Purchase and Sale Agreements

how to handle criticismAttorney’s Obnoxious Conduct At Closing Factor in Large Award

Every now and then I have a contentious deal where I should be wearing a black and white referee’s shirt instead of a shirt and tie. I’m usually successful in getting everyone to calm down and close the transaction. The case of KGM Custom Home Builders v. Prosky (embedded below) recently decided by the Massachusetts Supreme Judicial Court is an example of how really bad behavior at a real estate closing can get a party into big legal trouble.

45 Acres in Mansfield for Sale

The Prosky family of Mansfield entered into an agreement to sell 45 acres of developable land to KGM Custom Builders. The sale price was linked to the number of buildable lots that KGM could permit. After spending over $300,000 in 5 years including weathering an appeal, KGM was able to obtain permits for 60 residential units. However, the Proskys received a better offer for the land and a dispute over calculation over the purchase price arose. Nevertheless, KGM was not willing to back down, and scheduled a closing. Repudiating the contract, the Prosky’s attorney informed KGM that it should calculate the liquidated damages provision in the contract because the sellers were not going to sell.

Closing Shenanigans

A closing was nevertheless scheduled at which the Prosky’s attorney showed up with a professional videographer as “defense strategy.” The parties’  attorneys started yelling at each other, and KGM’s attorney shut off all electricity to the building, but the videographer was able to tape with battery power. KGM’s attorney demanded that the Prosky’s attorney produce the closing documents he was supposed to have drafted. The Prosky’s attorney waived the documents in the air, and when the buyer’s attorney went to grab them, he pulled them back and asked if could read them from 2 feet away. KGM, with funds on hand, was ready, willing and able to close, and took the Prosky’s attorney’s antics at the closing as not engaging in good faith, and walked out. At the end of the closing, one of the sellers asked the videographer, “can you explain to me what just happened”? (I would love to see this videotape!).

Anticipatory Repudiation, Breach of Good Faith and Fair Deal, or Both?

Naturally, KGM sued the sellers. The trial judge ruled the sellers had engaged in anticipatory repudiation but he calculated the sales price in favor of the sellers at over $1M, giving the buyer the option of going forward with the deal or taking the liquidated damages because the buyers had also breached the covenant of good faith and fair dealing with their attorney’s antics at the closing. The buyer elected damages, and the judge awarded nearly $500,000 in permitting costs and attorneys’ fees. The sellers weren’t happy with this, so they appealed.

On appeal at the SJC, the legal issue was whether the law allowed the trial judge to provide the buyer with this favorable election of remedies. With few exceptions, outside of the commercial law context, Massachusetts has not generally recognized the doctrine of anticipatory repudiation, which permits a party to a contract to bring an action for damages prior to the time performance is due if the other party repudiates. One such exception occurs where a seller of land informs the “holder of an enforceable option” to purchase that he plans to sell the land to a third party. The high court ruled that this case fit within this exception and upheld the award of damages to the buyer. Naturally, the court seemed particularly upset about the behavior of the seller’s attorney at the closing. In fairness, the SJC did slash the attorneys’ fee award by $120,000, but with statutory interest accruing for several years now, the end result will likely be the same — the sellers are out a lot of cash.

Fortunately, these types of antics are very much the exception rather than the rule at Massachusetts closings. There is really no excuse for this type of unprofessional behavior at a closing, no matter how contentious the dispute. If a party is going to elect to terminate a deal, go ahead and do it without the theatrics. After all, what you say and do at a real estate closing may come back to bite you and your client.

KGM Custom Home Builders v. Prosky (MA SJC 5/30/14)

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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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7076759_ac0f_625x1000Do Your Due Diligence!

Condominiums remain hot in the Greater Boston area, often the new starter home for the young professional buyer. I am also seeing quite a lot of two and three family homes in the Boston, Cambridge, and Somerville area being converted into condominiums. While condos are usually a great investment, buying one requires some unique due diligence. You must be satisfied that the condominium project as a whole is financially healthy and that you are not buying into a major “money pit.”

The role of the buyer’s attorney in a condominium purchase is to review the condominium documents including the master deed, declaration of trust/by-laws, budget and meeting minutes, if any. The documents, however, only tell so much of the story. What’s really important is what may be lurking behind those documents. Here are some good questions to ask:

  1. How much money is in the capital reserve account and how much is funded annually? The capital reserve fund is like an insurance policy for the inevitable capital repairs every building requires. As a general rule, the fund should contain at least 10% of the annual revenue budget, and in the case of older projects, even more. If the capital reserve account is poorly funded, there is a higher risk of a special assessment.  Get a copy of the last 2 years budget, the current reserve account funding level and any capital reserve study.
  2. Are there any contemplated or pending special assessments? Special assessments are one time fees for capital improvements payable by every unit owner. Some special assessments can run in the thousands. Others, like theBoston Harbor Towers $75 Million renovation project, in the millions. You need to be aware if you are buying a special assessment along with your unit.  It’s a good idea to ask for the last 2 years of condominium meeting minutes to check what’s been going on with the condomininium.
  3. Is there a professional management company or is the association self-managed? Usually, a professional management company, while an added cost, can add great value to a condominium with well run governance and management of common areas. Self-managed condos tend to have a higher incidence of dysfunction.
  4. Is the condominium involved in any pending legal actions? Legal disputes between owners, with developers or with the association can signal trouble and a poorly run organization. Ask whether there are any pending lawsuits.

Purchase and Sale Agreement Tips

Regardless of the answers you receive, my practice is to insert a comprehensive condominium verification provision in the purchase and sale agreement. This will make the seller go on the record as to some important aspects of the condominium financial’s health and should go a long way to ensure that the buyer is not stepping into a huge special assessment or other major financial catastrophe. If issues arise prior to the closing, this provision will give the buyer an “out” to terminate the deal and return the deposits.

