple economics!

Later, when I started practicing on my own and money in the bank on 12/31 vs. 1/1 made no difference to me, we still had surges in November and December. But, if deals weren’t closed by the middle of December, many clients began to close up shop for the holidays, deciding to carry over the gain or loss until the next tax year.  Thus, 12/31 became an artificial deadline.  Sometime before 12/20 was the new deadline only for my own peace of mind.

Today, the feeding frenzy is as real as ever. It is true for residential and commercial closings.  Some of it might have to do with Trump tax reform.  But there are other factors.  First, we continue to ride a long, strong economy.  The real estate market remains strong and interest rates remain low.  With so many deals out there, clients want to close quickly to take advantage of the economic climate and interest rates before this changes.

Second, contracts signed early in the year, after everything closed at year end, run their course and have year end closing dates. There are 2 factors driving this.   Commercial deals are longer term.  Once the due diligence period has run its course and approval and other contingencies have been satisfied, closing must occur.  In a typical commercial contract, this can take 6-12 months, sometimes longer.  But when the date comes up, there is a rush to close.  Though you can’t predict when a contract will be signed, it does seem that many projects start at the beginning of the year which often times out the closing date for the end of the year.  As to residential contracts, many people put their homes up for sale in the summer, after the school year.  Consequently, contracts are often signed at the end of summer and early fall.  Closings usually take 60-90 days, which puts the closing right in the middle of the holiday period.

Third, cash deals are very common in both residential and small commercial contracts. Take a lender out of the picture and the process to close gets shorter.  Sellers like to accept cash contracts as it takes a major contingency out of the picture, further shortening the closing.  Sellers will accept lower purchase prices to get to closing faster.  If the expectation is a faster closing, a closing scheduled for the holiday time period will not likely carry over to the new year.

How do we cope with the frenzy and avoid becoming shark chum? Clients, brokers and other attorneys can sense stress immediately and when they do, they do what they can to add to it.  It is important to remain organized and up to date on every transaction, no matter the size, so that you never let the sharks smell the blood in the water.  If we do this, we will make it from Thanksgiving to New Years in one piece.

Residential real estate closings cause all kinds of challenges. Whether you are working with the buyer or the seller, every step in the closing process can be emotionally draining.  The client so often feels wronged by the other side and wants to strike back.  I often feel as if I am working as a therapist, helping my clients cope with the latest obstacle to closing.

One of the biggest obstacles to overcome is when damage to the property between the contract Effective Date and the Closing Date occurs. Who is responsible for the damage?  Fortunately, this does not happen often and when it does, the damage is usually minor.  But, sometimes, there is major damage, like recently, following Hurricane Irma.  Or worse, when the seller does nothing to maintain the property and lets it deteriorate significantly, the issue is very contentious.  The answer of responsibility should be clear in the contract.  Unfortunately, the FAR/BAR contracts that are often used, don’t provide adequate answers for either the Buyer or the Seller.

The 4/17 revisions of the FAR/BAR Residential Contract for Sale and Purchase (“Standard Contract”) and the AS-IS Residential Contract for Sale and Purchase (“As-Is Contract”) both have weak and somewhat contradictory provisions that neither seller or buyer should love. Paragraph 11 of both contracts, Property Maintenance, provides: “Except for ordinary wear and tear and Casualty Loss [and those repairs, replacements or treatments required to be made by this Contract,] Seller shall maintain the Property, including, but not limited to lawn, shrubbery, and pool, in the condition existing as of the Effective Date (“Maintenance Requirement”).  (Bracketed language is in Standard Contract only).  This language would require the Seller to continue to maintain the Property until closing, allowing only for “ordinary wear and tear”.  At closing, Seller would have to restore the Property back to its condition as of the date of the contract.

