An investor (who I will call “Phil”) recently contacted me with a situation that arises from his successful bid at an estate auction for a single-family home. Similar to most estate auctions, the auction participants had approximately one hour only to look through the property prior to the commencement of the auction. As you can imagine, this didn’t allow for a great deal of time to inspect the property, its systems, the grounds, etc.

Upon winning the auction, Phil was handed a two-page, pre-printed agreement of sale by the auctioneer with the material terms (price, deposit monies, date of settlement) hand-written into the blanks on each page. Having gotten caught up in the frenetic pace of the auction, Phil didn’t carefully scrutinize all of the terms of the Agreement of Sale. In his mind, he already was aware of the fact that he was purchasing the property “as is”, so what else did he need to worry about?

Fast-forward about ten days following the auction…Phil received a letter in the mail from the township Public Works Department. The letter advised that a representative of the department recently observed the need for 9 sidewalk blocks and 1 section of curbing to be replaced in front of the property—the current condition of the sidewalk/curb was a code violation. Phil became instantly enraged realizing that the required repairs would probably cost about $3,000.00. But, Phil had a thought…he was not yet the owner of the property, so he couldn’t possibly be responsible for the repair work, right?

So, Phil pulled out the Agreement of Sale that the auctioneer had him sign and he found the following paragraph:

“Seller represents that as of the date of the approval of this Agreement, no notice of any municipal, county or township authority has been served upon Seller or anyone in Seller’s behalf, including notices relating to violations of housing, building, safety or fire ordinances which remain uncorrected except as noted hereafter, and the Buyer agrees to assume all responsibility and will pay all costs for any work required to be done by any such authority for which a notice may be served between the date of approval of this Agreement and final settlement…” (Emphasis added).

Upon reading the language of the contract, Phil realized two things. First, this language was different than what Phil had seen in other agreements of sale. Secondly, Phil was clearly on the hook since the township notice was sent almost two weeks after the auction, which falls into the time period between approval of the agreement of sale by the Seller and final settlement.

How did Phil make such a mistake? He relied on what he had seen and known from the many investment properties he had purchased in the past. Most of the deals Phil had been involved in utilized the standard Pennsylvania Agreement of Sale, which requires the Seller to advise the Buyer of any notices of violations that are received prior to settlement AND the Buyer is given the option to void the contract if the Seller refuses to make the required repairs or issue credits.

The Agreement of Sale utilized by the auction company contained different language. The responsibility for violations falls to the Buyer for any notices that are received prior to settlement and the Buyer does NOT have the option to void the contract. This is a very significant distinction.

Unfortunately, the fast-pace environment that accompanies most auctions got the best of Phil. He didn’t take the time to slowly and carefully read through the Agreement of Sale and he missed some very important details of the transaction.

The lesson learned is simple: Take your time. Each deal is different. Don’t rely on what you have seen or read in the past. Don’t let third-parties rush you when it comes to signing on the bottom line…take a deep breath, slow things down and read through the contract before you sign!

Tags: auction, auctions, foreclosure, real estate investing, real-estate-auction

The Settlement Statement, often referred to as the “HUD-1”, is a document that contains a detailed breakdown of the closing costs apportioned between the buyer and seller of property.

Typically, the closing agent (often a representative from the title company), gathers the pertinent information, completes the Settlement Statement and disperses the required funds once the buyer and seller have certified the accuracy of the statement by signing it.

The first page of the Settlement Sheet is broken down into a summary of the borrower’s (buyer) transaction on the left side and a summary of the seller’s transaction on the right. The second page is divided into those costs that are “paid from borrower’s funds at settlement” and those costs that are “paid from seller’s funds at settlement”. If buyer, seller and title agent agree that the statement is true and accurate, all parties sign and date the sheet toward the bottom of page two.

The following key sections of the HUD-1 should be thoroughly reviewed in any transaction:

Borrower’s Transaction:

Line 101 - Lists the contract price as stated in the Agreement of Sale

Line 103 - Total settlement charges to the borrower; this is obtained from adding up all of the costs on the second page and is also referenced in Line 1400.

Line 120 - This is the total amount due from the borrower inclusive of the contract price, costs listed on page two of the sheet and adjustments for taxes and other items paid by seller in advance.

Line 220 - States the total amount paid by or for borrower including deposit monies, principal loan(s) and Sellers Assist.