Condominium Verification Information.  The Seller represents that, to the best of his/her knowledge, the following information is true and accurate as of the date of this Agreement  and shall remain true as of the date of closing:

    1. The condominium documents provided to the Buyer and/or available for downloading on the ____ County Registry of Deeds are true, accurate and complete copies of all documents recorded with the Registry of Deeds as of the date hereof and that no other documents and/or amendments which adversely impact the Unit being purchased will be recorded which have not been presented to the Buyer.
    2. The current condominium monthly fees are $_____ per month.
    3. Seller has not received any notice of nor is Seller aware of any special assessments for the Unit, whether or not assessments are due now or in the future, and Seller is aware of no immediate pending improvements, repairs or replacements or plans therefore which would likely result in a supplemental assessment or significant increase in the monthly common expenses for the Unit.
    4. In the event there are any supplemental assessments owed with respect to the Unit on the closing date, Seller shall be obligated to pay such assessments in full prior to closing notwithstanding any agreement by the organization of unit owners to allow such payments to be made in installments but only to the extend Seller’s lender agrees to allow said payment on the HUD-1 Settlement Statement. Otherwise, Buyer may either agree to accept the obligation to pay said assessment or terminate the agreement by written notice to Seller within 5 days of receipt of notice of said assessment.
    5. The master insurance policy for the unit conforms with the requirements of the Condominium Documents.
    6. There is presently no litigation threatened or pending by or against the Seller, or the Condominium Association, which would cause the Condominium to not be in compliance with current secondary mortgage market guidelines.

The Seller shall promptly notify the Buyer of any change in facts which arise prior to the closing which would make any such representation untrue if such state of facts had existed on the date of execution of this Agreement.  The provisions of this paragraph shall survive delivery of the deed.

If you have any questions about purchasing a Massachusetts condominium unit, please contact me 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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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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A Simple Email Disclaimer Cannot Hurt & Can Only Help

Boilerplate email disclaimers at the bottom of messages are so ubiquitous that most of us hardly notice them anymore. They certainly take up a lot of text space and can be annoying to some, but are they legally effective or just plain toothless?

In the real estate context, where Realtors and attorneys write in the language of contract everyday, I believe that a short and simple email disclaimer may help, and certainly cannot hurt, the sender (aside from annoying a snarky recipient or two). In this post, I will discuss a few common real estate situations where an email disclaimer could come into play, then give you the disclaimer that I use in my emails. Now I have my own disclaimer here: A court will determine each case individually, and there is no guarantee that any particular disclaimer will be effective in any given case.

Contract Negotiations

The most common situation where an email disclaimer could come into play is during real estate contract negotiations. For many agents and attorneys, e-mail has become the default mode of communication, replacing the telephone and the outdated fax. E-mail, however, can provide the “smoking gun” in litigation because it’s nearly impossible to delete permanently, and people tend to be more casual and less introspective before hitting “send.” And don’t get me started with texting, which is even worse.

Realtors must remember that under Massachusetts agency law they are agents with actual or apparent legal authority to bind their clients to the statements they make in emails and other forms of communication. Like the Miranda warnings given by the police, a real estate agents’ statements “can and will be used against them in a court of law.” The same is true for attorneys.

A case in point: In the recent well-publicized case of Feldberg v. Coxall, a Massachusetts judge ruled that a series of e-mail exchanges between the buyer and seller’s attorney, the last one attaching a revised, but unsigned, offer to purchase, could create a binding contract even though no formal written agreement was ever signed. This is also one of the first cases applying the new Massachusetts E-Sign law to preliminary negotiations in real estate deals. There have been cases in other jurisdictions holding that e-mails can result in a binding contract even though the parties may have assumed otherwise.

Practice Pointer:

“Emails sent or received shall neither constitute acceptance of conducting transactions via electronic means nor shall create a binding contract in the absence of a fully signed written agreement.”

This is the new email disclaimer that I’ve formulated after the Feldberg ruling. It does two things. First, it provides that only a fully signed contract can bind the parties. Second, it attempts to counter the presumption in the E-sign Act of conducting the transaction electronically via email. It has not been tested in court yet, but again, aside from taking up some pixel space, it can’t hurt. Now remember, this type of disclaimer would favor a selling/listing agent, but not necessarily a buyer’s agent, because the buyer’s agent would typically want to enforce preliminary negotiations. So, caveat emptor (buyer beware).

Practice Pointer: “Subject to final client review/approval”

Another best practice that Realtors and attorneys should get in the habit of doing is to write “subject to final client review and approval” or words to that effect in the midst of email contract negotiations and draft agreements being circulated. This could sway a court from determining that a binding deal was formed, and plus, it gives you an “out” in case a client has last minute changes.

Confidential Communications

Attorneys love to use long confidentiality disclaimers in their email. Do they work? Occasionally. Do they matter in real estate? I still think so.

First, the concept of legal confidentiality is limited to those situations governed by legal privilege. There is an attorney-client privilege between lawyers and their clients, obviously. While there is no legal privilege between a Realtor and his/her client as for communications solely between the agent and the client, the attorney client privilege will likely attach to emails and communications between and among the real estate agent, the attorney, and the client provided that legal advice is being given. But a particular email does not automatically get confidentiality protection simply because the attorney is copied on it. Some courts have pointed to email disclaimers as a factor in upholding the confidentiality. But there have been many court rulings where judges have discarded the disclaimers.

While attorneys should absolutely have a confidentiality email disclaimer, do Realtors need one? I say yes, because sometimes emails between attorney and client wind up in Realtors’ inboxes and sometimes they get forwarded on purpose or by mistake when they shouldn’t, and that could waive any privilege which is attached and become the “smoking gun.”

Practice Pointer:

I use this simple email disclaimer:

CONFIDENTIALITY: This e-mail message and any attachments are confidential and may be privileged.

The best practice, of course, is to cleanse and delete portions of any email with attorney-client or confidential information before forwarding. And of course, THINK BEFORE YOU HIT SEND!

**Thank you to Cambridge MA Realtor Charles Cherney for suggesting this topic!

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein, Esq. is a nationally recognized real estate attorney who writes frequently about legal issues facing the real estate industry. He can be reached at info@vetsteinlawgroup.com.

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realtor mag copyI wanted to share a recent article I authored for Realtor Magazine which was published in their January/February 2013 edition. The article is based on the Massachusetts court opinion in Feldberg v. Coxall, which I wrote about previously in this post. The court ruled that under recently passed electronic signature laws, emails between agents or attorneys could form a binding agreement even where there was no signed offer or written purchase and sale agreement. That’s a scary proposition for any agent! In the article, I suggest using a disclaimer in your email signatures to avoid having emails come back to bite you.

