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Your Next Closing is a Financed Deal? – Watch Out!

It is an exciting event; buyers are purchasing their new home, their castle, their fortress of solitude.  It should be a happy time, and a great experience for them and their family.  However, purchasing real property has never been more complicated with all the governmental oversight involved these days, and more and more we see stressed out buyers on the day of closing that unfortunately aren’t as excited as they should be.  But how can they avoid this outcome?

Well, one way is to be as prepared as possible for potential “pitfalls” during the financed closing process.  A good real estate agent will be well versed in the process to guide buyers along the way, along with the other parties in the transaction, e.g. real estate attorney/title company, mortgage lender, accountant, etc.  But despite all that professional involvement, buyers could still get tripped up.  Here is a list of some things to watch out for to help keep the transaction on track, and the buyers’ stress-level down.

Logistics: if you are working with financed buyers, help them understand the challenges of being mailed the loan and closing documents, that they must have access to a notary and witnesses for certain documents, and be able to get to an overnight carrier for delivery of documents.  Buyers can no longer “pre-sign” mortgage documents due to TRID rule delivery requirements.  It is always best to have financed buyers in town for their closing, if possible.  Otherwise, they will be required to sign the mortgage documents where they are on the day of the closing, overnight them, and disbursements will be delayed until the following business day (assuming the documents arrive and are correctly signed).  This may or may not be ok with the sellers, especially if there is a weekend and/or holiday in between signing and disbursements.  Address this issue with everyone as soon as you become aware that the buyers will be signing elsewhere.

Homestead Issues: if the property being purchased is going to be the buyer’s homestead and the buyer is going through a separation or divorce proceedings but is not yet legally divorced, then both spouses must sign the mortgage since all rights to the property (including rights under FL homestead laws) must be encumbered by the mortgage.  It does not matter that the property is going to be titled in only one name!  Similarly, if a couple is recently married, they both must sign the mortgage.  And once again, this is even if title will be held in only one of their names.  Failing to identify this issue as early as possible could be catastrophic for the transaction. 

Powers of Attorneyif the buyer is granting another person the authority to sign loan/closing documents for him/her via a power of attorney (“POA”), both the buyer’s lender and the closing agent must approve the form of the POA, so getting a copy to them both as soon as possible is crucial.  The original POA must be produced by closing and recorded along with the mortgage, so confirming the original exists and is available is also crucial.  A POA terminates on the death of the principal.  Even if the POA is “durable” and has language stating it survives the death of the principal, it does not.  A durable POA can survive the incapacity of the principal if it adequately addresses this issue.  Typically, two witnesses unrelated to the principal must witness the POA’s signing and it must be notarized.  And finally, a POA makes for a lengthy closing when a loan package is involved, as documents must be signed in a very specific and detailed fashion.  Prepare the buyers to budget at least 1.5 hours for the closing.

Side AgreementsLenders are entitled to know all the details of a transaction, especially when it comes to monetary agreements between the parties.  For example, if the buyer is leasing the property back to the seller after closing, or receiving credits from the seller at closing for repairs or otherwise, this must be disclosed to the lender.  The lender will require the buyer to sign affidavits at closing stating that either there are no such agreements, or that they have been fully disclosed to the lender.  Anything done outside the purview of the lender is not appropriate and could be illegal.  Communicate often with the closing agent and the lender on any issues arising due to inspections, logistics, or otherwise that could result in a separate agreement between the parties so that everything in the transaction is transparent and correctly dealt with.  If your instinct is to keep something secretive, or you are given advice to do so, it is typically not a good idea.

In all types of real estate transactions, especially financed deals, be sure to contact a Florida licensed real estate attorney to discuss the issues presented here, along with any others that may come up specific to the transaction.

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I Could Be Liable for What?!

