Closings

IMG_2872This isn’t law related, but this is just too good of a story not to share with you. I conducted a closing for Derek and Jillian, a nice, young couple buying their first home, a condominium unit in Norwood. The closing itself was rather uneventful but what happened next was certainly not.

The happy new buyers, closing papers in hand, took the elevator down to the office foyer. I started walking back down the hall, but all of a sudden, I heard a female voice shriek then the sound of crying. Thinking something awful had happened, I raced down the stairwell only to find Derek on one knee with diamond in hand, proposing to Jillian in our office foyer! I’m happy to report that she did say yes! Of course I had them pose for a picture which I’ve posted here.

These are the moments which make me really proud and grateful to be a real estate attorney. It certainly put a smile on my face for the rest of the day.

I would love to hear from you readers about similar “love nest” stories. Feel free to share in the comment section.

Warmly, Rich

 

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massachusetts notary publicCourt Points Out Potential Problem with Standard Notary Acknowledgment Form

Could the the standard form notary acknowledgment clause used in virtually every recent Massachusetts deed, mortgage and other recorded instrument be defective in certain situations involving power of attorneys? That may be the result of a recent court decision by the First Circuit Bankruptcy Appellate Panel in Weiss v. Wells Fargo Bank (click for link to case).

The ruling is causing quite a bit of angst in the real estate conveyancing community. Since Revised Executive Order 455 – Standards of Conduct for Notaries Public was passed by Gov. Romney in 2004, notaries public and attorneys have been using the approved notary acknowledgment form providing that the document is signed “voluntarily for its stated purpose. ” In the Weiss case, however, the court held that the notary acknowledgment of an attorney-in-fact under a power of attorney was defective as it failed to indicate that the principal has signed under “his free act and deed.

The facts in the Weiss case are rather unique so it may have limited effect. But it should serve as a wake-up call for notaries public, attorneys and lenders that the better practice may be to use a notary public acknowledgment with the “free act and deed” language as was common before the 2004 notary rules.

Practice Pointer:  Going forward, I recommend that real estate attorneys, notaries public and lenders should consider using “free act and deed” language in notary public acknowledgments. See below for form language. 

Fact of the Case: Botched Notarization With Power of Attorney

In the Weiss case, a bankruptcy trustee for Chicopee homeowners attempted to use his “strong-arm” powers to void a refinance mortgage. The borrowers took out a refinance loan on their Chicopee home with Wachovia Mortgage. They signed a limited power of attorney to enable a one Shannon Obringer (who I assume was a bank employee) to sign the mortgage. The actual signing of the mortgage occurred in Pennsylvania by a Pennsylvania notary (I assume at Wachovia’s offices). You know this wasn’t going to end well….

The pre-printed notary acknowledgment form on the mortgage was the approved MA Executive Order form, which the notary partially completed as follows:

On this 11 day of June 2007, before me, the undersigned notary public, personally appeared Shawn G. Kelley and Annemarie Kelley by Shannon Obringer as Attorney in Fact, proved to me through satisfactory evidence of identification which was/were ________________ to be the person(s) whose name(s) is/are signed on the preceding document, and acknowledged to me that he/she/they signed it voluntarily for its stated purpose.

Although there was some ambiguity from the wording as to who actually appeared before the notary and the notary failed to fill out the identification form blank space, the Court held that these were not necessarily fatal. However, the Court ruled that the language in the notarization that it was signed “voluntarily for its stated purpose” was fatally defective because it did not sufficiently demonstrate that it was the borrowers’ “free act and deed” by the attorney-in-fact’s signature, as required by Massachusetts statutory and case law. The Court went on to void the mortgage in favor of the bankrupt debtor.

New Notary Public Acknowledgment 

Going forward, I would consider using a notarization acknowledgment with the older “free act and deed” language in power of attorney signing situations. The 2004 acknowledgment should be ok for typical individual notarizations. Of course, you should consult with your title company, lender and/or attorney before notarizing in any tricky situations.

If you have any questions about notarization after this court ruling, please contact me at rvetstein@vetsteinlawgroup.com or 508-620-5352.

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CFPB.pngCFPB Issues Long Awaited “Know Before You Owe” Mortgage Disclosures, Replacing Truth in Lending, Good Faith Estimate, and HUD-1 Settlement Statement

As part of a continuing overhaul of the home mortgage market, the Consumer Financial Protection Bureau today issued a final rule to bolster fairness and clarity in residential lending, including requiring a new good faith estimate of costs for homebuyers, Truth in Lending disclosure and a new HUD-1 Settlement Statement.

The new Loan Estimate will replace the current Good Faith Estimate (GFE) and the current Truth in Lending Disclosure (TIL). The new Closing Disclosure will replace the current HUD-1 Settlement Statement. The new forms are embedded below.

The real estate industry will have 20 months to implement the new disclosures, by August 1, 2015. The CFPB website has a summary of the new rules and disclosures here.

Initial Impressions, Did The CFPB Finally Get It Right?

Overall, I would say that the forms are a major improvement over the existing disclosures, especially the Truth in Lending disclosure. I always joke that the Truth in Lending disclosure should be called “Confusion in Lending” (which usually gives the borrower a chuckle) as it’s nearly impossible to explain even for a trained attorney and sophisticated borrower. That may be rectified now with the new forms — although I still may employ the joke!

The new HUD-1 Closing Disclosure is a longer and more involved form, but it basically just reorganizes all of the information now contained in the current 3 page HUD-1 Settlement Statement, and it appears to be easier to read and explain at the closing table.

The CFPB says that the new forms will replace the existing forms, resulting in a decrease in pages to review — which is a minor miracle in and of itself. A common complaint from borrowers is the sheer number of forms and disclosures signed at the closing, so this is welcome news.

3 Business Day Rule May Be Problematic

As Bernie Winne of the Massachusetts Firefighters Credit Union testified at the announcement hearing today in Boston, the new requirement that the Closing Disclosure (new HUD-1) be provided to the borrower within 3 business days of the closing may pose a problem in some transactions and will certainly result in a major adjustment in current practices. There are often last minute changes in closing figures, seller credits, holdbacks, payoffs, etc., which result in last minute changes. Hopefully, the CFPB will realize this in the upcoming implementation period and relax the rules in certain circumstances. There has already been significant chatter on Twitter and the blogosphere about this new requirement.

Another encouraging note was CFPB Director Cordray’s comments today about the agency pushing for more electronic closings. Fannie Mae has done squat to push e-closings, so hopefully CFPB will take the lead in this important area!

Loan Estimate Disclosure

  • The new Loan Estimate will combine the disclosures currently provided in the Good Faith Estimate and the initial Truth in Lending statement.
  • Lenders must provide the Loan Estimate 3 business days after an application is submitted by a consumer, excluding days that the lender is not open (e.g., Saturdays).  However, it is not clear based from materials available thus far when a consumer has submitted sufficient information to constitute an “application.”
  • The Loan Estimate will conveniently provide for the monthly principal and interest payment, projected payments over the term of the loan, estimated taxes and insurance (escrows), estimated closing costs, and cash to close.
  • It will provide for a Rate Lock deadline.
  • The Annual Percentage Rate (APR) appears on page 3, despite requests by consumer advocates that it appear in a prominent location on the first page.  In addition, it appears that the Bureau did not adopt the proposal to revise the APR calculation to include more items in the finance charge and thereby potentially increase the number of loans that would fail the Qualified Mortgage’s points-and-fees test or would be treated as “high cost” or “higher priced.”

Closing Disclosure

  • The Closing Disclosure will combine the disclosures currently provided in the HUD-1 settlement statement and any revised Truth in Lending statement. It is now a 5 page document compared to the current 3 page document.
  • Critically, the Closing Disclosure must be provided at least 3 business days before the closing. Lenders and closing attorneys will have to adapt to this new requirement as currently we usually get the final HUD approved by the lender 24-48 hours before the closing.
  • Page 1 of the Closing Disclosure carries over much of the Truth in Lending information previously found in the TIL form.
  • Page 2 and 3 replicate the existing HUD-1 Settlement Statement (pages 1 and 2) outlining the fees and closing costs, adjustments, and commissions charged to the buyer and seller. It also contained a more extensive section on Cash to Close which will be helpful to explain.
  • Page 4 contains a nice easy-to-read section on the escrow account which is often challenging to explain to borrowers.
  • The last page is similar to the current page 3 of the HUD-1, providing a quick summary of the loan terms, interest rate, total payments and APR.

CFPB Loan Estimate

CFPB Closing Disclosure

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CFPB.png

Updated 11/20/13: CFPB Issues Final Mortgage Rules and Disclosure Forms (click here for more info)

A long awaited regulatory and compliance announcement may be coming to Boston next week.