Line 303 - The figure here is the total amount of funds (in cash or certified check) that borrower needs to bring to settlement in order to close.

Lines 801-811- All of the costs associated with the loan such as origination fees, appraisal fee, credit report fee, processing fee, administration fee and flood certification fee are listed. If any of the fees are “lender retained”, which is indicated by the abbreviation LR, then this amount was subtracted from the amount of funds actually wired by the lender to the title company.

Lines 901-905 - Any amounts that are required by the lender to be paid in advance, such as daily interest, is set forth here. For example, if Buyer settles on May 20, 2008, the lender will likely require that the Buyer pay in advance daily interest on the loan through June 1, 2008.

Lines 1001-1009 - All reserves that the lender requires to be set aside in an escrow account such as hazard insurance, county taxes, and school taxes are set forth.

Lines 1101-1113 - Includes all charges associated with the Buyer’s title insurance such as the insurance premium, search fee, examination fee, endorsements, closing service letter and overnight wire fee.

Lines 1201-1203 - Details the recording fees charged by the county to record the deed and mortgage and sets forth the proportionate share of the real estate transfer taxes for Buyer and Seller.

Seller’s Transaction:

Lines 406-412 - Adjustments are made for items, such as taxes, that Seller has already paid in advance of settlement. For example, if settlement takes place on June 1, 2008 and Seller has already paid county taxes through the end of 2008, then Seller must be reimbursed from the date of closing (June 1, 2008) through the end of the year.

Lines 501-509 - Itemizes all reductions in the amount that Seller would otherwise walk away with from the settlement table, such as existing mortgages that must be paid off and Seller’s settlement charges (as listed on Line 1400 on page 2).

Line 603 - This is the total amount of funds that Seller nets on the transaction, which is typically dispersed by way of a check from the title agent.

Lines 701-702 - Sets forth the total commission that Seller must pay to the real estate agents involve in the transaction. This is typically the Seller’s single largest cost at settlement.

Lines 1201-1203 - The Seller is also responsible for a share of the real estate transfer taxes. In many jurisdictions, the transfer taxes are based on a percentage of the contract price and are split equally between Buyer and Seller.

It is always good practice to request that the title company (or closing agent) furnish a preliminary HUD-1 a day or two before closing so that there are no surprise costs at the last minute. Make sure to review the preliminary HUD-1 with your attorney or real estate agent and bring it with you to settlement. You should compare this draft with the final HUD-1 to insure accuracy of all costs to Buyer and Seller.

Tags: HUD, HUD-1, real estate, real estate investing, real-estate-deals, settlement statement

I have often found that many homebuyers lack a fundamental understanding about title insurance. While most past clients have admitted to briefly discussing the topic with their real estate agent, they don’t seem to understand its purpose or function–only that it will be an additional expense on the settlement sheet for which they are responsible.

What is Title Insurance?
Title insurance is a policy of insurance that protects against losses arising from defects in and/or claims against the title to property. Examples of such defects and/or claims include tax liens, easements, mechanic’s liens and ownership claims by third parties.

Lender’s Policy/Owner’s Policy
There is no legal requirement to purchase title insurance prior to acquiring a property. In practice, any lender will require you to obtain, at a minimum, a Lender’s policy of title insurance for an amount equal to the loan. This protects the lender’s investment in the event of a third-party claim. The insurance remains effective until the loan is repaid.

A homebuyer will also want to obtain its own protection of the equity in the property since a Lender’s only policy extends solely to the loan amount. This requires an Owner’s title policy for the full value of the home. Typically, the additional cost to add Owner’s coverage to the cost of the Lender’s policy is small; all the more reason for any homebuyer to get the necessary coverage. By way of example: If the sale price of a home is $500,000.00 and the homebuyer is borrowing $400,000.00—the title insurance policy would include Lender’s coverage in the amount of $400,000.00 and Owner’s coverage in the amount of $500,000.00.

Is title insurance similar to other types of insurance?
No. Most insurance policies protect against events that happen after the policy is issued, such as a car accident that happens 6 months after purchasing a new car. Title insurance in most cases protects against losses arising from events that occurred prior to the issuance of the policy. The coverage afforded by these policies typically does not extend into the future. The exception to this is certain enhanced title insurance policies, which offer coverage of a limited amount of future occurrences that are spelled out. All homebuyers should check the state in which they are buying in order to determine if such policies are available.