Most of us in the real estate business know the standard in Florida: “where the seller of a home knows of facts materially affecting the value of a property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer.”  Johnson v. Davis, 480 So.2d 625 (Fla. 1985).  This language is even reiterated in our standard contracts [see para. 10(j) of the FAR/BAR contracts].

However, what many do not realize is that this duty extends to the real estate agent AND the agent’s broker.  Several seminal cases exist to establish the duty of disclosure of not only the real estate agents, but also the brokers themselves.  Below is a brief summary of the holdings of some of these cases.

The 3rd District Court of Appeals (Fla.) in Revitz v. Terrell, 572 So.2d 996 (1990) stated, “[a]ssuming that the seller’s agent knew, or reasonably should have known [of the material fact], there was a duty to disclose that fact to the buyer.”  This case, and its progeny, effectively extend the standard of Johnson v. Davis to real estate agents.

The 2nd D.C.A. (Fla.) went further in Young v. Johnson, 538 So.2d 1387, stating, “[a]lthough the record does not reflect that [the real estate agent] had actual knowledge of [the material fact], the ‘knowledge’ element…can also be established by proof that [the agent] made a material false representation without knowledge of its truth or falsity, or under circumstances which he should have known of its falsity.”  A troubling standard, which remains today.  The agent could be held liable for making statements that he doesn’t know are false (i.e. lacking actual knowledge), but that turn out to be false, or where he should have known of their falsity when he made them.

Even more recently, the 4th D.C.A. (Fla.) extended the Johnson v. Davis standard to brokers under an agency theory in the case of Goodman v. Rose Realty West, Inc., 2016 WL 2744975 (2016).  The liability of the agent was imputed to the broker.  The case stated that the broker, as the principal, is liable for the tortious acts of its agent, despite the acts being fraudulent, since the acts are within the scope of an agency relationship.  Any information that was withheld or failed to be disclosed was done during the scope of the agent attempting to sell the property, and the broker has an interest in the transaction because the broker would earn a commission from the sale.

As you can see, the liability for failure to disclose can be far-reaching.  If you are an agent or broker and have concerns over whether or not you have a duty to disclose in any given circumstance, you should always contact a licensed Florida real estate attorney for advice.

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Powers of Attorney: Not As Simple As You Might Think

Your buyer will be out of the country when closing occurs; your buyer is in a nursing home and getting signatures is difficult; your buyer is now mentally incapacitated and therefore cannot sign closing documents; what do you do?  The standard response is get a durable Power of Attorney (POA), or in the last scenario, hope you already have one.

These circumstances, and many others, come up frequently in real estate transactions.  Unfortunately, as is often the case in real estate, the solution is not as simple as most people think it is.  Powers of Attorney executed in Florida must be very specific, the original (or certified copy) must be provided for recording, and the Florida POA must be witnessed by two parties and must be notarized. Fla. Stat. § 709.2105(2). 

Often we are asked to use a POA that was prepared and executed out of state, which POA fails to meet the Florida requirements, as outlined above.  If the property is homestead property and the POA is insufficient, your transaction may be in trouble unless you can get a new POA signed with the deficiencies corrected.  However, if the principal is now incapacitated and incapable of signing a new POA, then your transaction could be over, as it is likely that a legal guardianship over the principal will be needed, causing significant delays (and added costs to the seller). 

Nevertheless, if the property is not a homestead, there may be a work-around if an out of state attorney is willing to provide an opinion letter as to the efficacy of the POA in the state it was executed, stating that the POA is effective to convey title in the foreign state.  Usually, the attorney who prepared the POA will provide this letter, which is then recorded with the POA and the deed.  For example, New York POAs do not require witnesses, only a notary.  Florida law allows for the use of the NY POA if the property is not homestead property and the POA complied with NY law at the time of its execution.  Again, this would be evidenced by an opinion letter from a NY attorney.