The Consumer Financial Protection Bureau has announced that on November 20, 2013, it will hold a field hearing in Boston on the “Know Before You Owe: Mortgages” rules. Industry experts predict that CFPB will announce its long-awaited new Truth In Lending (TILA)-RESPA integrated disclosures final rule and forms.

The new rules and disclosures will result in another dramatic change in the Truth in Lending, Good Faith Estimate and HUD-1 Settlement Statement used by lenders and attorneys in residential purchase and refinance transactions. A new “Loan Estimate” would replace the current Good Faith Estimate (GFE) and the current Truth in Lending Disclosure (TIL). A new Closing Disclosure would replace the current HUD-1 Settlement Statement. Our prior post on the new closing disclosures can be found here.

The event will feature remarks by CFPB Director Cordray and testimony from consumer groups, industry representatives, and members of the public. The event will be held at the Back Bay Grand, Back Bay Events Center, 180 Berkeley Street, Boston, MA 02116. If I’m lucky enough to get an invite, I will be there and will report back on what happens.

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Real-Estate-AgentsReviewing this blog, it occurred to me that I’ve never written about real estate agency and designations, which is one of the more confusing aspects of real estate law. I think all the new disclosures and regulations imposed by the Board of Real Estate, while well-intended, have made this area unnecessarily complicated. I’ll try to explain agency in plain English.

Massachusetts Mandatory Licensee Consumer Relationship Disclosure

The Massachusetts real estate brokerage industry is highly regulated by both state law and regulations, as well as local and national codes of ethics. Under state regulation, once you sit down with a Massachusetts real estate agent to discuss a specific property, the agent should give you a form called the Massachusetts Mandatory Licensee Consumer Relationship Disclosure. The disclosure form describes the five types of agency relationships between and among buyer, seller, and agent:

Seller’s Agent – This is typically known as a listing agent. The real estate agent represents only the seller, not the buyer. The listing agent owes the seller undivided loyalty, reasonable care, disclosure, obedience to lawful instruction, confidentiality and accountability. However, a listing agent must disclose all known material defects in the real estate to buyers.

Open Houses:  Open houses are often the cause of disputes as to agency and commissions. Under Mass. regulations, at any open house the listing agent must conspicuously post and/or provide written materials explaining to attendees the relationship they may have with the agent conducting the open house. If a buyer is working with an agent (but the agent is not present at the open house) it’s a good idea to write the name of the agent’s name and leave the agent’s card at the sign-in, otherwise the listing agent could be considered the procuring cause of the buyer which could cause a dispute down the road.

Buyer’s Agent – A buyer’s agent works for the buyer only. The agent owes the buyer undivided loyalty, reasonable care, disclosure, obedience to lawful instruction, confidentiality and accountability. Like a listing agent, a buyer’s agent must disclose any known material defects in the real estate. Some agents are exclusive buyer agent’s and do not take on listings. An advantage of using a buyer’s agent is that you can be assured the agent will work only for you, the buyer, and will have no relationship with the listing agent’s office, as is common with designated and dual agencies described below.

Designated Seller’s and Buyer’s Agent – This type of agency occurs when a listing agent refers an agent working in the same office to represent the buyer. So, two agents in the same office are representing both sides of the transaction. The happens a lot when an unrepresented buyer is introduced to the property at an open house, and the listing agent will refer the buyers to a fellow agent in her office. This is usually the smart and prudent choice to avoid the conflicts inherent in being a dual agent representing both buyer and seller, discussed below. Both buyer or seller must agree to a designated agent agency in writing. The designated agent owes her client the same duties and obligations discussed above.

Dual Agent – A dual agent represents both sides of the transaction — buyer and seller –but can be a risky proposition. The upside for the agent is that he or she keeps the entire commission, but the agency can be fraught with potential conflicts of interest. Dual agency is allowed only with the express and informed consent of both the seller and the buyer. Written consent to dual agency must be obtained by the real estate agent prior to the execution of an offer to purchase a specific property. A dual agent shall be neutral with regard to any conflicting interest of the seller and buyer.

Non-Agent Facilitator – This is the rarest of all agencies. When a real estate agent works as a facilitator that agent assists the seller and buyer in reaching an agreement but does not represent either the seller or buyer in the transaction.

What is a “broker” vs. a “salesperson”?  Under the Massachusetts regulations governing real estate agents, a real estate broker runs the real estate office and is the broker of record, overseeing the transactions of all salespersons (agents). A broker must complete 40 additional hours of education and must work for a broker for at least three (3) years before they can move on to licensure as brokers. A broker is responsible for accepting and escrowing all funds, such as a deposit placed on the purchase of a home, and for finalizing transactions. A real estate broker must supervise any transactions conducted by a salesperson. Every local real estate office, even the large ones like RE/MAX, Century 21 and Coldwell-Banker, will have a broker/office manager in charge of the office. The small, independent real estate offices are typically operated by a single broker, with perhaps a handful of salespeople.

real estate salesperson is what most folks consider real estate agents. When a person first passes their real estate exam, they become a “salesperson.” A salesperson must be affiliated with, and work under, a broker, either as an employee or as an independent contractor, under the supervision of the broker. A salesperson can not operate his own real estate business. A salesperson also has no authority or control over escrow funds.

What Is A Realtor®? A Realtor is a real estate broker or salesperson who is a member of the National Association of Realtors and has agreed to conduct herself under the comprehensive NAR Code of Ethics. Not all real estate agents are Realtors. Membership in the NAR gives a Realtor full access to the entire Multiple Listing Service providing a national database of all sold and listed properties. Realtors can also file complaints against each other and the organization accepts complaints from consumers. Complaints can affect membership status and fines can be levied against agents who are found guilty of wrongdoing by a multi-member panel of their peers. The NAR does not have the ability to suspend a real estate licenses–that action can only be accomplished by the Mass. Board of Real Estate.

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RDV-profile-picture.jpgRichard D. Vetstein, Esq. is a Massachusetts real estate attorney with over 15 years of experience. If you have any questions regarding real estate agency, please contact him at rvetstein@vetsteinlawgroup.com or 508-620-5352.

Massachusetts Mandatory Licensee Consumer Relationship Disclosure

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government shutdown I’ve been glued to CNN in recent days, watching incredulously as those buffoons in Washington grind our government to a halt. I though for sure that a midnight deal would have been struck, but I woke up this morning with the dreaded news that the government has indeed shutdown. I’ve been trying to get a handle all morning on how this is going to affect the Massachusetts and national real estate market, and here’s what I have so far. (Updated 10/1/13 at 4:30pm below).

Tax Transcripts/SSN Verification Delays

Virtually all federally back mortgage lenders request copies of borrower’s tax transcripts through the IRS and social security numbers through the SSA. According to my friend Rick Moore, loan officer at Lendmark Loans in Framingham, and media reports, the shutdown will apparently either stop or hinder the federal agencies’ ability to issue those verifications, resulting in mortgage approval delays across the board. I know that lenders were furiously ordering tax transcripts and SSN verifications last week, in preparation for the shutdown. If your loan is in the middle of underwriting, speak to your loan officer now. You may be facing a delay in getting a clear loan commitment and a resulting delay in your closing date.

Federal Housing Administration (FHA)
The shutdown’s impact on FHA loans appears to be not as bad as originally thought. HUD’s Contingency Plan states that FHA will endorse new loans in the Single Family Mortgage Loan Program, but it will not make new commitments in the Multi-family Program during the shutdown. FHA will maintain operational activities including paying claims and collecting premiums. Management & Marketing (M&M) Contractors managing the REO portfolio can continue to operate. You can expect some delays with FHA processing.

VA Loan Guaranty Program
Lenders will continue to process and guaranty mortgages through the Loan Guaranty program in the event of a government shutdown. However, borrowers should expect some delays during the shutdown.

Flood Insurance
The Federal Emergency Management Agency (FEMA) confirmed that the National Flood Insurance Program (NFIP) will not be impacted by a government shutdown, since NFIP is funded by premiums and not tax dollars. Changes to the flood insurance program scheduled to take effect on Oct. 1 will be implemented as scheduled.

USDA Loans
For USDA loan programs, essential personnel working during a shutdown do not include field office staff who typically issue conditional commitments, loan note guarantees, and modification approvals. Thus, lenders will not receive approvals during the shutdown. If the lender has already received a conditional commitment from the Rural Development office, then the lender may proceed to close those loans during the shutdown. A conditional commitment, which is good for 90 days, is given to a lender once a USDA Underwriter approves the loan. If a commitment was already issued, the funds were already set aside and the lender may close the loan at its leisure. If Rural Development has not issued a conditional commitment, the lender must wait until funding legislation is enacted before closing a loan.

It is important to note that the traditional definition of “rural” for qualifying communities for assistance will be continued in effect during the shutdown.  We expect that language to continue the current definition will be included in whatever funding measure is eventually enacted.