Is title insurance required for a refinance of the existing loan?
Yes. The lender will require you to purchase a new lender’s policy because 1.) the existing policy terminates upon the full payment of the mortgage and 2.) the lender wants to protect itself from any title issues that have arisen since you took title to the property. The good news is that you won’t need to obtain a new owner’s policy and title companies generally offer a discounted premium if your last policy was acquired within a certain amount of time.

What can I expect to pay for title insurance?
The premiums for title insurance policies are state specific. In some states, title insurance premiums include the actual insurance as well as the costs for a title search and title examination (to determine if there are any defects in the chain of title). In other states, the premium covers the insurance only and the homebuyer must also pay a third party company and/or attorney to provide the search and examination services.

Some states such as Pennsylvania and New Jersey strictly regulate rates and the premiums are the same regardless of the insurance carrier selected by the homebuyer. Other states do not regulate premiums and the homebuyer is wise to shop for the best available price.

Tags: insurance, real estate insurance, Real Estate Law, real estate title, title, title-insurance

If you are a starting a new business that requires you to either lease office space or open a physical store where you can visit with customers, chances are you will be signing a commercial lease. Before you engage in the process of selecting a viable location that meets your needs, it is a good idea to retain the services of a commercial real estate broker that specializes in representing the interests of tenants (often referred to as a “tenant rep”). Tenant reps are typically familiar with the available properties in your geographic location and have a firm grasp on the fair market rent for varying property types. Best of all, tenant reps are paid a commission by the landlord; so, essentially you get to avail yourself of the knowledge and skill of your tenant rep without cost.

Even though, many tenant reps are knowledgeable in handling the lease negotiations with the landlord on your behalf, it is still extremely important to have a real estate attorney review and amend, if necessary, the proposed lease in order to insure that your interests are protected. On a side note, I have spoken with many tenant reps that have told me they always suggest to their clients that they retain the services of an attorney—beware of any tenant reps that advise otherwise.

This article will briefly discuss some key provisions of a commercial lease that are important for tenants to review and understand before committing to any lease.

1. Basic Lease Information - Many commercial leases will have a few summary pages in the beginning, which may be referred to as “Basic Lease Information”, “Lease Information” or other similar name. These pages serve as a quick reference of the key terms of the lease such as: rent amount, address of landlord and tenant, term, security deposit amount, square footage of area leased, option period, etc. It is important to understand the actual start date of the lease–some leases may refer to this date as the “Rent Commencement Date” or “Lease Commencement Date”. If the space requires either the landlord or tenant to build-out the space to fit the tenant’s business needs then the actual start date of the lease will probably be a certain defined period that is related to the completion or substantial completion of the construction to be performed.

2. Alterations, Fixtures, Improvements - Most leases will prohibit the tenant from making any alterations or improvements to the interior and exterior of the property without prior approval form the landlord. Tenants should also be aware that the landlord will deem as fixtures any items or alterations that are affixed to the property, which are surrendered upon the termination of the lease. If you are tenant, you want to insure that any trade fixtures installed remain your property and may be removed upon vacating the property. Trade fixtures are equipment that a tenant specifically installs for the operation of his/her business. Since trade fixtures can be expensive, you want the ability to take all equipment with you when your lease is up.

3. Assignment and Subletting - Leases almost always require that the landlord give prior approval before the leased space can be assigned or subletted to a third party. If you are a tenant attempting to assign or sublet your space, it is essential that you read the language of your lease very carefully - typically, the lease states that the tenant is still fully liable for all rents even if the property is assigned/subletted to another party.

4. Condemnation - Condemnation deals with a governmental entity acquiring ownership of the property. Some leases state that if all or any portion of the property is taken by condemnation, then the lease automatically terminates. Other leases provide that the tenant may remain in the property if only a portion was taken by condemnation, and the tenant is still able to utilize the remaining space without interruption in the tenant’s normal business operations.

5. Defaults and Remedies - This provision of the lease is extremely important. It sets forth specific conduct or actions on the part of the tenant that trigger a default under the lease. Some examples include: failure to pay rent, the filing of a mechanic’s lien against the property as a result of tenant’s failure to pay for work performed, abandonment of the property by tenant, filing a petition in bankruptcy, failure to pay all required taxes, etc. The landlord’s remedies in the event of a default are also clearly defined. Tenants should pay special attention to a “Confession of Judgment” clause. In some states, a Confession of Judgment clause permits the landlord to go to court in the event of tenant’s default and obtain a judgment of possession to take back the property without any prior notice to tenant. This essentially speeds up the process for the landlord to regain control of the property if the tenant has defaulted under the lease.