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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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Worcester Diocese Allegedly Pulled Out of Deal Over Possibility Of Gay Marriages at Mansion

James Fairbanks and Alain Beret, married business partners from Sutton, had been searching for the perfect property for nearly two years when they discovered Oakhurst, an aging mansion on 26 beautiful acres in Northbridge. The former retreat center, which was affiliated with the Diocese of Worcester and had been on the market for some time, would be the ideal spot for their next venture: an inn that would host weddings and other big events, as reported by the Boston Globe. When the Diocese of Worcester unexpectedly dropped out of negotiations with them in June, Fairbanks and Beret were shocked — and flummoxed. Then, they say, a church attorney inadvertently forwarded their broker an e-mail from Monsignor Thomas Sullivan, chancellor of the diocese, advising a church broker that he was no longer interested in selling to Fairbanks and Beret “because of a potentiality of gay marriages” there.

Sullivan wrote: “I just went down the hall and discussed it with the bishop.  Because of the potentiality of gay marriages there, something you shared with us yesterday, we are not interested in going forward with these buyers. I think they’re shaky anyway. So, just tell them that we will not accept their revised plan and the diocese is making new plans for the property. You find the language.”

Today, the gay couple filed what could be a landmark lawsuit in Worcester Superior Court against Sullivan, the bishop, the church’s real estate agent, and the nonprofit retreat center, the House of Affirmation, alleging they discriminated against Beret and Fairbanks on the basis of sexual orientation in the course of a real estate negotiation, violating state law. A copy of the Complaint in Fairbanks, et al. v. Roman Catholic Bishop of Worcester, et al. is embedded below.

A spokesperson for the church told the Globe that the church, as a matter of policy, will not sell properties where Masses have been celebrated to people who plan to host same-sex weddings. The church will not sell to developers who plan to transform them into abortion clinics either, he said — or to bars, lounges, or other kinds of uses that church officials deem inappropriate. “We wouldn’t sell our churches and our properties to any of a number of things that would reflect badly on the church,” he said. “These buildings are sacred to the memory of Catholics.”

In an even more ironic twist, the Diocese previously used the mansion for a retreat center for pedophile priests, according to Banker & Tradesman.

Watching this case play out will certainly be very interesting both from a legal and political perspective. Massachusetts — the birthplace of gay marriage — is one of the few states in the country which outlaws housing discrimination based on sexual orientation. One of the questions will be whether the Church is covered under the anti-discrimination law given their historical stance against homosexuals and gay marriage.

Also, as I pointed out to a reporter covering this story, the church could have negotiated a restriction on the future use of the property, which is common for sales involving open space, recreational use and such. It appears that the church did not do this, but instead came up with a pre-textual reason after the fact to support their decision not to proceed with the sale due to the gay marriage issue. We will be monitoring this interesting case!

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Richard D. Vetstein, Esq. is a Massachusetts real estate attorney with offices in Framingham and Needham, Mass. He can be reached at info@vetsteinlawgroup.com.

Complaint | Fairbanks v. Roman Catholic Bishop of Worcester, Mass.

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Feldberg v. Coxall: First Case To Apply New UETA (Uniform Electronic Transactions Act) To Real Estate Transactions

“This case involves the intersection between the seventeenth century Statute of Frauds and twenty-first century electronic mail.” –Justice Douglas Wilkins

Massachusetts courts have been grappling with the question of “when is a deal a deal” for a long time. With the vast majority of communication in real estate now done via email and other electronic means, it was just a matter of time before a court was faced with the question of whether and to what extent e-mails can constitute a binding and enforceable agreement to purchase and sell real estate. The real estate community has been waiting a few years for a case like this to come down, and now it’s here.

In Feldberg v. Coxall (May 22, 2012), Superior Court Justice Douglas Wilkins ruled that a series of e-mail exchanges between the buyer’s and seller’s attorney, the last one attaching a revised, but unsigned, offer to purchase, arguably created a binding agreement entitling the buyer to a lis pendens (notice of claim). This is also one of the first cases applying the new Massachusetts E-Sign law to preliminary negotiations in real estate deals.

This is a very interesting and important decision for anyone dealing in residential real estate in Massachusetts. The immediate take-away is that now anything sent in an e-mail can potentially create a binding deal, even if no offer or purchase and sale agreement is ultimately signed.

Vacant Lots In Sudbury

Feldberg, the buyer, was interested in purchasing 2 undeveloped lots in Sudbury owned by Coxall, the seller. The parties’ attorneys, via email, began negotiating the terms of the deal. (Apparently, brokers were not involved in the offer stage).

The buyer’s attorney e-mailed the seller’s attorney and attached a “revised offer with changes to reflect the conversations we have had today.” The revised offer appeared to be comprehensive inasmuch as it contained an agreed upon purchase price of $475,000 and a firm closing date. The email ended with the suggestion that both attorneys work “to have the final offer form finalized in time for my client [the buyer] to sign it and get deposits checks to you before the end of the day tomorrow.”

The seller’s attorney emailed back the next day, stating that “we must have a written approval letter from the bank today by 5pm and I think we are ready to go (I assume they will provide a closing date with the approval).  We are almost there.” That same afternoon, the buyer’s attorney provided a commitment letter from Village Bank with standard conditions.

Apparently, before the seller signed the offer, he backed off and refused to proceed with the transaction. The buyer sued, and sought a lis pendens, which is a notice of claim filed with the registry of deeds. In most cases, a lis pendens will prevent a seller from conveying litigated property to another buyer.

Statute Of Frauds Intersects With E-Mail

As Judge Wilkins eloquently noted, this case involves the “intersection between the seventeenth century Statute of Frauds and twenty-first century electronic mail.” The Statute of Frauds is the genesis of the saying “always get it in writing.” The ancient law, originating in England, provides that all real estate contracts must be in writing signed by the party (or agent) to be charged. In the “old” days, application of the Statute was quite simple. If there wasn’t a written agreement signed in wet, ink signatures, there was no binding deal. Now with e-mail it’s much more complicated.

As the judge noted, this is uncharted territory for the courts as there has been a dearth of precedent on point. The Massachusetts Uniform Electronic Transactions Act (UETA) provides that parties to a real estate transaction may consent to conduct the transaction electronically via email or electronic signature technology if they use such technology in their dealings (which everybody does these days). They even may even switch to a traditional hard copy agreement at the end of negotiations like Feldberg and Coxall did here. The UETA requires some form of “electronic signature.” The judge ruled that an email signature block or even the “from” portion of the email may constitute a valid electronic signature. Accordingly, the judge found that the buyer had made a sufficient case that a binding deal had been reached, despite the seller refusing to sign the hard copy offer. (Update: the case was settled out of court by the parties).

