I recently came across a blog by Camile Baptiste titled 3 Advantages of Buying Bank Owned Property (REO) (see Camile’s Blog HERE). I tweeted it out and said that it is totally false (follow me @dkblattneratty).  Maybe it isn’t totally false, but there are numerous reasons not to buy REO property.  Banks, as sellers, are extremely difficult to deal with.  Let me briefly enumerate my observations.

  1. Banks typically attach a multi-page addendum to the standard from contract used in a locale. The addendum, of course, disclaims any liability for anything that could possibly be wrong with the property. OK, “AS IS” is “AS IS”.  But the addendum changes customary contract provisions including times for inspections, responsibility for closing costs and rights regarding title.

 

The title issue can be a big one. In most areas in Florida, the buyer selects the title agent.  Banks, following foreclosure, like to control title.  In a recent REO transaction I handled for a buyer, the bank’s title company provided the title commitment and set the closing date.  However, the title commitment showed that the foreclosure was not complete and a subordinate lender was not properly foreclosed.  Therefore, the property had to be re-foreclosed.  Because we couldn’t control the process, it was difficult to first convince the title company and then the bank that re-foreclosure was required.  They wanted us to close!  Then, we had no ability to coordinate with the bank to assure that the case was progressing and the re-foreclosure took over 18 months.

  1. Banks don’t negotiate – anything. Their form is their form.  The deal is the deal.  If there is a problem later, they don’t negotiate.  During the same transaction, while waiting for the re-foreclosure, Hurricane Irma hit South Florida.  Though the contract was “AS-IS”, it also provided that seller shall maintain the property and deliver it in the same condition as of the Effective Date.  Additionally, there was a casualty/risk of loss paragraph.  Hurricanes were covered under this paragraph and seller had an obligation to spend up to 1.5% of the purchase price to repair damages, including removal of debris and trimming of trees following a casualty.  Of course, there was extensive damage and the purchase price was just under $1,000,000.  The bank did almost no clean up or repair.  The roof was severely damaged and had extensive leaks, yet the bank didn’t even put a tarp on the roof to stop the growing water and mold damage to the interior.  The pool pump became inoperable creating a green cest-pool.  A horse stable on the property was demolished and not cleared or re-built.  Fences were missing and trees uprooted.  Notwithstanding, the bank only agreed to a closing credit of only $10,000.

 

  1. Banks don’t close or make decisions as quickly as advertised. When a contract is submitted or a decision is required, the real estate agent will tell a buyer that the bank will respond immediately.  That is never the case as approval is not obtained locally.  An out of town asset manager makes the decision.  The asset manager has dozens of files on his/her desk and responds when he/she can, regardless of contractual deadline.  If buyer’s lender requires information or a signature, the asset manager doesn’t move any more quickly.  There is no “professional courtesy” afforded from the selling bank to the new lender.

 

  1. REO property is always in worse condition than advertised or than you observe. The foreclosed owner didn’t care for it and in fact, purposefully damaged it on the way out.  Bank will do the absolute minimum to maintain it while it owns it and will do nothing to repair it.  They hire local property managers or real estate agents to do these things and the local managers/agents spend as little as possible to maximize their profits under their contracts.

 

  1. Anti-flip provisions in REO sale contracts limit buyers. A large percentage of buyers of REO properties are flippers.  Many REO sale contracts restrict the buyer’s ability to flip.  These restrictions range from 60-180 days.

 

  1. Banks and asset managers are usually located out of state and therefore, unfamiliar with local law and custom. This causes additional delay and confusion.

These are but a few of the difficulties in buying REO property. Though the price is often attractive, these and other difficulties can cause a buyer time, money and lost opportunities which might offset the favorable up front pricing.  Think more than once before buying from an REO.

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        The cost to buy or sell a house can be frightening if you aren’t prepared. But don’t worry. The government is here to help (these are scary words too). The CFPB Disclosure rules are supposed to take the guess work out, at least for buyers who are obtaining federally insured mortgages. Under Dodd-Frank, a buyer is receives an estimate of costs at the time of loan application and then a final statement of the actual costs 3-days prior to closing via the Closing Disclosure. The problem is that the CFPB forms are very confusing and unless the person explaining the forms to the buyer understands the forms, they are not helpful. And, the seller and cash buyers don’t get these forms.

             So what will your closing costs be when buying a house?   A buyer’s costs can be broken down into 4 categories:

             Loan Costs – these include origination fees, underwriting fees, mortgage broker fees (over and above origination fees) credit reports, appraisal fees, tax-service fees, flood-certification, pre-paid interest and escrow (for taxes, insurance and PMI). Often, the credit report and appraisal are paid at the time of loan application while the remainder of these charges, and sometimes, others, are collected at closing. Origination fees, underwriting fees and mortgage broker fees are usually expressed as “points” or a percentage of the loan amount. These costs are always the highest of the loan expenses. Pre-paid interest is the interest which would be due from the date of closing through the end of the first month. Most loans are paid in arrears so the interest for the first month has to be paid in advance. Thereafter, the first payment is due the first day of the second month following the closing.