6. Attornment and Subordination – In this provision, the tenant agrees that the lease and all of tenant’s rights under the lease are subordinate to the rights of any mortgage, deed of trust or other security instrument constituting a mortgage upon the property. If a mortgagee (such as a bank or other lender) comes into possession of or acquires title to the property, the tenant agrees to “attorn to” or essentially recognize the mortgagee as the new landlord. Under this scenario, all terms and conditions of the lease remain in effect.

7. Additional Rent for Taxes, Common Area Maintenance and Insurance - Most commercial leases require tenants to cover additional expenditures associated with the property, and classify these costs as “additional rent”. Tenants should pay particular attention to these expenses in calculating monthly and yearly payments owed to the landlord. It is quite common for landlords to require that a tenant pays for a portion of the real estate taxes on the property, the costs of maintaining the common areas (hallways, stairways, elevators, lobbies, bathrooms, parking lots, etc.) and the commercial liability/property coverage insurance on the building.

Tags: commercial lease, Commercial Real Estate, commercial tenant, fixtures, rent, tenant

With homeowners defaulting on their mortgages at a record pace, many people are practically begging their lenders for some form of relief or assistance in order to prevent themselves from ending up on the street. While it is certainly disconcerting to receive collection letters and threats of impending foreclosure from a lender, those who are falling deeper into debt and enduring difficulty making their monthly mortgage payments need not despair. The “short sale” is one alternative worth considering as a viable means for resolving your debt with the lender and dealing with a home that is no longer affordable. Here are some basics you need to know before starting the short sale process.

What is a Short Sale?

A “short sale” occurs when the net proceeds from the sale of property is not sufficient to satisfy the outstanding mortgages on the property, and the seller does not have the financial ability to make up the difference. The lender is asked to take less than the full amount owed in order for the sale to be completed

What Causes A Short Sale?

Sometimes a short sale is brought about because the homeowner borrowed more than he/she could afford to pay back and miscalculated his/her financial status. Often, the short sale arises because of an unforeseen change in the homeowner’s life, such as a long-term illness, disability, divorce or loss of employment, which has dramatically affected the person’s income such that the mortgage payments are no longer affordable.

Why is the short sale a viable option for the seller?

A foreclosure can have a devastating impact on someone’s credit report that has a lasting effect for years to come. A short sale is typically reported on a credit report as a debt that is “settled for an amount less than what is due”. While this will cause a dip in credit score, it will be nowhere near as harsh as the reporting of a foreclosure.

Why would a lender agree to a short sale?

The answer is very simple: Lenders do not want to own houses. Lenders are in the business of loaning money, not in the business of stockpiling real estate. There have been numerous reports that banks can face fees of up to $50,000.00-$60,000.00 in actually foreclosing on a property. From a business standpoint, the lender will make out better if the property is put on the market and given an opportunity to attract a buyer through private sale.

How does the short sale process work?

Most lenders have a short sale package containing documents that the seller must submit in order to have the short sale approved. Such documents include: hardship letter from seller/borrower explaining why the short sale is necessary, seller’s financial statement, two most recent pay stubs, two most recent bank statements, two most recent tax returns, copy of an Agreement of Sale with buyer, copy of proposed settlement statement (HUD-1) demonstrating net monies to the lender. Once the package is submitted to the lender, a negotiator is assigned to the file who handles the short sale on behalf of the lender through closing.

Miscellaneous Points to keep in mind

• If you find a buyer, don’t expect closing to take place quickly. It may take 60 days, 90 days or even longer, depending on the lender, to get approval from the negotiator for the short sale to go forward.
• Lenders are not properly staffed to handle the number of short sale requests. In order to make sure that your file doesn’t linger on someone’s desk, you need to be persistent—your agent or attorney should make frequent calls to the negotiator in order to insure that your short sale moves forward.
• You must negotiate for the release of both the property and the underlying personal debt secured by the note. If you fail to do this, the lender may not forgive the personal debt.
• It is wise to consult with an attorney and real estate agent who has been through this process before and has significant experience working with lenders. Also, attorney’s fees come out of the lender’s net proceeds. Therefore, you will not have to pay out of your own pocket for an attorney to assist you in the transaction.

mortgages, lenders, foreclosure, short sale

A Miami-Dade County, Florida developer, Related Group, has filed multiple lawsuits in the past month against real estate brokerages seeking the return of commissions on deals that fell through. The amount in controversy, which exceeds $460,000.00, is tied to commissions advanced by Related Group to the named-defendant brokerages on at least 19 sales contracts in the Hallandale Beach Club Tower III project. Related Group is alleging breach of contract in these actions for the brokerages’ failure to return commissions paid on deals that never closed.

