Tuesday, August 30, 2011

Surveys are expensive!

Whenever a Seller does not have a copy of a survey, the Buyer runs into the situation of having to order a new survey. Surveys are costly and sometimes time consuming, especially during certain times of the year. If the premises is located in the Town of Brookhaven an owner of real property or a purchaser in contract to buy real property, may obtain a copy of a survey from the Town of Brookhaven Assessor's Office at no cost. While there is no guarantee that they will have a survey on file, nor that the survey will be guaranteed to a Title Company (required to insure the boundary lines of the premises), nonetheless it is well worth the attempt. A third party can also request a copy of a survey for a fee. The catch is that the fee is paid upfront and not returned should they not have a survey on file. Either way if a survey is on file it will cost the Buyer much less than ordering a new one.

New Requirements for FHA Loan Modifications

Effective, October 1, 2011, HUD has issued new requirements for borrowers to successfully complete a trial payment plan prior to being approved for a loan modification. To read the requirements embodied in Mortgagee Letter 2011-28, click on the attached link.

Interestingly, the letter indicates an incentive fee for lenders who give the modification after a successful trial plan pursuant to the Letter's rules. Its important for borrowers to understand the requirements put on lenders in order to get those incentives because lenders are going to want the money and therefore mandate compliance with the trial plan rules.

Sunday, August 28, 2011

Some Good Storm News - Homeowners Insurance

To Start:

Take a look at your insurance policy before you do anything about your claims. Read the policy, review your deductibles, determine the procedure, but act quickly so that the insurance company can't disclaim coverage for untimely notice. Yet, read your policy and learn your rights. Remember, insurance companies are not excited to pay claims and you need to be a great advocate for your own rights, you may even want to hire a lawyer if you get into a dispute with your insurance company about coverage. If you believe that they should pay based upon what your policy says, don't just take their denial as being correct, fight it. Be clear, each policy is different, so you have to read your policy before you act.


Something Interesting:

It's likely you have a Hurricane Deductible in your policy. New York is one of many States that have Hurricane Deductibles in homeowners' policies. These deductibles are a charge of a percentage of the claim, instead of a flat fee, prior to the policy paying. Some are in the neighborhood of 4% of a claim. So, it can get quite pricey. The States (territories) that have these deductibles are Washington DC, Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Texas, and Virginia.

Something Good:

The reason it's a good idea to look at your policy is that this deductible may not be triggered by a tropical storm. Each policy is different, but the downgrade in the storm may have saved you thousands of dollars in your deductible. Good luck.

Friday, August 26, 2011

Lead Disclosure Law is Limited

Residential Lead-Based Paint Hazard Reduction Act


In a landlord-friendly decision, the Appellate Division, Second Department (with jurisdiction over Long Island, among other places) just ruled that minor children of tenants cannot sue landlords for injuries resulting from exposure to lead paint under this Act even if they take possession with the tenant at the beginning of the tenancy.

To be clear, we are talking about the law that requires disclosure of known information on lead-based paint and lead-based paint hazards to a purchaser or lessee. A law that real estate agents should be very familiar with.

The Court held that the purpose of the act was to establish disclosure obligations triggered upon the lease or sale of property. The case is Brown v. Maple3, LLC and can be found by clicking here and the applicable law, RLPHRA, is 42 USC 4851. The clear rule is that infants residing with lessors are not within the zone of interest protected by the statute. The statute is about disclosure, not about strict liability for injuries.

Nonetheless, the Court did note that the door is not closed on the minor children and suggested that they instead pursue a claim under common law negligence. This means if you are injured in a residence as a result of lead exposure, your rights may be limited, but that you still do have rights and you should pursue them.

Thursday, August 25, 2011

There's a storm front coming - what if the house is destroyed pre-closing?

Buyers: The general rule is that if you have not taken possession or closed the deal, you can cancel the contract because of a mutual impossibility of performance. Nonetheless, you are in a great position because you may also demand performance with a price reduction. The price reduction would be the fair market value of what was lost in the storm as determined by an appraisal (this would likely be litigated as I'm sure the seller's appraisal would differ with yours). Yet, should you wish to cancel the contract, you can get your deposit back and that is the direction you will likely go. Anyway, lets hope the storm changes course and you can close on a fabulous property that's now in contract.
Sellers: You may have to take a price reduction as stated above, but hopefully your homeowners policy covers your loss. Nonetheless, its likely the deal will just be cancelled and you will have to rebuild.

Disclaimer: This advice assumes material damage to the premises and is based upon NY General Obligations Law 5-1311(1)(a)

Monday, August 22, 2011

Cell Phone Deposits

Recently, there have been developments in technology, notably, smart phone applications which allow persons who bank at large franchises to take snapshots of the front and back of a check in order to immediately send it for deposit. This can be useful-or detrimental-when it is done by a Seller at a real estate closing.