Take-Away: Emails May Come Back To Bite You

I think that some Realtors and even some attorneys have assumed that negotiations by email leading up to an offer are preliminary and not binding until the offer is actually signed by both parties. This ruling throws that conventional wisdom out the window.

What can you do to prevent your emails from creating binding obligations? Well, apart from not using email in the first place, one thing you can do right now is to insert a disclaimer in your email signature. Here’s one that I just came up with:

Emails sent or received shall neither constitute acceptance of conducting transactions via electronic means nor shall create a binding contract in the absence of a fully signed written contract.

Feel free to use it. Other than that, you need to watch what you say in your emails, especially when you represent a seller who is considering multiple offers. Make it clear and in writing from the outset that there is no deal until an offer is signed by both buyer and seller.

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney who’ specializes in real estate litigation. Please contact him if you need legal assistance purchasing residential or commercial real estate.

Feldberg, Et Al. v. Coxall ORDER on Plaintiff’s Emergency Motion for Endorsement of Memorandum of Lis Pende…

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Tips For Massachusetts Real Estate Cash Buyers & Sellers

As Yogi Berra once humorously said, “cash is just as good as money.”

This is especially true in real estate transactions where a cash buyer is often perceived as better and less risky than a mortgage financed buyer. (Please note that we often encourage buyers to obtain a conventional mortgage where possible given the federal tax benefits through the mortgage interest deduction and also because of the low interest rates available).

What Is A Cash Buyer?

The term cash buyer means a buyer who plans to buy real estate without using a mortgage. The term can also apply to a buyer who plans on using a mortgage, but doesn’t plan on using a mortgage contingency with the purchase contract. (This carries significant financial risk, which we typically do not recommend except for rare instances).

Cash Deals On The Rise In Mass. and U.S.

Massachusetts cash real estate transactions have risen considerably in the last few years, as reported by the Boston Globe. Cash sales accounted for a surprising 34% of all Massachusetts residential real estate transactions in 2011, according to data provided by the Warren Group. According to the Globe, cash buyers include baby boomers downsizing to Boston condominiums with profits from the sales of their suburban houses, well-off parents purchasing homes for college-age children, and investors seeking discounted properties they can rent or sell. They are turning to cash for various reasons, including tighter lending guidelines that have made mortgages less attractive, dwindling bank financing for investment properties, and a volatile stock market that has sent people looking for other places to put their money.

Frequently Asked Questions For Cash Transactions

If you are a cash buyer, or considering selling to one, you may ask whether the transaction will proceed the same way as in a mortgage based transaction and whether there are any other special considerations involved. The short answer is that the transaction, for the most part, will proceed in the same manner, and often with a shorter time-frame than a mortgage financed deal, but there are a few special considerations that a cash buyer needs to be aware of, which I’ll outline below.

Do I Need A Real Estate Agent?

Absolutely. A cash buyer needs a real estate agent for the same reasons a financed buyer needs one. Those reasons include market knowledge and savvy; skilled negotiation; being a critical liaison between the parties; and keeping the transaction and all the players on target for a successful closing. Plus, as with all transactions in Massachusetts, including cash, the seller, not the buyer, pays for the real estate commission.

Do I Need A Real Estate Attorney?

Yes, it’s not only the smart choice but it’s the law. Massachusetts law now provides that only licensed attorneys can conduct real estate closings. In mortgage backed transactions, the lender will assign a closing attorney (who is often the same attorney working for the buyer) to close the transaction. With a cash transaction, however, there’s no lender, and thus, no lender appointed closing attorney to rely on. So a cash buyer must select his or her own attorney to close the transaction.

A cash buyer’s attorney will act as the closing attorney and legal “quarterback” on the deal, having the ultimate responsibility for the vast majority of legal work on the transaction. Here is an outline of all the responsibilities which will fall upon the attorney for a cash buyer:

  • Reviewing and editing the draft Purchase and Sale Agreement (“P&S”)
  • Drafting a “Rider” to the P&S to provide additional protections to the Buyer
  • Negotiating the P&S with the Seller’s attorney
  • Keeping the Buyer updated throughout the negotiations
  • Advising the Buyer about the provisions in the P&S
  • For condominiums, reviewing the condominium documents, including the Master Deed, the Declaration of Trust, and the Operating Budget
  • Conducting a 50 year title exam;
  • Ordering the Municipal Lien Certificate and Seller’s Payoff Statement(s)
  • Reviewing the 6(d) Certificate, Smoke Cert and Unit Deed
  • Preparing the HUD Settlement Statement
  • Procuring an Owner’s Policy of Title Insurance and Declaration of Homestead
  • Preparing Documents for Closing
  • Conducting the Closing;
  • Receiving and Disbursing Funds at Closing
  • Conducting final title run-down then recording the Deed, MLC and Homestead.
  • Post closing issues: mortgage discharge tracking, payment of outstanding real estate taxes

Without an attorney, the cash buyer is simply lost. I would never recommend that the buyer hire the same attorney who is representing the seller. Not only is this a huge conflict of interest, but the seller’s attorney allegiance will rest with the seller, not the buyer.

Do I Need Title Insurance?

As we always recommend, yes! There are two types of title insurance policies: lender’s and owner’s. In a cash transaction, there will be no lender’s policy, and the owner should always opt to obtain an owner’s  owner’s title insurance policy. We’ve written extensively about owner’s title insurance here. It’s especially important in this day of paperwork irregularities with mortgage assignments and discharges, robo-signing, and botched foreclosures.

When Do I Need That Cash Again?

As with all transactions in Massachusetts, a cash buyer will put down between $500 – $1,000 with the Offer and 5% of the purchase price with the signing of the purchase and sale agreement. With no mortgage lender involved, the cash buyer must realize that at the closing they must have liquid funds for the remaining “cash to close” (usually hundreds of thousands) in the form of a cashier’s check or bank check at the closing. Accordingly, the cash buyer must make all investment withdrawals, transfers and receipt of gift funds well in advance of the closing date. Since cash deals proceed much quicker than financed deals, my advice to cash buyers is to have all necessary cash in hand and in a no-risk account when the purchase and sale agreement is signed. Don’t stick your cash in some stock fund which crashes weeks before the closing.

What Happens If I Have Second Thoughts or Don’t Have Enough Cash To Close?

This is where the cash buyer is at more risk than the mortgage financed buyer who has the benefit of a mortgage contingency. If the mortgage buyer cannot obtain financing within the agreed upon deadline, he can opt out of the deal with no penalty. By contrast, after signing the standard purchase and sale agreement, the cash buyer is locked in to going forward with the deal with little, if any, wiggle room to get out. Generally, if the cash buyer has to default, he will lose his deposit (5% of the purchase price). So for any cash buyer, make sure you don’t get any buyer’s remorse!