Government Sponsored Enterprises
Fannie Mae and Freddie Mac will continue operating normally, as will their regulator, the Federal Housing Finance Agency, since they are not reliant on appropriated funds.

Treasury
The Making Home Affordable program, including HAMP and HAFA, will not be affected as the program is funded through the Emergency Economic Stabilization Act which is mandatory spending not discretionary.

Updated (Oct. 1 at 4:30pm). Memo from national mortgage lender:

“There has been no progress today toward a resolution to the government shutdown. Fortunately, the initial impact of the shutdown on mortgage originations has been small. The biggest concerns are obtaining transcripts from the IRS and social security verifications from the SSA. Certain Government produced economic reports will not be available. The Construction spending report due out this morning was not issued. The Non-Farm Payrolls report due on Friday may be affected. The impact on the mortgage market of this lack of data is difficult to anticipate.

At this time, Fannie, Freddie, and Ginnie say they will continue to operate as normal. VA says that they, too, will have no disruptions in services. FHA, however, expects delays due to reduced staffing. Origination companies, correspondent banks, and warehouse lenders may react differently as they access the risks associated with an extended shutdown.”

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HomeTheatreI had a interesting situation come up the other day during a pre-closing walk-through. Unbeknownst to me or the listing agent, the seller had removed wall-mounted speakers from the living room, leaving gaping holes with the built-in surround sound speaker wires hanging out. Needless to say, the buyers were not happy after the walk through. While we were able to amicably resolve the issue at the closing table, it underscored an important, but often overlooked, aspect of the sale process: how to best handle fixtures and built-in items.

What’s A Fixture vs. Removable Personal Property?

From a legal standpoint, when equipment, decorations, or appliances become affixed or fastened to the real estate, it becomes a fixture and is supposed to be transferred as part of the sale, unless there is an agreement providing otherwise. What are some of the factors determining whether something is a fixture?

Method of attachment. Is the item permanently affixed to the wall, ceiling or flooring by using nails, glue, cement, pipes, or screws? Even if you can easily remove it, the method used to attach it might make it a fixture. Examples include built-in surround sound wiring, lighting fixtures, built-in speakers into the wall, custom built-in cabinetry.

Adaptability. If the item becomes an integral part of the home, it cannot be removed. For example, a floating laminate floor is a fixture, even though it is snapped together. Built-in appliances are properly considered fixtures, especially custom items. That includes your Sub Zero refrigerator and Viking Range/Oven specially selected for the gourmet kitchen. Free standing appliances, however, are generally not considered fixtures.

There are, of course, plenty of gray areas with fixtures. Wall mounted flat screen TV’s, surround sound speaker systems, and decorative mirrors are a few coming to mind. These gray areas are the cause of most disputes surrounding fixtures. How do you handle them? Keep reading.

Disclose All Exclusions/Inclusions In Listing

The opportunity to address fixtures, inclusions and exclusions starts when the home is listed. As suggested by Sudbury, Mass. Realtor, Gabrielle Daniels, agents should identify all potential fixture issues ahead of time, and disclose them on MLS either as included or excluded in the sale. If the sellers want to take that new Bosch dishwasher with them to their new home, they had better disclose it ahead of time so the buyer knows ahead of time.

Carry Over To The Offer and Purchase & Sale Agreement

Referring to this as the “no-surprise” rule, Metrowest Realtor Jennifer Juliano correctly advises that the same exclusions and inclusions in MLS should be carried over and written into the Offer to Purchase with a reference to the MLS Listing Number, and the purchase and sale agreement. The standard form purchase and sale agreement addresses inclusions and exclusions with even greater detail, tracking the law of fixtures in Massachusetts. Below is the standard language in the Greater Boston Real Estate Board form:

Included in the sale as part of said premises are the buildings, structures, and improvements now thereon, and the fixtures belonging to the SELLER and used in connection therewith, including, if any, all wall-to-wall carpeting, drapery rods, automatic garage doors openers, venetian blinds, window shades, screens, screen doors, storm windows and doors, awnings, shutters, furnaces, heaters, heating equipment, stoves, ranges, oil and gas burners and fixtures appurtenant thereto, hot water heaters, plumbing and bathroom fixtures, garbage disposals, electric and other lighting fixtures, mantels, outside television antennas, fences, gates, trees, shrubs, plants, and ONLY IF BUILT IN, refridgerators, air conditioning equipment, ventilators, dishwashers, washing machines and dryer; and but excluding _______.

As you can see, the standard language provides by default that most commonly understood fixtures are part of the sale, such as furnaces, carpeting, and lighting fixtures. Exclusions must be written into the agreement, or by default they may be considered fixtures and included in the sale.

If items are left unaddressed in the agreements, you’ll have a situation similar to mine with the removal of surround sound speakers and a stressful walk-through. Feel free to post in the comments about your own thorny fixture situation!

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100316_photo_vetstein (2)-1Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. He can be reached by phone at 508-620-5352 or email at rvetstein@vetsteinlawgroup.com.

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images-10Overview of  ”Standard” Changes to the GBREB Form Purchase and Sale Agreement

Missing mortgage discharges, problematic  probates, “Ibanez” foreclosure issues and other title defects are always an unwelcome surprise to a seller, their Realtor and attorney. But they are unfortunately a common part of life in the real estate conveyancing world. The “standard” purchase and sale agreement form commonly used by Realtors and attorneys (Greater Boston Real Estate Board) provides for what happens in a transaction if a title defect is discovered and cannot be cleared quickly.

The GBREB form, paragraph 10, which is still in widespread use, provides as follows:

If the SELLER shall be unable to give title or to make conveyance, or to deliver possession of the premises, all as herein stipulated, or if at the time of the deed the premises do not conform with the provisions hereof, then any payments made under this agreement shall forthwith be refunded and all other obligations of the parties hereto shall cease, and this agreement shall be void without recourse to the parties hereto, unless the SELLER elects to use reasonable efforts to remove any defects in title, or to deliver possession as provided herein, or to make the said premises conform to the provisions hereof, as the case may be, in which event the Seller shall given written notice thereof to the Buyer at or before the time for performance hereunder, and thereupon the time for performance hereof shall be extended for a period of thirty days.

The standard provision is, unfortunately, outdated and problematic. Accordingly, experienced Realtors and attorneys are taught to modify this provision from the outset as follows:

If the SELLER shall be unable to give title or to make conveyance, or to deliver possession of the premises, all as herein stipulated, or if at the time of the deed the premises do not conform with the provisions hereof, then any payments made under this agreement shall forthwith be refunded and all other obligations of the parties hereto shall cease, and this agreement shall be void without recourse to the parties hereto, unless then the SELLER shall elect to use reasonable efforts to remove any defects in title, or to deliver possession as provided herein, or to make the said premises conform to the provisions hereof, as the case may be, in which event the Seller shall given written notice thereof to the Buyer at or before the time for performance hereunder, and thereupon the time for performance hereof shall be extended for a period of thirty days.

These standard modifications ensure that the Seller is initially responsible for clearing any title defects and gives them 30 days in which to do so. If the Seller cannot clear the title defect within 30 days, then both parties have the option of terminating the deal and all deposits must be returned.

Limiting Seller’s Financial Exposure

To limit the seller’s out of pocket expenses to clear title defects, real estate attorneys representing the seller will often insert language such as this at the end of paragraph 10:

Reasonable efforts shall be defined as the Seller’s expenditure of no more than $________, exclusive of all voluntary encumbrances which secure the payment of money which Seller shall be obligated to remove.

The dollar amount is typically anywhere between $1,000 – $4000 depending on the purchase price.

Protecting The Buyer

On the buyer side, what happens if during the 30 day extension cure period, the buyer’s rate lock expires and interest rates are floating up (like now)? Experienced buyer attorneys will often insert the following language in their  riders:

Notwithstanding anything to the contrary contained in this Agreement, if SELLER extends this Agreement to perfect title or make the Premises conform as provided in Paragraph 10, and if BUYER’S mortgage commitment or rate lock would expire prior to the expiration of said extension, then such extension shall continue, at BUYER’S option, only until the date of expiration of BUYER’S mortgage commitment or rate lock.  BUYER may elect, at its sole option, to obtain an extension of its mortgage commitment or rate lock or the Seller may elect to pay for same.

This language will ensure that the buyer doesn’t wind up floating up the interest rate river with an untimely rate lock expiration. This situation has come up rather frequently over the last several months as interest rates have increased dramatically.

This is just one, albeit a very important, part of how an experienced real estate attorney works up the purchase and sale agreement. I will do some more posts on other aspects of the P&S Agreement. Stay tuned!

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Richard D. Vetstein, Esq. is a Massachusetts real estate closing attorney with offices in Framingham and Needham, MA. He can be reached at rvetstein@vetsteinlawgroup.com or 508.620.5352.