Cell phone applications now make available the option of taking a photograph of the front and back of check for immediate deposit.

Beware of this as the Buyer because Sellers should not be depositing checks without Buyer's awareness or consent, or until such time has passed that it is acceptable to do so.

This can be an extremely efficient way to deposit funds and move forward in a deal in the best case scenario-when everything goes smoothly. In fact, this can help where Seller is going to turn around and purchase a house after selling their former residence.

However, it does not always work out where that is appropriate. Checks should be monitored because there may be situations where they are initially presented (and deposited unbeknownst to the Buyer). If Seller immediately deposits, then the deal goes bad by bickering, which we all know is possible, by the end of the closing Seller now has money they are not entitled to.

Wednesday, August 17, 2011

Modification Uptick

Just a matter of anecdotal evidence, for whatever that is worth - this firm has seen a drastic rise in the amount of modifications & short sales approved this month.

This confirms our thoughts that workouts come in waves & to keep reapplying even after a denial, until you get closer to what you want.


Tuesday, August 16, 2011

Opt-Out Deadline Approaching Quickly

The IRS released Notice 2011-66 on August 5, 2011 which requires form 8939 to be filed by November 15, 2011 in order for executors to opt-out of estate taxes on 2010 decedents. Exemptions for extending the deadline are extremely limited so this should be viewed as a hard-fast rule.

If no executor was named for decedent's estate, for example, if the entire estate was part of a living trust, then the person in actual/constructive possession may also use this form.

This is important to note as opting out of estate taxes is no longer automatic. If the election is made by filing 8939, the carry over provisions of Section 1022 are then applicable.

Keep an eye out for the form as the deadline is approaching and the new form is not yet available on the IRS website.

Monday, August 15, 2011

How to get my commission?

So you find a purchaser who is ready, willing & able, but the seller (your client) nonetheless refuses to pay. What do you do?

You look to your listing agreement and see what rights you have.

Regardless of the listing agreement, 2 rights you never have are that:
1) You can't file a Lis Pendens
2) You can't serve a motion for summary judgment in lieu of complaint (CPLR 3213) & must litigate the matter with a Summons and Complaint.

You may have to arbitrate pursuant to your listing agreement and you certainly should be mindful of Real Property Law 294-b, which permits you to file an affidavit of entitlement with the County Clerk and demand that your client deposits your claimed commission in the Clerk's office. Moreover, your client's failure to so deposit your commission will entitle you to costs and attorneys' fees in your subsequent litigation with the client.

Yet, no matter what you do, unfortunately, the Courts have uniformly stated that a real estate commission isn't entitled to a lien on real property pre-judgment. Maybe, its time to increase that lobbying.
Its time to get paid.

Thursday, August 11, 2011

Divorcing couples not subject to capital gains tax on their real estate

In contrast to the rule on transfer tax, just discussed, Federal Law provides that such a transfer of property incident to divorce does not work a gain or loss concerning capital gains tax; hence no stepped-up in basis results.

§ 1041. Transfers of property between spouses or incident to divorce

(a) General rule

No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)—

(1) a spouse, or

(2) a former spouse, but only if the transfer is incident to the divorce.

Divorcing couples subject to real estate transfer tax on their real estate

Recently, I attended a meeting of divorce attorneys in a group called the Collaborative Lawyers Association of New York (alternative dispute resolution for divorce). At the meeting, our group had mixed feelings if a transfer of real property between spouses at divorce was for no consideration (no tax) or for fair market value (tax). Ethically, the attorneys agreed that this matter required further research.

As it turns out there is a taxable event according to the New York Code of Rules and Regulations.

20 NYCRR 575.11(a)(10): A conveyance from one spouse to the other pursuant to the terms fo a divorce or separation agreement is subject to tax. (There is a rebuttable presumption in such case, that the consideration for the conveyance, which includes the relinquishment of marital rights, is equal to the fair market value of the interest in the real property conveyed.).

The takeaway is that even though you and your spouse own a piece of property already, when you transfer it to each other as part of a divorce settlement, you will be taxed or you are committing tax fraud.

BE WARNED.

Wednesday, August 10, 2011

Dual Agent with Designated Sales Agent - Who is the Dual Agent?

The benefits of being a teaching law firm is that we get to learn from students in their respective industries what issues they are actually having in practice before we litigate disputes.

The question I got today was this: Who is the third person in a real estate deal with a dual agent with designated sales agent? Do we have to split our commission with this third person? I just don't get it. Must we pick another person in the office to serve as this third person.

Lets be clear - the third person is technically the broker of record at your office, but no there is not another agent involved in the transaction nor do you have to further split your commission. Instead, the theory of a dual agent with designated sales agent is this:
  • Both agents (listing & buyers) work for the same company
  • At the company (brokerage house) there is a boss (broker of record)
  • Both agents (listing & buyers) have to report to the boss if the boss so requires
  • While reporting to the boss confidences of the seller or buyer may be required to be shared
  • The seller and buyer should know this limitation on their confidences before retaining the agents and either consent to it or not permit a dual agent with designated sales agent representation
If you have any more questions on this topic I suggest attending our next Conflicts of Interest class where this topic is discussed in more detail.