Best of luck on your Massachusetts cash real estate purchase

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Richard D. Vetstein, Esq. and Marc Canner, Esq. are experienced Massachusetts real estate cash buyer’s attorneys. They can be reached by email at info@titlehub.com or 508-620-5352.

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Standard Mortgage Contingency Language At Issue

I recently came across a very interesting and scary case from the Appeals Court, Survillo v. McDonough No. 11–P–290. Dec. 2, 2011. (It’s technically an “unpublished” opinion but it’s available to the public). The case underscores how carefully attorneys must craft the mortgage contingency to protect the buyer’s deposit in case financing is approved with adverse conditions.

“Prevailing Rates, Terms and Conditions”

The buyers, Mr. and Mrs. Survillo, submitted the standard Offer To Purchase the sellers’ home in Walpole. The offer provided it was “Not subject to the Sale of any other home.” The sellers accepted the offer. The buyers received a conditional pre-approval from a local bank for a first mortgage in the amount of $492,000. The pre-approval also stated that anticipated loan was “[n]ot based on sale of any residence.”

The parties then entered into the standard form purchase and sale agreement (P & S), with the typical mortgage contingency provision for a $429,000 mortgage loan:

“In order to help finance the acquisition of said premises, the [buyers] shall apply for a conventional bank or other institutional mortgage loan of $492,000.00 at prevailing rates, terms and conditions. If despite the [buyers] diligent efforts a commitment for such loan cannot be obtained on or before October 5, 2009, the [buyers] may terminate this agreement by written notice to the [sellers] and/or the Broker(s), as agent(s) for the [sellers], prior to the expiration of such time, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto “

Change In Circumstances: Lender Requires Piggyback Loan & Buyers List Their Residence

Due to the buyers’ debt to income ratios, the lender required that the loan be structured as a “piggyback” — a first mortgage of $417,000 and second mortgage of $73,400, and with the condition that the buyers listing their primary residence for sale prior to the loan closing. The buyers absolutely did not want to list and seller their residence, so they wanted out of the deal.

On the last day of the extended financing deadline, the buyers timely notified the sellers that they had “not received a loan commitment with acceptable conditions,” and attempted to back out of the agreement under the mortgage contingency provision. Ultimately, with the buyers refusing to sell their home, the bank denied the buyer’s the mortgage application based on the fact that the “borrower would be carrying three mortgage payments and the debt to income is too high.”

Focus On “Prevailing Terms” Language

The sellers refused to return the deposit, and litigation over the deposit ensued.

The Court framed the case as follows: “Before the extended mortgage contingency deadline of October 21, the buyers received a commitment from the bank for two mortgages totaling $492,000. The P & S’s mortgage contingency was accordingly satisfied unless the bank’s requirement that the buyers list their home for sale was not a “prevailing” term or condition.”

The court started with the assumption that “the typical loan condition for most borrowers is to require them to sell an existing home before the new loan closes. The condition here required only that the buyers list, not sell, their home and it was accordingly not a typical condition.” The buyers argued that because the condition was unusual, it was not a “prevailing” condition within the meaning of the contingency clause of the P & S, despite the fact that the condition was more favorable to them than the standard condition. The court flat out rejected that argument, citing prior rulings that terms of a mortgage contingency presuppose that the buyers will accept commercially reasonable loan terms. If less is required, the condition becomes an option. The court also noted that the buyers failed to notified the sellers that they were unwilling to list or sell their existing home, nor did they insert a proviso to that effect into the mortgage contingency clause. Subsequent events suggested that if the buyers had timely disclosed their intentions to the bank, the loan would have been disapproved, which may well have given the buyers the shelter they sought under the mortgage contingency clause.

The court ruled against the buyers who had to forfeit their $31,000 deposit.

An Ounce of Prevention Is Worth A Pound of Cure

I’m not sure who is to blame here, the buyer’s attorney or the buyers themselves. Probably both.

From a legal drafting approach and as the court pointed out, the buyer’s attorney could have insisted on language into the mortgage contingency provision that the buyers’ financing could not be conditioned on the listing or sale of the buyers’ present residence. After all, the language was in the Offer, so it could have easily been carried over into the P&S. There was no indication from the decision that this was raised or negotiated.

It also seems apparent that the buyers were not particularly up front with anyone on their insistence that they would not list and sell their current residence. If they had been more forthcoming about that, perhaps they could have avoided this situation.

A commenter on Boston.com also places some blame on the loan officer:  “Not all pre-approvals are created equal. For a few minutes of work and adherance to a common standard of practice by the mortgage professional, a true pre-approval is supported by a credit report, the main criteria for ability to qualify for a mortgage. This is generated in a few seconds, and the pre-approval letter usually states subject to verification of income, assets, and property appraisal. Had this been done, THE DEBT TO INCOME RATIO ISSUE WOULD HAVE SURFACED EARLY.”

Based on the loan amount, this mistake or gamble cost the buyers around $31,000 plus legal fees. Ouch!

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. Please contact him if you need assistance with a Massachusetts purchase or sale transaction.

 

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The Offer to Purchase Has Become Much More Important

With a glut of distressed property still on the market and lenders realizing foreclosures aren’t very cost-effective, analysts are predicting a healthy spike in short sales for 2012. Short sales are quite unique in terms of deal dynamics, and should be handled differently than the typical transaction.

Massachusetts real estate attorneys and Realtors, however, are set in their ways when it comes to real estate contracts. For decades, we’ve been using the standard form Offer to Purchase and Purchase and Sale Agreement from the Greater Boston Real Estate Board or some variation thereof. We have also developed a predictable process in which the parties sign the Offer, conduct property inspections, sign the Purchase and Sale Agreement, obtain financing, order title, and get to closing.

With the recent proliferation of short sales, we have had to … yes, that dreaded word, CHANGE, the way we do things. Some agents and attorneys still do things the “old way” for short sale transactions, but they are doing themselves and their clients a disservice by doing so.

In this post, I will outline –  and explain — the “newer and better” way of handling the legal contracts in a Massachusetts short sale transaction.