In many cases, the client asks the Realtor, Closing Attorney or Title Company to be the attorney-in-fact (“AIF”) under the POA; however, Florida law prohibits a person with a financial interest in the transaction from performing as the AIF.  And from a practical standpoint, why would you ever willingly take on this added level of liability?  Furthermore, in financed transactions, lenders often have very strict rules on who can perform these duties, and typically will only allow relatives of the borrower to be the AIF.  There will also be other specific requirements, for example, the physical address of the property typically must be included in the POA.  This can be problematic if the existing POA only gives a general authority over “all land of the principal.” 

If an acceptable POA exists and the client is now incapacitated, the transaction may still proceed as long as the existing POA is durable, the client is still alive, and the authority has not been suspended or challenged through judicial proceedings and no action for a guardianship has been filed.  The AIF will need to sign an affidavit at closing attesting to these facts.

Finally, from a practical standpoint, when a POA will be relied upon by an AIF to sign a lengthy mortgage loan package for the principal, let the AIF know that the signing process will be about twice as long as normal, as there is a specific and lengthy signing procedure that must be followed very closely for each document signed and/or initialed by the AIF. 

There is often a fee for preparation of the POA, as there should be, along with recording costs that the client should be aware of before the POA is prepared.  Whenever the issue of a POA arises in real estate transactions, be sure to contact a Florida licensed real estate attorney to discuss the issues presented here, along with any others that may come up specific to the transaction. 

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You Need a “Quick” Claim Deed? Not So Fast!

As real estate professionals, we've all had that phone call.  "Hey, I need to transfer some property to my friend, my cousin, my spouse, my buddy, my LLC, my trust, etc., etc.  Who can do a quick claim deed for me?"

For starters, it is a "Quit" Claim Deed, not a "Quick" Claim Deed, but that's for another day.

The important thing to take away from this discussion is that what sounds simple almost never is.  The facts surrounding a requested conveyance of real property should always be fully analyzed before it is done.  This blog article will cover some of the more common issues that come up, but this is by no means a complete explanation of all the problems that could arise from seemingly simple property transfers.

The first complexity of a simple transfer is the applicability of "transfer taxes".  Transfer taxes, also known as Documentary Stamp taxes, are due on a conveyance of real property with very few limited exceptions.  For example, even a conveyance from one spouse to another will trigger transfer taxes at $0.70 per $100 if the property has a mortgage on it.  The most common scenario here is that one spouse owns a property subject to a mortgage, and after the wedding, the spouse wants to add his new wife to the title.  Simple enough, and no money is changing hands.  This is still a taxable conveyance.  Let's say there is a mortgage balance of $200,000 at the time of the deed.  The tax would be based on 50% of the balance, or $100,000, meaning the transfer tax would be $700.00!

Second, clients should be aware of "due on sale" clauses of standard mortgages.  Every mortgage contains one of these clauses, which obviously states that the full debt of the mortgage loan is due upon a sale of the property.  But looking more closely at these clauses, they also typically state that the mortgage debt is due upon any conveyance of title, which would include gifts or even transfers pursuant to a court order, like a divorce decree.  Therefore, when a property is encumbered by a mortgage, not only do clients need to verify what transfer taxes may be due, but they must consult with their mortgage lender to verify if the transfer will even be allowed, and what processes and/or fees are involved in getting the transfer approved.

Next, let's address gift tax consequences.  Annually, you can gift up to $15,000 without having to file a gift tax return.  Gift taxes are not due until the lifetime exemption amount is met, which is currently $11,180,000 at the time of this blog.  The transfer of real property to another without financial consideration is a gift.  If the value of the interest conveyed is above $15,000, then the transferor will be required to file a gift tax return.  Furthermore, if the value of the conveyance results in the transferor's lifetime gifts exceeding $11,180,000, then gift taxes will be due.  As a relevant aside, gifts in excess of the annual exclusion also reduce the transferor's lifetime estate tax exemption.  Note: the exclusion amounts above are only available to U.S. citizens and resident aliens.  If you are working with non-U.S. citizens, proceed with extra caution and I strongly encourage you to recommend the clients speak with a U.S. attorney and accountant before completing any transfer of U.S. real estate.