 

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Signing or not signing?Bar Counsel Tightening Ethical Standards and Expectations

On the second anniversary of the SJC’s important ruling in Real Estate Bar Assoc. (REBA)  v. National Real Estate Information Services (NREIS), which banned “witness-only” notary closings in Massachusetts, the Office of Bar Counsel has issued an important advisory opinion to Massachusetts real estate closing attorneys. The advisory opinion can be found here.

In the advisory, Bar Counsel first reaffirms the SJC’s pronouncement of the critical and mandatory role that Massachusetts attorneys play in a real estate purchase, sale or refinance transaction. The core functions at a real estate closing — certifying good, clear and marketable title, ensuring that title is properly conveyed, and holding and disbursing funds under the good funds law — are all acts constituting the practice of law and must be handled by a licensed Massachusetts attorney. Accordingly, as the SJC held, Massachusetts attorneys must “substantially participate” in all facets of the real estate conveyance transaction.

Following the SJC’s requirement of “substantial participation,” Bar Counsel advises attorneys that they must closely manage and oversee each conveyance transaction:

“It is not the appropriate course for the lawyer’s only function to be present at the closing to hand legal documents that the attorney may have never seen to the parties for signature, and to witness the signatures…A witness only appearance by an attorney would necessarily be inadequate, professionally and ethically, except in the perhaps unlikely event that the attorney is first assured that steps constituting the practice of law are being or have been properly handled by other Massachusetts attorneys.”

There are some closing attorneys and conveyancing mills who hire inexperienced contract attorneys to run around the state to do closings. These attorneys are nothing more than glorified paralegals. Bar Counsel’s advisory opinion calls this unfortunate practice into serious question, unless the managing attorney can ensure that the contract attorney is familiar with the title and file (which is unlikely as Bar Counsel notes).

Bar Counsel is clearly tightening the ethical standards on real estate attorneys. And this is good thing for the profession and consumers alike.

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ar123517806003655.jpgIs One Better Than The Other?

The first step in the purchase and sale of real estate in Massachusetts is the execution of an Offer to Purchase. Historically, agents and attorneys have used the Offer to Purchase Real Estate form generated by the Greater Boston Real Estate Board which has been around since the 1960′s. Recently, however, I’ve been seeing an increase in the use of the newer and more modern Massachusetts Association of Realtors Contract to Purchase Real Estate Form #501. I don’t think most Realtors, attorneys and consumers realize that these two forms have some critical differences, depending whether you are representing the buyer or seller. I’m going to outline the differences and similarities in this post.

  MAR GBREB
General Buyer Friendly Seller Friendly
Inspections Built-in, No $ Cap Addendum. Only Serious Issues, $ Cap
Mortgage Contingency Yes Yes
Representations Yes with waiver language No.

 

Buyer or Seller Friendly?

Both the MAR and GBREB offer forms are legally binding contracts to purchase and sale residential property in Massachusetts as I’ve written about here. They both have the basic and critical components for a deal:  identification of the property, price, deposits, good-through date, closing date, “good and clear record and marketable title” language, and P&S deadline, among other provisions.

The GBREB is clearly a more seller-friendly form, while the MAR form is definitely more friendly to buyers with some caveats that I’ll discuss below. Does this mean that if you are a buyer agent, you absolutely have to use the MAR form? No, but it may be a good practice to get into. Some agents are more comfortable with the older GBREB form, and that’s fine. They just should be cognizant of the differences in the two forms and how it may help or hurt their clients.

Inspection Contingencies

The first critical difference in the two forms is the inspection contingency. The MAR form has all inspection related contingencies (home inspection, pest, radon, lead paint, septic, water quality and drainage) built into the form, while the GBREB form uses a separate addendum for each type of inspection. The major difference, however, is what will trigger the buyer’s right to terminate the deal based on an inspection issue. The MAR form is extremely buyer-friendly, providing that the buyer may opt out of the deal merely if any of the inspection results are “not satisfactory.” You can drive a Mack truck through that open-ended language. The MAR form also has some often overlooked waiver language — (1) protecting Realtors from getting sued if the buyer does not conduct inspections, and (2) making it more difficult for a buyer to get out of the deal if she doesn’t provide timely notice of termination based on an inspection issue.

The GBREB form is far less buyer favorable, providing for an opt-out only for “serious structural, mechanical or other defects” the cost to repair of which is a dollar amount to be filled in (usually ranging from $500-$2500).

Mortgage Contingency

Both the MAR and GBREB forms give buyers a standard financing contingency, enabling buyers to obtain a firm loan commitment at “prevailing rates, terms and conditions” by an agreed upon date. The contingency language is almost identical in both forms, so there’s no issue here.

Representations/Acknowledgements

The MAR form has a modern provision confirming that the buyer has received all the various disclosures required by law, including the agency disclosure, laid paint, and Home Inspectors Facts for Consumers brochure. The GBREB does not have this provision. The MAR form also has some very agent-friendly waiver of representation/warranty language in this clause, providing that the buyer is not relying upon any of the Realtor’s representations, MLS or advertisting concerning the legal use, zoning, number of units/rooms, building/sanitary code status of the premises. However, I’m not sure this provision would pass legal muster in light of the recent SJC ruling in DeWolfe v. Hingham Centre holding an agent liable for misrepresentations concerning the zoning classification of property. Nevertheless, Realtors can use all the legal protection they can get in this litigious environment!

 Which Form Is Better?

There is no easy answer to this question. All things being equal, if I’m a buyer agent, I would go with the MAR form. (And buyer agents are typically the ones who are writing up the offers). The MAR form is more buyer-friendly while at the same time gives Realtors way more legal protection than the GBREB form. If I’m representing the seller and have the opportunity to select the offer form, I’ll go with the old-standby GBREB form for the simple reason that it will give the seller some more leverage in case of a home inspection battle. But I would still seriously consider trading up to the MAR form. I’ve embedded both forms below.

Agents, attorneys, readers what are your thoughts? Post in the comments below.

Also, if you are interested in joining the Massachusetts Association of Realtors or the Greater Boston Association of Realtors, click on the respective links. Both are great organizations and extremely helpful to new and established agents alike!

501 – Contract to Purchase Real Estate (c) 2012 – ID-WATERMARK

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2691601505_c65b897bcc.jpgYou have been eagerly awaiting the closing of your new construction home, but alas, the builder has not been able to complete the landscaping, walkway and driveway by the closing and there is a two page punch-list of other incomplete work. You have already hired a moving company and packed all of your family’s stuff. Anxious thoughts race through your mind…Can we close on time? What will my lender do about the incomplete work? Should I be in panic mode?

Throw Me An Escrow Holdback Agreement!

In this situation, your closing attorney should recommend an escrow holdback agreement which, if approved by your lender, will enable the transaction to close as scheduled. The parties will sign a standard escrow holdback agreement at closing, with an agreed upon portion of the seller sale proceeds held in escrow (usually by the closing attorney) pending completion of the unfinished work. Escrow holdbacks are fairly common in Massachusetts real estate practice. They can be used to address all types of situations which would otherwise delay a closing: approval of a new septic system, unfinished construction/repair work, missing mortgage discharges and title issues, or any other obligation the seller should have completed for the closing.

Lender Approval Often Required

If you are using conventional mortgage financing, you will usually need to get your lender’s approval of the escrow holdback agreement, and it must be shown on the HUD-1 Settlement Statement. Some lenders and some loan programs will not allow an escrow holdback, so your closing may have to be pushed back. For incomplete new construction work, some lenders will require an inspection before allowing for the release of the escrowed funds, and they will typically require that 1.5 times the cost of the work be placed in escrow.

Builders Playing Hardball

Recently, I’ve seen some new construction builders refuse to agree to any escrow holdbacks in their purchase and sale agreements. This is ridiculous in my opinion, and should not be agreed to. Rarely does a new construction building complete a project without some unfinished work or punch list items. I typically counter with a language allowing an escrow holdback if the buyer’s lender insists upon it.

For these situations, “money talks”, and withholding seller funds is often the only way to ensure that the seller does what he or she has agreed to do.

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein, Esq. is an experienced Massachusetts real estate closing attorney. If you have any questions about the Massachusetts closing process or escrow holdback agreements, please contact him at info@vetsteinlawgroup.com or 508-620-5352.

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GMAC-MortgageRejects “In For One, In for All” Theory in Title Insurance Coverage

One little mistake in drafting and recording legal documents during a refinance can result in a huge problem for a lender — such as the lender having no legal ability to enforce the mortgage! (A slight problem..) GMAC Mortgage learned this the hard way last week at the Supreme Judicial Court in GMAC Mortgage v. First American Title Insurance Company (SJC-11161), where the court found in favor of First American Title Insurance Co., in a dispute over coverage under a lender’s title insurance policy.