             Title charges – these include title premium for owner’s and lender’s policies and survey. The title premium is based on the higher of the purchase price or the loan amount and is a promulgated rate in the State of Florida. So, while lenders tell borrowers that you can shop it, the price charged will be the same everywhere. A title company will charge a closing fee for handling the closing (but can not charge extra for issuing the policy). This fee varies from company to company. Under the CFPB rules, the charge is to include all costs. There should not be line items for every service provided by the title company. So buyers can expect that this number will be higher than they may have previously seen. However, they should not see multiple charges by the title company for copies, wires, couriers, processing and the like.

            Governmental charges – these include recording, documentary stamps, intangible taxes and real estate taxes. Buyer will have to pay to record the deed and mortgage and perhaps some other ancillary documents required to assure that title is clear or required by the bank. While standard FAR/BAR contracts in Florida make the seller responsible for documentary stamps on the deed, the buyer is responsible for documentary stamps on the note (at the rate of $.35 per $100) and intangible tax (at the rate of $.20 per $100).   Real estate taxes are due on March 1 and payable as of November 1. Therefore, if taxes have not yet been paid at the end of the year, expect that taxes will be prorated and collected so that they may be paid. Of course, buyer will be credited for seller’s share of taxes as well.

             General closing charges – these include inspections, processing or administrative fee to buyer’s broker, insurance and attorney’s fees. Although the lender may be escrowing for insurance, the first year’s premium will have to be paid in advance. It can be paid outside of closing or at the closing table. The home inspection might also be paid outside of closing.

             Sellers also have costs of sale. They fall into similar categories, but there aren’t usually as many line items.

             Loan costs – Obviously, sellers aren’t getting a new loan. But often, they are paying off one, or more loans. This is the first reduction in amounts due to the seller. Existing mortgages must be paid off in full before anyone else gets any money.

             Title charges – Sellers are usually responsible for the cost of the title search. For most house closings, this charge will run about $100-$150. Note that in Palm Beach County, the custom is that sellers pay the Owner’s premium as well. Sellers also pay the cost of the lien searches and any condo or HOA estoppels.

             Governmental charges – Sellers pay documentary stamps on the deed (at the rate of $.70 per $100 of consideration for the deed. Consideration is the purchase price). In addition, sellers must pay to record any documents necessary to cure title issues showing on the title commitment not arising because of buyer and the actual cost to cure such issues.

             General closing charges – Seller is responsible for brokers’ commission to all brokers and any processing or administrative fee due to the listing agent. There might also be a negotiated credit for repairs or something else. Seller will have to credit buyer for seller’s share of taxes for the year of closing and any unpaid HOA or condo assessments.

             Carefully review the closing statement or closing disclosure to assure that the expenses have been accurately assessed to the proper parties. Because the CFPB closing disclosure is difficult to read, it is a good idea to work with your attorney and other professionals to help you understand.

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        An Indiana couple has struck back against Marriott and its profitable vacation club. Anthony and Beth Lenner filed a lawsuit against Marriott Vacation Club and others in Federal Court in Orlando last month under the RICO Act claiming Marriott tricked them into thinking that they were buying a timeshare interest in real estate. Instead, the plaintiffs only received a license to use real estate. The lawsuit alleges violations of both the RICO Act and the Florida Vacation and Timeshare Act.

             The complaint seeks unspecified damages and will seek class action certification. Plaintiffs seek to abolish the points program which, attorneys say is unique among timeshare companies. Actually, that is not the case. I have to admit that my wife and I like to travel and often take advantage of “unique offers”. Over the last few years, we have accepted invitations to visit a few vacation club properties for ridiculously low prices. The clubs offer us hotel reward points, rental cars and other gifts. In exchange, we agree to attend a “brief” presentation. In the last year we visited 2 different clubs, a Starwood in Hawaii and a Hilton in New York. We have visited others over the years, but the pitch is always the same. For nearly the cost of our house, we could acquire an interest in the beautiful resort/club. We would receive several hundred thousand points so use each year at the dozens of club locations in exotic locales around the world. Each location “costs” different amounts of points. So, our total room nights would be between 7 and 14 each year depending on 1) which club we buy, 2) where we use the points and 3) when we use the points.

             We would receive a deed. We would pay annual maintenance and taxes which would amount to about $250 per month in Hawaii and $350 per month in New York. And, best of all the pitch goes, we would be saving over $500,000 over our life time in vacation costs! But companies wanted our down payment that day or the deal was off. As an incentive, they offered several hundred thousand hotel reward points as well, meaning we would have over 4 weeks of travel in the first full year. Both companies would finance us for 12 months. Then, we could pay off the balance or refinance. The interest rate? 23.9%! What a deal!

             As a real estate attorney, there was so much that I could say to the sale people about these offers. But I didn’t. My wife and I just wanted our gifts and to return to our vacation. But these were high pressure sales jobs. Remarkably, I did well not to argue. Much of what I would have said will come out in the Marriott lawsuit:

  • There is no property interest to deed in the points program. There is not a legal description. While Marriott has created a trust and owners get some beneficial interest in the trust, that is not an interest in real estate. If this were an actual timeshare, the deed would be for a specific unit and a specific week, or a fractional interest in a unit. The trust ties to real estate, but the interest is a license interest.