Finally, let's touch on capital gains taxes.  This is a complicated topic, but for now, what should be known is that if a lifetime gift of real property occurs, typically, the value attributed to the gifted property is based on the price for which the transferor/owner bought the property.  So if the asset is then sold, the "gain" is the difference between what the original owner bought it for and the sales price.  However, if the transfer is one of inheritance after death, as opposed to a lifetime gift, then the inheriting party receives a "stepped-up" basis, receiving credit for the value of the property at the time of death, not the value at the time the deceased owner acquired it.  This is significant because typically assets are worth more at death than when first acquired, therefore, lifetime gifts can result in more capital gains tax than inheritance.

In addition to the foregoing, there are many, many other concerns involving "simple deeds" that clients need to be fully aware of before attempting to transfer real property (e.g. Medicaid eligibility, effects on title insurance coverage, probate issues, impact on homestead tax exemptions, etc.).  The best advice you can give to a client looking to transfer an interest in real property is to have him/her speak with a licensed Florida real estate attorney.

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Survey Now, Save Later

Oftentimes Buyers consider foregoing a land survey to speed along a transaction, cut costs, or simply because their "dream home" couldn't possibly have anything wrong with it. However, considering the typical survey cost ranges from $300-$400, this is a risky gamble to take and not obtaining a land survey could result in costly and troublesome problems to the Buyer after closing.

Surveys identify key features such as:

• The legal description of the property

• Exact locations of fences, buildings, pools, sheds, and roads in relation to the property

• Specific property boundaries & size of the property

• Location of Improvements made to the land

• Zoning regulations, setbacks that apply to the property and easements

Having this information allows the Buyer to better understand what is being purchased, and to help plan for any future additions or improvements (e.g., addition of a fence, pool, garage, etc.) to the property.  A survey would identify for example, problems such as a driveway encroaching on the neighbor's land; or that the backyard shed actually encroaches 2 feet into a drainage and utility easement. Such issues can become major issues when a Buyer finances or refinances the property, or when the Buyer subsequently resells the property.

Unless a land survey is obtained, the following standard survey exception will be contained on the Buyer's title insurance policy:

"Any encroachment, encumbrance, violation, variation, or adverse circumstance affecting the Title that would be disclosed by an accurate and complete land survey of the Land."

This standard exception means that the Buyer/Owner's title insurance policy would not insure or protect the property from any issues that could have and would have been discovered had a survey of the land been completed prior to closing the transaction. Further, if a survey is not obtained and the Buyer subsequently contracts to sell the property to a potential purchaser, the Buyer would be responsible for remedying any issue identified by the survey obtained by the potential purchaser.

In addition to obtaining a survey, a Buyer should have an experienced real estate professional review the survey and handle the closing and insurance of the title insurance policy. Timely identification of such issues is essential as real estate contracts only allow a limited time after receipt of survey for a Buyer to make objections and protect their rights. If you have any questions about surveys, title insurance or closings, we encourage you to contact a Florida licensed real estate attorney.Survey.jpg


"On or Before" Closings, Is There a Benefit?

 

It’s a popular phrase, but one common misconception regarding the use of the words "on or before" is that these words alone somehow provide either party to the transaction the unilateral ability to change the closing date to any date that he/she wants.  However, the addition of the phrase "on or before" only allows a change to the provided date by agreement of both parties to the contract.  If either party does not agree to the earlier closing date, then the earlier closing does not occur.  You might wonder, so what is the practical difference when using a closing date without the phrase "on or before"?  Nothing really, because if a closing date is provided without that phrase, and the parties then want to change the closing date, they again must separately agree to the change in the closing date.  