First-American-Title-Insurance-CompanyA Doozy of a Mistake

As title defects go, this is a doozy, because it was easily preventable, and yet wrecked so much legal havoc in its aftermath. Elizabeth Moore and her husband, Thomas Moore, lived in a home in Billerica, the title to which was in Mr. Moore’s name. In 2001, for the purpose of refinancing the property, Mr. Moore executed a note and a mortgage to GMAC’s predecessor corporation (which obtained a lender’s title insurance policy from an agent of First American). Mr. Moore also signed a deed conveying the property from himself to himself and his wife as tenants by the entirety, as his plan was for both of them to hold title jointly as husband and wife. Under the “first in time” rule, in order for the mortgage to properly attach to the property, it should have been recorded before the deed went on record. However, the closing attorney mistakenly recorded the instruments in the wrong order, so the mortgage only attached to Mr. Moore’s 1/2 interest in the Property. Mr. Moore died in 2007. After his death, record title to the property vested solely in Mrs. Moore, and GMAC was left with no ability to enforce its mortgage against her or the property.

GMAC sued Mrs. Moore to enforce its mortgage rights, and she countersued for a slew of wrongful foreclosure and consumer protection claims. GMAC and Mrs. Moore wound up settling out of court, but GMAC tried to recoup all its legal fees and losses against the lender’s title insurance policy issued by First American.

Court Rejects Complete Defense Doctrine for Title Insurance

Unlike commercial general liability policies, which courts have ruled must provide coverage to all claims in a lawsuit if merely one claim is covered — the “in for one, in for all” theory —  the SJC ruled that title insurance policies do not provide such wide-ranging coverage. Reaffirming the notion that a policy of title insurance is merely an indemnification policy and not a guaranty of perfect title, the justices ruled that First American’s duty was only to cover the aspects of Mrs. Moore’s claims affecting title, and not her wrongful foreclosure and consumer protection claims. This ruling will mostly affect the relationship between the large banks and lenders and title insurance companies, but provides a good reminder about what title insurance does and what it doesn’t cover.

Title Insurance Coverages Often Misunderstood

As a former outside claims counsel for a leading title insurance company, I have found that most insureds and claimants do not fully understand title insurance coverages. And why would they? It’s complicated stuff.

Most regular folks think that title insurance provides a full and complete guaranty and assurance that title to their home is pristine and clean. While title insurance gives an ordinary homebuyer “max coverage” available for title defects, it does not provide a 100% warranty that every conceivable problem affecting legal ownership of a home will be covered.

Subject to various exclusions and exceptions noted on the policy, a title insurance policy provides coverage for loss or damage sustained by reason of a covered risk as of the time of the closing. What are those covered risks? Some risks such as forgeries, improper legal descriptions, and recording errors are covered. Other risks such as certain encroachments, boundary line disputes, wetland issues, and zoning issues are not covered. Defects or liens arising after the issuance of a policy are likewise not covered, unless a new policy is issued. Also, the new enhanced policies provide for more expanded coverages than the older standard policies. It’s best to consult an experienced title insurance attorney for a complete explanation of what a title policy covers.

I’ve written several blog posts on title insurance which can be found by clicking here.

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein, Esq. is an experienced Massachusetts title insurance claims and coverages attorney who was previously outside claims counsel to a leading title insurance company. You can reach him at info@vetsteinlawgroup.com or 508-620-5352.

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seinfeld-kramerOne of my favorite Seinfeld episodes is the one where Kramer tries to explain to Jerry how tax write-offs work. “It’s all a write-off!” exclaims Kramer who, not surprisingly, had no idea what he was talking about. I’ve embedded the Youtube video below.

With the April 15 tax deadline quickly approaching, let’s talk about some of the taxes, deductions, and “write-offs” arising out of a Massachusetts residential real estate purchase and sale. (Disclaimer: I am neither a CPA nor tax attorney, so consult your own tax professional for specific questions).

Real Estate Property Taxes

Every Massachusetts municipality levies a real estate property tax on residential property. Indeed, the real estate tax is the primary revenue producer for most towns with a limited commercial tax base. The real estate tax rate is set by the local board of assessors and is keyed to the assessed value of your land and home, which is often less than the true market value.

Real estate taxes are generally tax deductible if you itemize your deductions on IRS Form 1040, Schedule A. At closing, the closing attorney will ensure that all real estate taxes are paid up and allocated between buyer and seller as of the closing date. If the end of the fiscal quarter is approaching, most lenders will require that the buyer pay the upcoming real estate tax bill in advance.

Most lenders these days require an escrow account for the payment of real estate taxes, and the mortgage company will actually send the payment to the assessor. However, the homeowner should check the actual property tax bill to calculate the exact amount of real estate taxes paid for the year.

Rich’s AdviceIt’s very important to keep a copy of your HUD-1 Settlement Statement on file (and for your tax preparer). Also, get a copy of your loan amortization schedule for reasons I’ll discuss later.

Mortgage Interest Tax Deduction

The mortgage interest tax deduction is typically the largest tax deduction taken by a typical homeowner. The deduction applies to interest paid on a qualifying mortgage for both a principal residence and a second home. It also applies to home equity lines and second mortgages subject to some limitation, discussed below.

If you paid any points for getting a mortgage, they may also be tax deductible, either the year paid or over the life of the loan. This applies to both purchase loans and refinances. (Check your HUD-1 Settlement Statement). The same is true for PMI — mortgage insurance premiums. They remain tax deductible for 2012 and 2013 thanks to the Fiscal Cliff Bill.

Cash out refinances and equity lines have some special rules. If you use the money for a car, a vacation, college tuition, etc., then you can deduct your interest on loan amounts up to $100,000. If you borrow more than $100,000, the interest on the excess is not deductible. However, if you use the money to make improvements on your home, then the money is treated for tax purposes as though it’s part of your home mortgage … so you can deduct all the interest, along with your mortgage interest, as long as the total amount you’ve borrowed doesn’t exceed $1 million plus $100,000.

Consult IRS Publication 936 for more information on the mortgage interest deduction.

Rich’s Advice:  At closing, I advise new buyers to speak to their accountant about whether they should recalculate their W-4 withholdings in light of their new mortgage and corresponding tax deductions. This is where that loan amortization schedule comes in very handy. New buyers often have substantially more tax deductions than before becoming homeowners, and thus, they can adjust their withholdings so they can keep more of their take home pay every week, instead of giving Uncle Sam an interest free loan!

Massachusetts Property Transfer Tax

Sometimes called deed stamps, transfer tax or excise tax, Massachusetts home sellers must pay a tax on selling their property. For every Massachusetts county except Barnstable and the Islands, the tax is $4.56 per thousand of the purchase price on the deed. So for a $500,000 sale, that’s a whopping $2,280 tax bill. There is considerable debate among tax professionals as to whether this tax is deductible on your federal and state return. It’s best to consult your tax preparer.

Capital Gains On Sale

If you sell your home for more than you paid for it, you have a capital gain, and in theory you have to pay capital gains tax. However, in most cases, you don’t have to pay taxes on the first $500,000 of capital gain on a home (or $250,000 if you’re married and filing separately). To get this special treatment, you have to have owned the home and lived in it as your primary residence for two years out of the last five years prior to the sale. Even if you didn’t own and live in the home for two full years, you might still be able to exclude some or all of your capital gain; you just won’t be eligible for the full $500,000 exception.

Other Closing Costs

Unfortunately, most of the typical real estate closing costs are not tax deductible. This includes lender origination fees, credit report, flood certification, homeowner’s insurance, appraisals, attorney fees, title abstract, title insurance, county recording fees, and real estate commissions.

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney who helps people buy, sell and finance residential real estate. If you need assistance, please contact him at 508-620-5352 or at rvetstein@vetsteinlawgroup.com.

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Lara Gordon, Coldwell Banker

Put Your Best Offer Forward & Get Pre-Approved Beforehand, Advise Local Experts

Well, it’s official now. With buyers back in droves, an abnormally low inventory of good properties, and bidding wars popping up all over the place, the Greater Boston real estate market has now made full circle into a seller’s market. As the Boston Globe recently wrote, the market is “desperately seeking sellers.”

images-11For prospective buyers in a seller’s market, the strategies to succeed and find your dream home are very different from just a year or two ago. To help you navigate these unfamiliar waters, I’ve asked Cambridge-Somerville Realtor, Lara Gordon of Coldwell Banker, and Brian Cavanaugh, Senior Mortgage Banker at RMS Mortgage, to join me in this “round-table” discussion about how buyers can succeed in a seller’s market. Lara and Brian were both featured in this month’s Boston Magazine Best Places to Live 2013.

Q: Laura, what are you seeing out there on the streets in terms of inventory, pricing, and respective bargaining power between buyers and sellers? Has the tide really shifted back to sellers?