The Offer to Purchase: Now The Operative Contract Document

We are seeing a shift to making the offer the operative contract in a Massachusetts short sale transaction. And for good reason. A short sale, by definition, is subject to a critical contingency: obtaining short sale approval from the seller’s lender(s). No short sale approval, no deal. Experienced short sale attorneys and real estate agents (and their clients) don’t want to spend the time and incur the expense of drafting a comprehensive (and contingent) purchase and sale contract when there is no guaranty of getting short sale approval. Furthermore, short sale lenders will accept a signed offer from the buyer during the approval process.

When we were first doing short sales, there were several instances where we drafted up purchase and sale agreements and then the short sale approval fell through. We had to charge the client for the drafting work or eat the cost. No one was happy.

The better way has proven to be the following:

  • Build all contingencies into the Offer to Purchase, namely, Short Sale Approval and Financing (we’ll talk about home inspections later)
  • Use a standard rider with short sale contingency language, with a deficiency waiver
  • Seller to use best efforts in obtaining short sale approval
  • Buyer agrees to be bound for set approval period  (60-90 days) in exchange for seller taking property off the market and not accepting back up offers. Negotiate deposit amount, usually 1% of purchase price. Buyer will obtain his financing and loan commitment during this approval period.
  • Negotiate extension rights, with corresponding protection for Buyer’s financing/rate lock
  • Upon short sale approval, purchase and sale agreement is signed within 5-7 days and full 5% deposit made
  • Closing within 30 days of short sale approval. (Most short sale approvals are only good for 30 days)
  • Waiver of home inspection or inspection prior to offer acceptance. Sellers should never agree to allow a home inspection contingency giving the Buyer a right to terminate. If the buyer doesn’t want to pay for an inspection up front, he is not a serious short sale buyer.

Change Is Hard…

I recognize that this is a departure from the “normal” way we document residential real estate contracts, but trust me, it’s a better way, and will actually decrease the time it will take to obtain short sale approval, because the parties are not waiting around for the P&S to be negotiated and signed and the buyer (and his attorney) don’t have to do unnecessary work.

Another important piece here is that the Buyer must get his financing in order, ready to go by the time short sale approval comes through. Lenders must recognize the unique short sale process and work with borrowers to get a firm loan commitment issued timely. Also, there’s no need for a lender to insist that the borrower have a signed purchase and sale agreement for underwriting approval. Under the process that I’ve outlined and under established Massachusetts case-law (McCarthy v. Tobin), the Offer is a legal and binding contract for the sale of the subject property and is sufficient for underwriting purposes. If it’s ok for the short sale lender, it should be ok for the buyer’s lender.

Help Is An Email Away

If you are a Realtor and need some guidance on the new Short Sale Offer, email me here and I will send you the form Rider. Also, if you need a referral for an excellent short sale negotiator, I highly recommend Andrew Coppo at Greater Boston Short Sales LLC.

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Richard Vetstein, Esq. is an experienced Massachusetts short sale attorney. For more information, please contact him at info@vetsteinlawgroup or 508-620-5352.

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The home inspection is one of the most critical aspects of every Massachusetts real estate transaction. Virtually every buyer in a standard purchase transaction (meaning not a short sale, foreclosure, or bank-owned property) will opt to perform a home inspection, and for good reason. You need to know whether there are any serious structural, mechanical or other defective conditions in the home before you close.

As always, I’m going to focus on the legal aspects of the home inspection as it impacts the overall transaction.

Buyer Beware

Let’s start out with the legal framework for what, if anything, a seller and his real estate agent are required to disclose to a prospective buyer. Surprisingly to most buyers, a private seller has no legal duty in Massachusetts to disclose any type of information, good or bad, about the property (except for the presence of lead paint). This is called caveat emptor, or buyer beware. Real estate agents stand on a heightened legal footing. Under Massachusetts consumer protection regulations governing real estate brokers, a broker must disclose to a buyer “any fact, the disclosure of which may have influenced the buyer or prospective buyer not to enter into the transaction.”

Nevertheless, I always advise buyers not to rely or trust anything the seller or his/her agent says about the property. This is exactly the reason why most buyers will choose to get an independent home inspection.

Inspection Contingencies

The standard form Offer to Purchase (click for form) will include several inspection related contingencies: the general home inspection contingency, radon, lead paint, and pest contingencies. The buyer typically has between 5 and 10 days to complete these inspections. If the inspections reveals any problems requiring repair or remediation, the parties will negotiate repairs during this inspection period, and the agreement will be reflected in the standard purchase and sale agreement or sometimes a separate repair agreement which is signed around 14 days after the accepted offer. Typically, the Realtors do the heavy lifting on home inspection negotiations, and by the time it gets to the attorneys, there is an agreement in place.

The attorneys can craft the language for repairs. I always insist that repairs are performed by licensed contractors with evidence of completion provided prior to or at closing. Also, buyers should know that repairs provided in the purchase and sale agreement may trigger a second property inspection by the lender’s underwriters which could add another layer of oversight into the deal.

If the problems are so serious that the buyer wants to walk away from the deal, there is a mechanism for where the buyer provides notice to the seller and a copy of the inspection report. It’s very important to provide proper notice in order to get the buyer’s deposit returned. An attorney should be consulted for this situation.

Home Inspector License Requirements

Since 1999, Massachusetts has required that home inspectors be licensed by the state Board of Registration of Home Inspectors. You can search for home inspector licenses here: Massachusetts Home Inspector License Search.

Buyers should recognize the limits of the home inspection. The state regulations requires inspection of “readily accessible” components of a dwelling. Most modestly priced inspections are visual inspections of the property. The inspector is trained to identify defects in the systems of a house but cannot be expected to have x-ray vision. Moreover, property inspectors are not generally trained civil engineers. Structural defects and weaknesses may not be readily apparent, and may require follow up by a licensed structural engineer. In many cases, however, evidence of inappropriate settling or structural failure can be observed during a visual inspection. An experienced inspector will summarize the “big picture,” but inspectors are not required to identify the exact nature and extent of structural deficiencies. Regulations specifying the elements of a dwelling to be observed and reported on by the home inspector may be found here at 266 C.M.R. § 6.00.

Condominiums

When you buy a condo, you not only buy the unit, but the common areas such as the common roof, mechanical and HVAC systems, grounds, etc. Good home inspectors will ensure that the inspection of a condominium includes the common areas as well as the unit itself. The common area inspection may reveal deferred maintenance needs and inadequately performed repairs that may result in increased condominium fees and special assessments.