 

  • Marriott, through a title company (who is also a defendant), provides title insurance to the buyers at the buyers’ cost. There is no insurable interest because there is no interest in real estate. I don’t believe that the vacation clubs that I visited offered me title insurance, which goes to show that Starwood and Hilton recognize that they aren’t really selling real estate.

 

  • Marriott implemented the points program as a means to quickly dispose of excess inventory which it acquired when the real estate marketed crashed. It took back thousands of units which were not being used. Their points program has now caused an over sale. Owners have great difficulty booking rooms less than 6 months in advance. If you “own property”, you should be able to show up and use it whenever you want. Starwood and Hilton and other like clubs use the program to finance construction of new properties. In fact, one resort we visited did not even offer us a “unit” in the resort we were visiting. They offered us pre-construction pricing in a resort that was still in planning stages in Mexico. In New York, we were offered a unit in the building we were staying in or one under conversion several blocks away. So, buyers buy interest in buildings that don’t exist. In theory, the closing can’t occur and the deed can’t be delivered until the building is completed. But the points are awarded upon payment. The buyer already has its license. In a true timeshare or other condominium, other than the down payment, no money is paid until completion.

 

  • Maintenance is used to pay the hotel’s operating cost. Yet, the owner rarely, if ever visits the “home resort/club” and is encouraged to use the points to explore the system. The owner is paying to maintain a building he/she doesn’t really have an ownership interest in. But my personal gripe here is with the sales pitch. The sales people pitch on the annual cost savings on vacation. But if you are spending $2,500 or so per year on maintenance, there is not any real savings on the cost of hotel room nights. That’s 10 nights of hotel at $250 per night. Plus, the six figures spent for the right to stay there. Sounds like a license to me.

 

  • What is going to happen when the Marriott/Starwood merger is complete? Will the programs combine seamlessly? Will they remain separate? Are the properties comparable? Do the point systems have parity?

 

            This is a case to watch. The other clubs using points systems should be watching closely. Some clubs have better systems in their programs than Marriott. However, as this case progresses, lawsuits against the other clubs could and should follow.

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        Your Florida Real Estate Law and Investment Blog publishers, David Blattner and Michael Greene at Assouline & Berlowe, P.A., will be speaking at Real Estate 101, a CLE Seminar hosted by Pincus Professional Education on April 1, 2016 at Sheraton Suites, Plantation, Florida.  Registration information can be found HERE.

        David will be part of a panel discussion speaking about basic contract documents. The panel will discuss residential contracts, including the FAR/BAR form contract and the recent changes made to comply with CFPB rules and more sophisticated commercial contracts.  David will also speak about title insurance – from receipt of and evaluation of a title commitment to issuance of the title policy.

        Michael’s presentation will be on real estate closings from the execution of documents to the logistics of the closing.

        This program has been planned with care and will cover your basic documents, title insurance laws, issues and complications, closings, commercial leasing, foreclosures, bankruptcy and liens.  Participants claim 7.5 general CLE units in Florida and 6.25 in California and New York.  If you are unable to attend, this program will be audio recorded.  (Only the live version is available for NY CLE credit.)

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There are many costs to be paid at a real estate closing. I am often asked, “what is the “custom” as to payment of closing costs in Florida?” Frankly, this is a loaded question. There is not a single answer. In commercial transactions, everything is negotiable and who pays each individual closing cost is often negotiated. When it comes down to it, there are generally only 2 things that anyone cares about anyway: documentary stamps on the deed and title insurance premium. Title insurance premiums are promulgated in Florida, so there is no shopping for a deal. However, since title insurance benefits the Buyer, the Buyer usually wants to select the agent (usually Buyer’s attorney, if licensed in Florida). Therefore, Buyer concedes and pays the title premium. However, sometimes search costs are passed back to the Seller.

Doc Stamps (and in Miami-Dade County, Surtax) remain an issue. Most attorneys start with the position that the “custom” is that Sellers pay. This is so only because that is the custom in residential transactions (see below). However, Sellers and their attorneys will always attempt to shift this cost and as many other nominal charges to the Buyer. Deal economics and other factors setting negotiating strength will determine the outcome.

Florida residential transactions are more set. It is customary for the Buyer to pay for survey, title premium and recording costs. The Seller, on the other hand, pays for the title commitment or other search costs and doc stamps. However, in Palm Beach County, Seller is responsible for the title premium (rather than Buyer) and selects the title/closing agent.

Of course, in both residential and commercial transaction, the Buyer is responsible for all financing costs, including additional title premium, doc stamps and intangible tax on the note and mortgage, bank fees and recording costs on the mortgage and loan documents.

The bottom line is that the custom of payment of closing costs depends on the type of transaction and the location of the transaction. If it is a commercial transaction – it is no holds barred. Negotiate!

 

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