A: (Lara Gordon) Yes—in a very big way. When sellers have 5-10 offers to choose from, which is typical for most listings in Cambridge & Somerville right now, they are really setting the terms, and some buyers are willing to accommodate just about any request they make, from waiving the inspection to offering a sale-and-lease-back if the seller needs time to find a new place. My listing at 27 Osgood Street, Unit 7 in Somerville (pictures to the right) is a good example — 6 bids.

Q:  Lara, I’m hearing about bidding wars on well-priced, good condition properties. What are you seeing out there, and what’s your best advice on getting that winning bid?

A: (Lara Gordon) I always tell my buyer clients this: if you know you’re going into a multiple offer situation, you should put your best foot forward from the start. Some people feel nervous about coming in high on their offer, thinking they need to leave some room to come up during negotiations, but that is a mistake. If a seller receives one offer that is significantly stronger than the others, they may well accept it without going back for a “best and final” round.

lr-mls

And again, price is just one aspect of the offer, so have a good pre-approval from a respected lender, do the best you can with the downpayment, be willing to work with sellers’ preferred dates, and make sure your agent is “selling” you as a knowledgeable buyer, reasonable to deal with, and committed to seeing the transaction through.

Q:  What do buyers need to do in terms of making their best and most competitive offer? Are we back to buyer’s writing a personal appeal to sellers and that sort of thing? 

A: (Lara Gordon) Some buyers do write letters to sellers, but it’s the list agent’s job to keep them focused on the strengths of the respective offers, so an emotional appeal really only gets a buyer so far. Buyers really need to put their best foot forward. This starts with price, downpayment, a solid pre-approval from a respected lender, tight contingency dates and as much as possible accommodating the sellers’ preferred timeframe for closing. Beyond that, list agents and sellers are looking for a deal that will proceed smoothly and will “stick” through closing, so buyers’ agents really need to “sell” their clients as educated on the market, realistic about the home inspection and committed to seeing the deal through.

Q:  Brian, I hear that buyers are coming to you at all hours and weekends for pre-approvals. When buyers come to you for mortgage approval, what sort of documentation should they have ready to go and how quickly can you close loans these days?

ex-mlsA: (Cavanaugh). Well, I’ll start off by staying that the pendulum has definitely swung around. When the market favored buyers, you would go look for houses, get an offer accepted then go to your mortgage banker for an approval. Now it’s the other way around. You need a mortgager approval in hand when you are out looking for homes. And that means from the start you need a very firm grasp on exactly what you can afford, how much to put down, etc. You need to work with a mortgage banker with a strong grasp of Fannie and Freddie guidelines.

As for the paperwork, you need 2 years of tax return and W2′s, 30 days of pay-stubs, one year of bank statements, statements for your 401ks, IRAs, and investment accounts. A lot of first time buyers use gifts of downpayment from their parents, which are particularly tricky. I tell them to get those monies into your account ASAP. You will need a gift letter executed by all parties involved and verification of funds.

Currently, we can close a single family loan in 45 days, and a condo purchase in about 60 days, since condo mortgages require more extensive FNMA approval.

Q:  How much are sellers looking at buyers’ financing? Are cash buyers winning out over financed buyers? What are the ways to ensure a seller that a financed buyer is of no greater risk that a cash buyer?

A: (Lara Gordon) Cash is definitely an advantage in that it takes one element of risk out of the equation. For sellers in a rush to close, a cash deal is also appealing because it can close a lot faster than when a lender is involved. But if timing isn’t a big deal and there are good comps for the property, there’s no reason a seller shouldn’t consider a good offer from a buyer who will finance. Of course, the size of the downpayment has become increasingly important as bidding wars drive prices up and appraisals become a concern.

Q: How are you dealing with contingencies in a seller’s market? Are buyers waiving inspection or even financing?
A: (Lara Gordon) There are certainly buyers out there waiving both financing and inspection contingencies, but it’s not always a good idea. While it’s fine for buyers to waive the financing contingency if they’re prepared to pay cash, I personally, would never advise someone to forego a home inspection. The key is to approach it as educational and a way out in case of a major issue, and not as a tool for renegotiating the price.

A: (Vetstein) I’m going to weigh in on this topic as it deals with legal issues. I would STRONGLY advise a financed buyer to resist the temptation to waive the financing contingency in the hope that it will make an offer more attractive. In this day and age of strict underwriting and frequent delays, this is simply a recipe for losing your deposit. I don’t care if a handful of lenders have told you that your file is a slam dunk — you could get laid off a few weeks before close and you’d be DOA for the closing. Same goes for the inspection contingency. Sellers know that buyers want to check the home’s bones beforehand. Trust me, it will cost you a lot more money down the line if you wind up buying equivalent of the “Money Pit.” Tightening the deadlines, that’s fine. Waiving them, that’s just asinine.

A: (Cavanaugh) I would echo Rich’s sentiments. In this day and age of tight lending guidelines, I would hate to see a buyer lose his deposit because he was under the assumption that he could qualify for a mortgage he really couldn’t qualify for. Again, talk to your mortgage banker before you make the offer.

Q: Last question guys. I always recommend that my buyers use a Realtor. But please tell the readers exactly why having a Realtor can greatly increase your chances of succeeding in a seller’s market?

A: (Lara Gordon) I’m glad you asked this question, Rich, because some people think that they will do better if they go directly to the list agent, but given the nature of the market right now, it just doesn’t make sense to try to go it alone.

A: (Cavanaugh). When my borrower works with a Realtor, it always makes the transaction run smoothly. I operate under a “team” concept with the agents, so I’m used to constant contact with both the buyer and listing agent to ensure we get access for the appraisal and all the documentation in place for the loan commitment and closing. When there’s a team of professionals involved in a transaction, it’s a win-win for everyone.

A: (Vetstein) A low inventory/seller’s market is precisely why you want a Realtor who knows the market inside out and can be your salesperson/spokesperson on your side. In a market where perception is everything, I think it’s fair to say that a listing agent/seller will take you more seriously if you are working with a top notch Realtor, rather than sauntering solo into an open house in your Bean duck boots. Not to mention that the buyer does not typically pay an agent commission in Massachusetts. Also, selfishly, working with a client with a Realtor is less stressful for the attorney.

Q: Lara and Brian, any final words of wisdom as we head full bore into the busy spring market?

A: (Lara Gordon) I guess I’d just like to acknowledge that this is a tough market for buyers, and I totally understand the stress and frustration many people are feeling. In an ideal world, you’d find a great house, take some time to think things over, maybe visit a few times, then make a fair offer in a non-competitive situation, and you’d have a new home. But buyers need to accept the reality of the market we’re in: we’ve got low inventory and high demand, and you won’t necessarily get the first house you bid on. Maybe not even the second or third. But if you are qualified financially, have realistic expectations, are patient and persistent, and know how to play the game, you will ultimately find a home.

A: (Cavanaugh). I would urge would-be buyers to talk to a mortgage banker as early as possible in the process. We still have near all time mortgage interest rates. Affordability may never be as good as now, so hang in there in terms of bidding wars and a seller’s market. RMS Mortgage is well known brand and people either know me by reputation or have worked with me. So you have some instant credibility with the listing agent who can vouch for a smooth and successful transaction, and that’s very important in this seller’s market.

Thank you to Brian Cavanaugh and Lara Gordon for a great round-table discussion! Lara can be reached at lara.gordon@nemoves.com or 617-245-3939. Lara blogs at Cambridegville. Brian can be reached at brian.cavanaugh@rmsmortgage.com and 617-771-5021. Brian blogs at Smarterborrowing.com.

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Electronic-signature1Electronic recording (e-recording) of deeds, mortgages and other title instruments has been available in Massachusetts for almost 5 years now, and is finally gaining widespread acceptance within the conveyancing community. E-recording is now fully operational in Berkshire, Bristol, Essex, Hampden, Middlesex, Norfolk, Plymouth and Worcester North and South registries of deeds. (Suffolk, please hurry up!). Legislation has recently been filed to require that all registries have electronic recording capabilities by July 2014. (Thank you Attorney Hugh Fitzpatrick, a newly appointed member of the Registry of Deeds Modernization and Efficiency Commission, for your efforts!).

E-recording is proving to be less expensive and faster than the traditional method of recording by sending a title examiner down to the registry of deeds. It also eliminates the need to fight traffic and hold closings at Cambridge or other hard-to-get-to registries.

Indeed, if we have the deed, mortgage and homestead signed at the beginning of the closing, we can be “on record” halfway through the closing! Music to seller, buyer and Realtor’s ears…

The process of e-recording is pretty easy.