Radon

The Environmental Protection Agency (EPA) has established an “action level” of 4.0 pico-curies per liter (4.0 pCi/l) of radon present in indoor air. Although not established as an unsafe level, this figure has been established as the point at which protective measures are recommended. Prospective purchasers and home inspectors frequently use commercially available canisters to collect radon data. This method is cost-effective but may not give accurate results. The canisters are ordinarily placed for twenty-four to forty-eight hours in the basement and on the first floor of the dwelling. The canisters must be placed away from drafts and should not be disturbed. After the test period, the canisters are sealed and forwarded to a testing laboratory. Sometimes, the radon results are not ready by the time the purchase and sale agreement has to be signed. In this situation, the parties can either agree to extend the deadline or agree to a radon contingency.

If the radon results come back over 4.0 pCi/l, depending on the language of the radon contingency, the buyer can typically opt out of the deal altogether or require the seller to install a radon remediation system. Often the sellers will attempt to cap the cost of the system.

Pests

Most home inspectors are also qualified to perform inspections for wood-boring insects, such as termites, powder post beetles, and carpenter ants. All properties should be inspected for such pests. Properties financed by certain government-sponsored loan programs, such as the Federal Housing Authority, require a pest inspection as a condition of obtaining a loan. It’s a good idea to ask the sellers if they have an existing pest control contract that can be transferred to the new buyers.

Lead Paint

The Massachusetts Lead Law requires the buyer to be given the opportunity to inspect for lead paint. The seller or broker is required to provide potential purchasers of homes built before 1978 with the notification package prepared by the Massachusetts Department of Public Health.

Sellers and real estate agents are required by law to disclose any information about known lead paint hazards in their properties, and to provide copies of any documentation relating to the lead paint status of the properties (i.e., a lead inspection report or risk assessment report). The seller must grant a ten-day contingency period from the date the buyer receives the property transfer notification to conduct a lead paint inspection. If the buyer discovers lead paint in the dwelling during the inspection period, the contingency required by the statute permits the buyer to withdraw from the agreement without further obligation.

Although a seller is under no obligation to actually abate the lead paint, a lead-free house may be more valuable and marketable. This is particularly true for multi-family properties where tenants with children under six years of age may trigger the abatement requirements of the law. Sellers are required to provide any documentation they have of the estimated costs to abate the lead paint. Should a seller refuse to make a price concession based on the presence of a lead paint hazard, a buyer could argue that any subsequent buyer also should be made aware of the hazards and related costs. As a result, the availability of a lead paint inspection and cost estimate can become a powerful negotiating tool for the buyer.

Lead paint testing is typically not done as part of a standard home inspection, and must be separately arranged by a certified lead paint assessor.

Mold and Mildew

Mold and mildew are tricky subjects for home inspectors. The presence of excessive amounts of mold spores has been linked to asthma and other respiratory ailments and is claimed to cause permanent injuries. Mold grows in warm, moist environments and can be present behind walls and ceilings, in heating and cooling ducts, and in other difficult-to-inspect parts of a house or condominium building. As noted, although a building inspector cannot peer behind walls, a thorough inspection can detect water penetration, which is the precursor and necessary condition for a mold problem. Where mold is suspected, a buyer can always request that his home inspector be allowed to drill small exploratory holes to test for the presence of mold/mildew.

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. Please contact him if you need assistance with a home purchase or sale.

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images-13Compliance Concerns Unwarranted

Electronic signature technology has been quickly gaining steam throughout the U.S. real estate community, and has now arrived in earnest in Massachusetts. Electronic signature software lets you send legally binding documents and get signatures anytime, anywhere from any Internet-connected device. It’s mostly used in Massachusetts on Offers and Purchase and Sale Agreements. I’ve been using DocuSign, and with a little learning curve, it’s been fantastic.

Realtors and attorneys who use electronic signature software can simply email encrypted contracts to their clients for signatures, rather than deal with travel, signing 4 original copies, and coordinating all the signatures. It’s especially helpful for out of state clients.

The Massachusetts real estate industry, traditionally conservative and slower to adopt new technology, has been lagging behind more progressive states such as California when it comes to adopting electronic signature technology. Plus, it hasn’t helped that technologically challenged attorneys are often involved in the drafting of the purchase and sale agreement.

In my informal survey of Realtors, the biggest questions were (1) are electronically signed contracts legal and valid, (2) how does it work: and (3) will lenders accept them?

Are Electronic Signatures Valid For Massachusetts Real Estate Contracts?

The answer is yes. Under the Massachusetts Uniform Electronic Transactions Act (UETA), real estate contracts which are electronically signed in compliance with the law are legal and valid.

Electronic signature legislation was adopted over 10 years ago. In 2000, Congress enacted the E-SIGN law which validates certain contracts in electronic form and electronic signatures across the country. In 2004, Massachusetts adopted its UETA, codified in Mass. General Laws Chapter 100G, which is essentially adopts and updates the federal E-SIGN law. Lawmakers designed UETA and E-Sign to recognize that “a signature, contract, or other record relating to a transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form.” The Massachusetts UETA provides, simply, that “In a legal proceeding, evidence of a record or signature may not be excluded solely because it is in electronic form.”

For offers and purchase and sale agreements, I have formulated the following rider provision to ensure electronic signature validity and enforceability. Feel free to use it.

This Agreement may be executed by and through electronic signature technology which is in compliance with Massachusetts law governing electronic signatures, including but not limited to, DocuSign®.  Electronic signatures shall be considered as valid and binding as original, wet signatures.  Signatures, originally signed by hand, but transmitted via e-mail or fax shall also be deemed valid and binding original signatures.

How Does It Work?

There are several electronic signature systems out there, including EchoSign, eOriginal, and DocuSign, which I use. All three providers warrant full compliance with federal E-SIGN and state UETA law and their European counterparts.

Since I’ve been using DocuSign, here is a quick video overview how it works.

As the individual requesting that a document be DocuSigned, you control who signs by providing the signer’s email address and other contact information. The document is routed to the signer’s email with a request to sign. DocuSign records the signer’s IP address and a time stamp of the signing activity. In addition, a signer can opt to provide geo-location information at the time of signing. If you require deeper levels of identity management, DocuSign offers additional authentication options, including: access code, knowledge-based ID check and biometric phone identification, among others.

As you can see, in many respects, an electronically signed contract is more secure and less susceptible to fraud and forgery than a traditional “wet” signature.

Are Lenders Accepting Electronically Signed Contracts?

Most are now. In fact, starting in 2012, FHA and the IRS will formally allow electronic signatures on loan and tax documents. However, I hear that some short sale lenders are still requiring wet signatures.