So what, if any, benefit is there to using the words "on or before"?  In my opinion, the benefits are twofold: (1) shows flexibility in the intent of the parties to perhaps close sooner, so all parties are on notice of this possibility and can prepare accordingly (albeit they must still agree to close earlier as stated above); and (2) use of the phrase may avoid the "time is of the essence” clause that exists in all the Florida contract forms, at least as it applies to the closing date.  

Much litigation exists over "time is of the essence" clauses, and in most cases, courts strictly enforce such provisions.  The use of this language essentially means that deadlines in the contract are firm deadlines, with penalties to a non-performing party for failing to meet the deadline, including a closing date.  For a buyer, this could mean a lawsuit for specific performance, or at a minimum, loss of the earnest money deposit funds.  The Florida form contracts state that typewritten or handwritten provisions shall control over the pre-printed provisions of the contracts.  Therefore, if the phrase "on or before" is typed or handwritten into the contract before a specified closing date, this may trump the "time is of the essence" clause as applied to the closing date.    

However, from a buyer's perspective, especially in financed transactions, the likely scenario is not that a transaction closes before the chosen closing date, but after.  Delays often occur in financed deals for one reason or another (e.g. underwriting delays, appraisal or inspection issues, etc.) and an agreement must be reached between the seller and buyer for an extension to the closing date, or the buyer could again be facing a specific performance lawsuit or loss of deposit.  Thus, when drafting the language for the closing date in an offer, if acceptable to the seller, one should consider using the language "on or about" as opposed to "on or before."  Logically, this language provides even more flexibility than its counterpart does, and would likely result in a reasonable extension to the closing date without enforcement of the "time is of the essence" clause and outright refusal by the seller to the proposed extension.

As always, before customizing any language or altering any terms of the form contracts, consulting with a Florida licensed real estate attorney is recommended.

 

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All Title Agents are Not Created Equal

In a burgeoning yet increasingly tricky real estate market that includes foreclosed properties, unpermitted improvements, high demand but low supply, and ever more litigious parties, it has never been more important to fully understand what the role is of your closing/title agent.  Choosing the right closing/title agent is an essential part of any real estate transaction.

Unfortunately, today, the terms “title agent” and “closing agent” are used to lump together all those who issue title insurance, yet there are vast differences in skill, knowledge and diligence among these parties. The options remain the same in Florida: there are non-attorney title companies and law firms / solo practitioners that can issue title insurance and conduct closings.

Title insurance premiums are fixed in Florida by law, therefore when clients “shop” among these options, the rates for title insurance will be constant.  The closing/title agent’s “closing” or “settlement” fee may vary some, but typically within a couple hundred dollars one way or the other.  Other costs related to closing (e.g. title search fee) will vary some as well, but to a negligible degree.  The assumption is that the law firm /attorney is more expensive and charges attorney’s fees, but these are widespread misconceptions.  In many cases, the attorney title agent is actually less costly.

While the fees may vary slightly among the options available, the services provided can vary greatly.  Attorneys are the only closing/title agents that are legally and ethically required to represent a party in the transaction and legally authorized to provide legal advice and legal protection.  Non-attorney title companies must remain neutral between the parties, cannot represent any side, and they cannot provide legal advice.  They can only conduct the closing and issue the title insurance policy.  Attorneys rather, as legal advocates for their clients, will provide legal advice to their clients throughout the closing on all aspects of the transaction, the property, the contract, and the closing documents, and will do everything they can to ensure that the title being conveyed is “marketable title.”  Furthermore, attorneys will timely object to title and/or survey related defects to protect Buyers’ deposits and their rights.  Non-attorney title companies may point out title defects noted in the title report, but they cannot make objections on behalf of a Buyer.  Additionally, they cannot provide legal advice as to options for dealing with defects, cannot provide advice as to the application of the contract terms to any particular factual situation, cannot interpret and examine a survey with the Buyer, and cannot handle disputes.

So no, all title or closing agents are not created equal.