  • Sign up with one of the registry’s authorized electronic recording vendors (Simplifile, Erxchange,Ingeo/CSC, or New England Title/Escrow)
  • Conduct closing
  • Scan original document to create an electronic image (pdf)
  • Log on to the secure website and enter data about the document and upload the document image
  • Perform a quick online title run-down to ensure no title issues have arisen since the first title exam
  • Press “send to the registry” button
  • The registry verifies the quality of the image and the accuracy of your data
  • Once accepted by the registry, the document is official on record with recording data and document image immediately available on the registry website
  • The filer immediately gets an electronic receipt with all recording information along with an electronic copy of the recorded document.
  • Fees are paid by electronic funds transfer from the closing attorney, and we can avoid the usual $35 rundown fee. E-recording fees run about $4-5 per document.

E-recording is legal and binding, and accepted by Fannie Mae, Freddie Mac and virtually every major lender. It is a major benefit to all parties involved with a real estate closing, and I’m well-versed in how to use the system to ensure a faster and more convenient closing. Please contact me at rvetstein@vetsteinlawgroup.com for more information.

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With the economy and housing market on the upswing, builders are finally building again. I’ve seen a definite uptick in new construction purchases. Buying a new construction home, however, is very different and much more involved compared to buying a previously owned property. In this post, I want to cover the various aspects of purchasing a new construction home, from selecting a builder, financing, legal, through construction and to the closing. As the Beatles song goes, I also have a little help from my Realtor friends in this post who have graciously offered some of their expert guidance. Follow our advice, and hopefully you will avoid becoming Tom Hanks and Shelley Long in the hilarious movie, The Money Pit!

Selecting and Working with a Builder

Choosing the right builder is obviously critical. You can search for builder licenses and state disciplinary history at the Mass.gov site here. (Search under Construction Supervisor). If the builder is not a licensed Construction Supervisor, they may be licensed as a Home Improvement Contractor (HIC) which can be searched at the Office of Consumer Affairs website here. If they hold neither license type, that’s a red flag. Also, look up the builder’s name in the Mass. Land Records site, and check whether they have any mechanic’s liens filed against them. That is another red flag indicating they may be undercapitalized and don’t pay their subcontractors.

Get a list of the last 5 homes the builder has constructed, and try to talk to those homeowners. Don’t rely on the builder’s list of references as no intelligent builder would give out a bad reference.

Hire A Buyer’s Agent

Besides conducting a town-wide survey, one of the smartest things you can do is hire an independent buyer’s real estate agent, preferably one with lots of experience in new construction. While buyers today can do a lot of their own due diligence and research on prospective builders, an experienced Realtor knows all the local builders in town and knows who builds castles and who builds shanty-shacks. A buyer’s agent will also provide a much-needed buffer between the builder’s sales agents and listing agent, many of whom unfortunately engage in high-pressure sales tactics and fast-talking. As buyer agent, Marilyn Messenger advises,

“Many buyers don’t realize that if they visit a new construction site without a buyer agent, they run the risk of having to work directly with the builder’s agent whose job is to work in the best interest of the builder. A buyer’s agent will watch out for the buyer’s interests.”

Amenities, Allowances & Upgrades

The builder should provide you with a detailed specification sheet with a standard panel of features and options for flooring, appliances, paint, trims, HVAC, and lighting, etc. These will be built into the purchase price. Most builders also have allowances for things like additional recessed lighting, upgraded stainless steel appliances, decking, and fancy hardwood floors. As Cambridge area Realtor Lara Gordon notes, the buyers’ ability to select design elements is one of the major advantages of new construction.

It’s imperative that all allowances be spelled out in writing and attached to the purchase contract documents, which I will discuss later. Change orders are common during the construction process, and these too should be memorialized in writing. They will be added to the purchase price or paid in advance.

Contract Documents

New construction purchases in Massachusetts follow the same basic legal process as already-owned homes. The parties first execute an Offer to Purchase which spells out the very basics of the transaction: down payment and purchase price, closing date, and financing contingency. A lot of builders ask for more than the standard 5% deposit, but I would push back on that in this market.

After the offer is signed, the parties will sign the Purchase and Sale Agreement. As a buyer, the detailed specifications, amenities and agreed upon allowances must be incorporated into the contract, along with the floor and elevation plans, if any.

The proposed purchase and sale agreement will likely track the so-called “standard form,” but the builder will typically add a detailed rider, which is completely different than the usual seller rider seen in existing home contracts. The builder rider will have provisions dealing with how change orders are handled, that the builder is not responsible for cracking due to climatic changes, and may attempt to hold the buyer’s feet to the fire with respect to getting his financing in place. A lot of builders will try to limit the availability of holdbacks at closing. I would push back on this important item of leverage for buyers. Some of the large national builders such as Pulte will even claim that their contracts are “non-negotiable.” This is nonsense. Everything is negotiable these days.

Hiring an experienced real estate attorney will tip the balance back to the buyer, and the attorney should have a comprehensive buyer rider in place to protect you in case there are title issues or you suddenly lose your financing. Because there are often delays with new construction, one of the most important rider provisions for buyers is a clause which will give buyer’s protection in case they lose their rate lock due to a delay.

Mortgage Financing

Most new construction buyers in Massachusetts will take out a conventional mortgage loan, with the builder responsible for financing the actual construction through his own construction loan. Some builders, especially national ones, will have their own mortgage lending for their projects, but they often don’t offer the best rates and terms. Sometimes, buyers will finance the construction through a construction loan under which the borrower pays interest only through the construction process, and is then converted to a conventional mortgage once the home is completed. I would counsel buyers to avoid taking on the financial responsibility of a construction loan. As with all lending, shop around and compare apples to apples.

Inspections & Warranties

For new construction, home inspections must necessarily be delayed from the usual timeframe (7-10 days after accepted offer) where the home is not yet completed, and buyers should absolutely reserve their right to perform the usual comprehensive home inspection prior to closing. (If the home is already done, get in there with the home inspector). During the construction phase, builders don’t want buyers on the construction site, for obvious liability (and annoyance) reasons, so resist the urge to buy your own hard-hat and hang out with the construction guys. Metrowest area agent Heidi Zizza of mdm Realty retells a funny story about a Natick woman who literally broke a window trying to gain entry into her under-construction home.

Contrary to popular belief, Massachusetts law does not require a 1-year builder’s written warranty for new construction, however, most builders will provide one, albeit littered with exceptions to coverage. Fairly recent Massachusetts case law does impose a 3 year “implied warranty of habitability” for certain undiscovered construction defects. Again, selecting a reputable builder in the first place is “the ounce of prevention worth the pound of cure.”

Punch-Lists and Closing

There will inevitably be unfinished items right up to the closing. I’ve rarely seen a new construction transaction without a punch-list at closing. Some unfinished items will be serious enough to warrant an escrow holdback at closing (remember, I had said push back on this during P&S negotiations). Some lenders, however, will not allow a holdback, so the parties will have to negotiate and be creative at closing to ensure that all unfinished work is completed within a reasonable time after closing. If the home is part of a larger project/subdivision, this is usually not an issue. However, for “one-off” single site projects, getting the builder to come back and finish punch-list items after closing can be like pulling teeth. Again, having a real estate lawyer on your side and in control of the funds will give you leverage here.

Once papers are passed, the closing attorney will lastly ensure that there are no outstanding subcontractor liens on the property, which is one of most common hiccup at closings. For this reason and many others, it is imperative that buyers obtain their own owner’s title insurance policy, to ensure that title is clear, marketable and free of undiscovered defects and liens.

Buying new construction is often a long, drawn out, and stressful process for new buyers. Do your research. Be patient. And hire the best professionals on your side. Good luck!

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney who often handles Massachusetts new construction home purchases. If you need assistance with a new construction purchase or sale, please contact him at 508-620-5352 or at rvetstein@vetsteinlawgroup.com.

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Mandatory 3 Business Day Waiting Period Will Delay Closings

Action Needed: Comment On Proposed Rule

While our attention has been diverted from more important issues such as Hurricane Sandy and the election, please be advised that November 6, 2012 is the last day for lenders, settlement agents, Realtors and the public to comment on the controversial new combined Truth and Lending/HUD-1 Disclosure rules proposed by the new Consumer Financial Protection Bureau (CFPB). For those who don’t know, the CFPB has proposed a major overhaul to closing disclosures, combining the Truth In Lending and the HUD-1 Settlement Statement into a single 5 page disclosure form.

Of paramount concern to the real estate community is the proposed Three Business Day Rule, which would require that lenders provide the final Closing Disclosure (the new HUD-1) at least 3 business days prior to the closing. The major problem with this rule is that if there are changes in settlement and closing figures between the time of disclosure and the closing, the consumer must be provided a new form, and the closing must be delayed for at least 3 business days. ((There is an exception for adjustments between buyer and seller, such as a repair credit and for items under $100.))