Tuesday, August 9, 2011

Estate Gift Tax Rates to Change

The President's 2012 budget, released in mid-February seeks to return the Federal Gift tax exemption to $3.5 million, which was temporarily increased to $5 million, and the gift and generation skipping to $1 million, with a 45% transfer tax rate. The senate is divided. Republicans would like to remove the estate tax all together, while both would agree on $5 million exemption, however disagreeing on the tax rate (45% or 35%).

Further, it seeks to make portability permanent, meaning, a spouse can use their spouse's unused exemption permanently, whereas now it is set within specific time limits.

Also sought is a 10 year minimum and remainder value greater than zero for grantor retained annuity trusts (GRAT). GRATs allow transfer of wealth between family members at a reduced gift tax cost if the grantor survives the term. Dynasty trusts will also be limited (used in jurisdictions that do not follow the common law rule against perpetuities) with a 90 year maximum on new trusts or new monies to existing trusts.

Additionally, the new budget seeks restrictions by way of a new class of tax restrictions on valuation discounts which allow discounts in the valuation of family owned businesses.

Look out for changes nearing 2012.

Anti-Deficiency in Short Sales: California

On July 15, 2011, a new law was enacted in California which prohibits deficiency judgments in short sale transactions. Short sale transactions are sales by homeowners to third parties, requiring lender approval, for less than the amount of the loan.

This applies to all 1-4 unit residential mortgages, whether first or later, and to borrowers as individuals, partnerships, LLCs, or corporations.

Originally, a law was enacted which prohibited deficiency judgments, but applied only to first residential mortgages by individuals.

This law may affect the bargaining position of homeowners with lenders regarding short sales, as it becomes a less attractive option for a lender where they are unable to get a deficiency judgment for the remaining amount of the loan. Many times lenders do waive this right, however, taking it off the table from the outset may be damaging to a homeowner's ability to procure the same, and further limits their options in foreclosure.

Although this law has not yet been enacted in NYS, California's enaction of the same, as well as the current state of the market and housing may appeal to NYS legislators and therefore it is something to keep an eye on into the future.

HUD SAFE ACT

On June 30, 2011, HUD (The U.S. Department of Housing and Urban Development) enacted the "Final Rule" for Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE), which lays out the minimum requirements for states concerning licensing and registration of mortgage loan originators.

This is important to pay attention to as licensure requirements are necessary in order to qualify as a loan originator, however it is also important to note who is exempt from the same. Further inquiry must always be made into state laws as they are free to expand on the minimum requirements laid out by HUD. However, after the original passage, states regulated tax-exempt organizations as well, so part of the purpose of this new Act is to remove that power from the states to do that.

This primarily affects non-profit organizations and HUD agencies, which provide services in foreclosure defense and inability to procure housing of financially distressed individuals.

SAFE Act's new standard for licensure is whether one is "engaging in business of a loan originator" and "take a residential mortgage application and offer or negotiate terms of a residential mortgage loan for compensation or gain".

These requirements are not limited to first loans, but also refinances, as these are not modifications, but instead are actually new loans in law and fact.

The new standards, differentiated from the 2009 act, allow HUD agencies and non-profits as exceptions to the requirements by way of codifying their role as different from a loan originator and therefore not requiring licensure. HUD has made it clear that this determination will be made based on the substance of a position, and not on its name. Consequently, a nonprofit's status under 501(c)(3) does not end the inquiry. Further analysis is required regarding the nonprofit's purpose, structure, incentives, and loan options. In fact, 7 criteria are used in order to further qualify:

1. Maintains tax-exempt status under section 501(c)(3) of the Internal Revenue Code of 1986
2. Promotes affordable housing or provides homeownership education, or similar services
3. Conducts its activities in a manner that serves public or charitable purposes
4. Receives funding and revenue and charges fees in a manner that does not incentivize the organization or its employees to act other than in the best interests of its clients
5. Compensates employees in a manner that does not incentivize employees to act other
than in the best interests of its clients
6. Provides to or identifies for the borrower residential mortgage loans with terms that are favorable to the borrower and comparable to mortgage loans and housing assistance provided under government housing assistance programs
7. Meets such other standards that the state determines appropriate

Also excluded from licensure requirements are government employees, bona fide nonprofit organizations that act as loan originators, although only in the course of their duties, and individuals who only engage in modifications or are 3rd party loan modification specialists. However the latter category could be subject to licensure under SAFE, but this is subject to determination of the Consumer Financial Protection Bureau (CFPB) as HUD has chosen not the regulate the same. Further, appendices of SAFE provide examples of the type of person not subject to the Act.