In a short contract period, this likely would be easy to determine. In a longer contract period, how could this ever be determined?  More importantly, what happens where the condition of a major component, such as the roof or air conditioning, is nearing failure as of the Effective Date, and, ultimately fails prior to closing.  Forget, the Standard Contract for a moment where the Seller might have some repair obligations for this, but assume the AS IS Contract where the Buyer would be taking AS IS.  Paragraph 11 seems to suggest that if the roof or air conditioning were in fact to fail, prior to closing, Seller would be obligated to restore them back to the condition they were in on the Effective Date.  The condition then was near failure but not quite failing.  Why would any contractor do that and how could it be determined what that point was and whether it was reached upon the restoration?  It would clearly be a waste of money to do so as buyer would likely have to make the replacement in the near future any way.

Is there a solution? Contractually, the language should be changed to specifically eliminate Seller’s maintenance obligation for items at the end of their useful life and eliminate them.  Make the Seller’s obligation to maintain but, at closing, Buyer takes those items, AS IS.

The FAR/BAR Contracts both have a Risk of Loss provision. The Standard Contract provision can  be found in standard R and the AS IS Contract provision can be found in standard M.  The provisions are the same.  They provide that if there is damage caused by fire or other casualty and the cost of restoration (including pruning and removing damaged trees), does not exceed 1.5% of the Purchase Price, the cost of restoration shall be an obligation of seller and closing shall proceed.  If the cost of restoration exceeds 1.5%, Buyer may decide to terminate or may close and take a credit from Seller in the amount of 1.5%.

Do the Maintenance and Risk of Loss provisions create an ambiguity? Clearly, after a casualty, the Property will not be in the same condition as it was on the Effective Date.  But, the Risk of Loss provision would seem to limit Seller’s liability to 1.5% of the purchase price because the provision is qualified to damage to the property caused by fire or other Casualty.  However, I still think there is some ambiguity here because some of the maintenance obligations that were neglected might have been exasperated by the casualty.  I have a personal example following Hurricane Irma.  My buyer client signed an AS Contract with an REO seller.  Because of a significant title defect, the closing has been delayed for over a year.  The client did an inspection upon signing the contract and knew that the roof was nearing the end of its useful life, but the report said that except for a couple of small leaks, the roof should last another 3-4 years.  There were other similar items in the report.  For example, the kitchen cabinetry needed about $4,000 worth of repairs.

Following Hurricane Irma, the roof is in total failure and there is significant water damage in the house. The client obtained a new inspection report of the house.  And, as an example, the kitchen cabinetry needs to be totally replaced at an estimated cost of $30,000.  Is the cabinetry damage due to the hurricane and thus covered by the Risk of Loss paragraph or is the damage due to excessive wear and tear due to the leaky roof getting worse?  And, is the fact that the roof condition went from 3-4 years life expectancy to total failure a casualty or not properly maintained?  There are numerous issues like this that we are faced with in this contract and the fact that it is REO has only made the situation harder.  Had the contract specifically excluded the roof and any interior damage caused by the on-going leaks from the Maintenance paragraph, we would have very few issues and likely only be discussing which trees need to be removed and which need to be pruned.  Instead, we continue to debate whether the bank will do any work or provide any credit for repairs.

To be honest, I had not thought much about the Maintenance paragraph before this closing. Until this one, even when the property was vacant, maintenance issues were usually pretty minor.  Certainly casualty issues arise from time to time, particularly in hurricane season.  But most buyers know what they are getting and what to expect when they are buying damaged or REO properties.  Maintenance prior to closing is not going to be an issue.  It should be.  Not just because this deal has given me and my client more grief than we need (the title issues and corresponding delays gave us more than our share to be sure).  But because the price a buyer offers on a property, commercial or residential, should reflect what the buyer is going to spend after closing to ready the property for occupancy.  If the property is not properly maintained, these costs go up.  In a residential setting in particular, the difference of a few thousand dollars can set a budget way out of whack.

It is important then, to consider the Maintenance paragraph, in particular, and also the Risk of Loss Paragraph in the FAR/BAR Contracts. Determine what is going to be important to your client, buyer or seller, and make the appropriate adjustments.

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