In today’s lending environment, last minute changes to settlement numbers are common, and given the crush of underwriting tasks, final closing figures are typically provided 24-48 hours prior to the closing, or even the day of closing. Moreover, there are often delays getting information from outside sources — real estate tax information from municipalities, insurance information from independent agents, final water/sewer readings, oil bills and 6d condo fees from Realtors, and payoffs from sellers — all of which are out of the control of the lender and the closing attorney.

If there are last minute changes to settlement numbers, the proposed rule will delay closings for at least 3 business days, which could be catastrophic. This will have an unintended ripple effect on both the borrower and other parties, especially where the borrower is doing a “sell-buy” on the same day.

The CFPB is out of touch with the real estate industry on this rule. Indeed, at a recent symposium on the new rules, the CFPB’s new general counsel was reported as being very surprised that last-minute changes in settlement figures were relatively common. Delaying closings for 3 business days through delays of no fault of the lender or settlement agent hurts all the parties to the transaction. The rule is regulatory overkill.

CLICK THIS LINK TO COMMENT ON THE NEW CFPB RULE (CLICK SUBMIT A FORMAL COMMENT)

Tell the CFPB that the 3 Business Day Rule is a bad idea, and give anecdotal stories about how delays in closings will affect your business. And please share this post with fellow lenders, mortgage bankers, closing attorneys and Realtors.

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Richard D. Vetstein, Esq. is a Massachusetts real estate attorney with offices in Framingham and Needham, MA. You can reach him at info@vetsteinlawgroup.com.

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Concise Disclosures Aimed At Reducing Borrower Confusion and Helping Comparison Shopping

As part of a continuing overhaul of the home mortgage market, the Consumer Financial Protection Bureau on Monday issued proposed rules to bolster fairness and clarity in residential lending, including requiring a new good-faith estimate of costs for homebuyers and a new closing settlement statement.

My understanding is that the new “loan estimate” would replace the current Good Faith Estimate (GFE) and the current Truth in Lending Disclosure (TIL). The new closing disclosure would replace the current HUD-1 Settlement Statement. The new disclosures are open to industry and public comment for 120 days, after which they will be finalized and codified as law. For more details on the new disclosures, go to the CFPB site here.

Here is the new Loan Estimate.

201207 Cfpb Loan-estimate

Here is the new Closing Disclosure

201207 Cfpb Closing-disclosure

I’m interesting in hearing comments on the new forms from mortgage professionals, real estate attorneys and borrowers. Please comment below!

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate closing attorney who has closed thousands of purchase and refinance transactions. Please contact him if you need legal assistance purchasing residential or commercial real estate.

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Real Estate Crash Has Resulted In Many More Forms and Disclosures

These days buyers are leaving closing rooms with not only their keys but a mild case of carpal tunnel syndrome! The reason for sore forearms and wrists is the voluminous stack of closing documents which are now required to be signed and notarized at every Massachusetts real estate purchase or refinance closing.

One of my opening “break the ice” lines at closings is to suggest that the buyers start massaging their writing hands. Then I show them the 2 inch stack of documents they must review and sign, and they usually say, “Are you serious? We have to sign all that?” Yep, I reply. You can thank Fannie Mae and the real estate collapse for that! All the new rules and regulations passed in the last 5 years have resulted in, you guessed it, more forms. Do you think the Feds and state ever eliminate old or out-dated forms? Nope.

Let me quickly go over some of the more important — and less important — documents signed at a typical Massachusetts real estate closing.

The Closing Documents

  • HUD-1 Settlement Statement. This is arguably the most important form signed at closing. It breaks down all the closing costs, lender fees, taxes, insurance, escrows and more. We did a full post on the HUD-1 and all the closing costs you can expect to pay here. Under the newer RESPA rules, most closing costs must be within 10% tolerance of the Good Faith Estimate provided by the lender (which you will also re-sign at closing).
  • Promissory Note & Mortgage. These two documents form what I like to call the “mortgage contract.” The promissory note is the lending contract between borrower and lender and sets the interest rate and payment terms of the loan. It is not recorded at the registry of deeds. The Mortgage or Security Instrument is a long (20+ page) document and provides the legal collateral (your house) securing the loan from the lender. The Mortgage gets recorded in the county registry of deeds and is available to public view. Read a full explanation of the Note and Mortgage in this post.
  • Truth in Lending Disclosure (TIL). The Truth in Lending should really be called “Confusion In Lending,” as the federal government has come up with a confusing way to “explain” how your interest rate works. This is a complex form and we’ve written about it extensively in this post. Your closing lawyer will fully explain the TIL form to you at closing.
  • Loan Underwriting Documents. With increased audit risk on loan files, lenders today are requiring that borrowers sign “fresh” copies of almost all the documents they signed when they originally applied for the loan. This includes the loan application, IRS forms W-9 and 4506′s.
  • Fraud Prevention Documents. Again, with the massive mortgage fraud of the last decade, lenders are requiring many more forms to prevent fraud, forgeries, and straw-buyers. The closing attorney will also make a copy of borrowers’ driver’s licenses and other photo i.d. and submit the borrower’s names through the Patriot Act database. They include Occupancy Affidavit (confirming that borrowers will not rent out the mortgaged property), and the Signature Affidavit (confirming buyers are who they say they are or previously used a maiden name or nickname).
  • Escrow Documents. Unless lenders waive the requirement, borrowers must fund an escrow account at closing representing several months of real estate taxes and homeowner’s insurance. This provides a cushion in case borrowers default and the taxes and insurance are not paid.
  • Title Documents. For purchase transactions, Massachusetts requires that the closing attorney certify that a 50 year title examination has been performed. Buyers will counter-sign this certification of title, as well as several title insurance affidavits and documents which the seller is required to sign, to ensure that all known title problems have been disclosed and discovered. Of course, we always recommend that buyers obtain their own owner’s title insurance which will provide coverage for unknown title defects such as forgeries, boundary line issues, missing mortgage discharges, etc.
  • Property Safety Disclosures. In Massachusetts, buyers and sellers will sign a smoke/carbon monoxide detector compliance agreement, lead paint disclosure, and UFFI (urea formaldehyde foam insulation) agreement. These ensure that the property has received proper certifications and will absolve the lender from liability for these safety issues.
  • Servicing, EOCA and Affiliated Business Disclosures. Chances are that your lender will assign the servicing rights to your mortgage to a larger servicer, like JP Morgan Chase or CitiMortgage. You will sign forms acknowledging this. You will be notified of the new mortgage holder usually within 30-60 days after closing. In the meantime, the closing attorney will give you a “first payment letter” instructing you where to send your first payment if you don’t hear from the new servicer. You will also sign forms under the federal and state discrimination in lenders laws and forms disclosing who the lender uses for closing services.

Well, those are most of the documents that buyers will sign at the closing. Sellers have a slew of their own documents to be signed at closing, and I’ll cover that in a future post. As I said, at your closing, massage your signature hand, grab a comfy pen, and sign your life away!

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. He can be reached by email at info@vetsteinlawgroup.com or 508-620-5352.

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Bar Assn. Lawsuit Targets Kentucky Based Settlement Service Company Employing Local Contract Attorneys

As first reported today by Massachusetts Lawyers Weekly, the bar association for Massachusetts real estate attorneys (REBA) has filed a lawsuit against National Loan Closers, Inc., a Kentucky closing services company, and a Holyoke attorney for allegedly conducting illegal “witness-only” real estate closings. REBA was behind last year’s landmark Supreme Judicial Court ruling in REBA v. National Real Estate Information Services, which held that Massachusetts attorneys are legally required to oversee all residential real estate closings in Massachusetts.

REBA’s suit against National Loan Closers is notable because NLC is alleged to have side-swiped the REBA v. NREIS court ruling by contracting with local attorneys to attend real estate closings. According to the suit, NLC’s model is for these contract attorneys to act similarly to the robo-signers who sign foreclosure documents, as they are simply there to witness and notarize documents and are contractually prohibited from giving legal advice to the parties at closing. Thus, this model runs afoul of the REBA ruling’s mandate that attorneys “substantially participate” in the closing process by reviewing the title and ensuring that title passes legally.

REBA argues, and I agree, that such closings put home buyers and mortgage lenders at risk, erode the public’s confidence in the state’s recording and registration system, and deprive the Massachusetts Interest on Lawyer Trust Accounts program — IOLTA — of thousands of dollars of revenue.

No home buyer wants to close on the single biggest purchase of their life with a contract attorney who knows nothing about the transaction and cannot answer the most basic of legal questions. In the standard model, a supervisory Massachusetts attorney will examine the title and certify under state law that the title is good, clear and marketable, and often that same attorney (or a junior associate with full familiarity with the file and title) will be the closing attorney.

The complaint filed in The Real Estate Bar Association for Massachusetts, Inc. v. National Loan Closers Inc., et al. can be found by clicking here.

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