Apparently, is it routine practice for Related Group to pay commissions once prospective buyers have given a deposit, rather than waiting until the transaction formally closes. Under Florida law, the commissions are paid to the broker of record, who then pays the agent of record in accordance with the agent and broker’s agreed upon compensation split. The broker registration agreements that Related Group supposedly filed along with the lawsuits state that a commission is to be earned only upon the close of title. At least one of the attorneys involved for a particular defendant has stated to the media that there is no language in the broker registration agreement that states a commission must be refunded if the buyer fails to close. In addition, the defendants have stated that the developer never returned the deposit monies to the buyers who backed out of the deals; therefore, they are questioning the developer for trying to recover commissions for deals in which Related Group kept the deposits. Whether or not this point is relevant and valid as a potential defense is something that will have to be determined in court.

Many of the brokerages involved as defendants are unable to return the commissions, as they were already paid out to individual agents on contracts that were executed several months ago if not more. A number of agents participating in those past deals no longer work for the brokerages, making it even more difficult for the brokerages to try and return the money. Regardless, the collective sentiment of the defendants in these related lawsuits appears to be that the developer is not entitled to a return of the commissions. Further, the defendants are questioning the loyalty and business judgment of the developer, who has reaped millions of dollars over the years from the efforts of the brokerages in successfully closing numerous deals. There is no doubt that these lawsuits will have a chilling effect on brokerages doing business with Related Group in the future. At a minimum, brokerages would be wise in the future to place an advanced commission in escrow until a deal successfully closes, to insure that an agent doesn’t prematurely spend his/her portion.

This case presents an interesting twist on the types of lawsuits that have been filed recently during this volatile residential market. Much of the litigation surrounding residential real estate across the country has centered on foreclosure actions and cases involving buyers who want to void agreements of sale while retaining deposit monies. Whether or not Related Group succeeds in its efforts against these defendants, both developers and agents will have to re-examine their business relationships, and specifically, the practice of advancing commissions.

When I ask “Do you know what it will cost to buy your home?”, I’m not referring to the amount of your mortgage or interest rate. I’m talking about the closing costs, escrows and pro-rated reimbursements that you will have to pay out of your pocket at the closing table.

If you are working with a real estate agent or mortgage broker, I encourage you to obtain a “Good Faith Estimate” of your closing costs as early as possible. Although this is only an estimate of what you can expect to pay at settlement, an early review of your anticipated costs can be quite eye opening. It can also paint a clear picture of whether you actually have enough money to get into that beautiful home that you can’t stop thinking about.

Your Good Faith Estimate should include the following:

1. Mortgage Origination Costs: mortgage origination fee, appraisal cost, credit report costs, document preparation fee, flood certification fee, underwriting fee;
2. Title Insurance Costs: title premium, policy endorsements, service fees;
3. Escrows Required By the Lender: real estate taxes, homeowners insurance, condo/Homeowners Association dues, mortgage insurance;
4. Reimbursements to Seller: real estate taxes, sewer bill, condo/Homeowners Association dues;
5. Other closing costs: real estate transfer tax fees, recording fees, home inspection fees, homeowners insurance, notary fees, termite inspection.

Your Good Faith Estimate should also include a final breakdown of the total funds you need to bring to the settlement table (your out of pocket costs) as well as your estimated all-in mortgage payment (inclusive of your principal, interest, real estate taxes, homeowners insurance, mortgage insurance and condo fees).

Most importantly, do not forget that this is an estimate! You should always plan that your actual costs at settlement may be higher. If you review the Good Faith Estimate early in the home-buying process and plan to pay slightly higher costs at closing, you will go along way toward eliminating unpleasant surprises at the settlement table.

Happy house-hunting!!

closing costs, escrows, mortgage, Good Faith Estimate, Origination Costs, underwriting, Title Insurance