This is always the problem with adopting new technology. It’s disappointing because electronic signatures have been legal and valid for 10 years now. The law was passed by Congress and now all the states. As more and more agents and attorneys embrace the technology, we will see objections falling by the wayside, just as we did with faxed signatures.

Agents, are you using electronic signatures, and if so, how has it helped your business and clients? Have you run into issues or objections from lenders or attorneys?

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate closing attorney who’s handled over 1,000 closings. Please contact him if you need legal assistance purchasing residential or commercial real estate.

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Realtors, are you using the most current contingencies and language in your Offers? Do you know the most current Fannie Mae/FHA condo rules and how they will impact your condo sale? Want to know the latest on the U.S. Bank v. Ibanez ruling and the foreclosure title mess? How can you avoid last minute crises? All these questions and more will be answered in our upcoming free webinar.

One Hour Complementary Webinar: An Ounce of Prevention Is Worth A Pound Of Cure: Strategies & Teamwork To Avoid Deal Disasters

November 1, 2011, starting at 11:00am EST.

Presented by: Richard Vetstein, Esq. and Marc Canner, Esq. of TitleHub Closing Services and Brian Cavanaugh of MetLife Loans.

Click Here To Register

Facebook Event Invite Here

Topics Include:

1. Must Have Language For Your Offers
a. Fannie/FHA condo compliance
b. Realistic deadlines
c. Beyond the standard contingencies

2. Early Lending Intervention
a. Coordinating with Mortgage Partners
b. Pre-quals and pre-approvals
c. Current underwriting concerns

3. The Attorney’s Role: Purchase and Sale Agreement
a. Common Pitfalls & Solutions
b. New buyer rider provisions
c. Ibanez Foreclosure Title Issues

4. Dealing with 11th Hour Problems
a. Extensions for financing
b. Title issues & title insurance
c. Use and occupancy agreements

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Benjamin Franklin once said famously that “the only certainties in life are death and taxes.” That’s certainly true in real estate practice. Today, I will go over how real estate passes when the owner dies  –  with a will or without a will – and how the probate process affects the real estate process.

Tenancy by the Entirety

Married couples in Massachusetts are recommended to hold real estate as “tenants by the entirety.” It’s a special form of joint tenancy for married couples. If one spouse dies, the surviving spouse succeeds to full ownership of the property, by-passing probate. By law, tenants by the entirety share equally in the control, management and rights to receive income from the property. Property cannot be “partitioned” or split in a tenancy by the entirety. A tenancy by the entirety also provides some creditor protection in case one spouse gets into financial distress as creditors cannot lien the non-debtor spouse’s interest in the property.

Death Without A Will—Intestacy Laws

Clients were often surprised to learn that when one spouse dies without a will, the law of intestacy in Massachusetts leaves a portion of the estate to the surviving spouse and a portion to the decedent’s children. This is changing as of January 2012 with Massachusetts’ adoption of the Uniform Probate Code. Under the “UPC,” if a spouse with children of the marriage dies, the surviving spouse gets the entire estate, including the marital home. If there’s no surviving “descendant,” or child, of the deceased, but a surviving parent of the deceased, the surviving spouse gets the first $200,000 of the estate, plus 75% of the balance of the estate. The laws of inheritance remain rather complicated to explain fully here. A good guide to the new Uniform Probate Code can be found here.

Death With A Will — Testate

The basic rule is that if the owner dies with a will, which includes a power to sell real estate, the executor or administrator of the estate is generally authorized to convey title without further authority from the probate court. If the will does not provide for a power of sale, the executor will have to obtain a license to sell from the probate court.  If a final account has been filed and allowed, the heirs (in the case of an intestacy) or devisees (in the case of a will) are able to convey title.

Missing Probates

If the title examination turns up an interest that is not accounted for by a probate, and the death of the interested party occurred less than 25 years ago, a probate may need to be opened to convey the property. Deaths over 25 years old where a special affidavit has been filed, may pass without probate.

Federal & Massachusetts Estate Tax Liens

A federal and state estate tax lien arises immediately upon death and attaches at the time of death to the gross estate of the decedent. The gross estate includes all property, wherever situated, that the decedent owned or in which the decedent had an interest at the time of death. The threshold for federal gross estates for 2011 and 2012 is $5 Million for an individual and $10 Million for a couple. The Massachusetts estate threshold remains at $1 Million. For estates below those amounts, the executor must merely file a simple Affidavit of No Estate Tax Due. Estates over the thresholds must file the more complicated release of lien from the Department of Revenue which requires the filing of a full estate tax return.

Bought A House? Get A Will!

Julie Ladimer, Esq.

Danielle Van Ess

After every closing, I always have a chat with my new buyers about setting up a will and other estate planning vehicles. It’s very important on all fronts. For those in the MetroWest area, I recommend Julie McQuade Ladimer, Esq. of Framingham (email: jml@michaelgatlinlaw.com; Tel: (508) 788-0028. For those on the South Shore, I recommend Danielle Van Ess, Esq. in Hingham (email: info@dgvelaw.com; Tel: 781.740.0848. Both are very good and well regarded estate planning attorneys.

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Richard D. Vetstein, Esq. is an experienced real estate attorney who’s handled over 1,000 closings. Please contact him if you need legal assistance purchasing residential or commercial real estate.

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26297-cooperation-handshakeSeller Couldn’t Sit Back & Watch Construction Project Unfold

Massachusetts appeals judges have been mighty busy this summer issuing real estate decisions. From the forced removal of condo buildings to toxic mold, to foreclosure eviction defense, it’s been no summer vacation in Massachusetts real estate law.

Handed down today is a case right from a first year law school property exam, Hurtubise v. McPherson, embedded below.

As most real estate professionals know, contracts for the sale of real estate must be in writing and signed by the party to be charged, i.e, the seller. This is a rule of law going back to English common law and is called the Statute of Frauds which can be found in the General Laws of Massachusetts, Chapter 259, Section 1. As with most black letter law, there are a few exceptions to the general rule, and this case is a textbook example of the “detrimental reliance” exception to the Statute of Frauds.

Hand-Shake Land Swap Agreement

Here are the facts of the case. Hurtubise and McPherson owned adjoining tracts of land in the town of Templeton. Hurtubise operated a storage business on his property. He wanted to build an additional storage shed along the border between his property and McPherson’s property. Hurtubise realized that he could not meet the setback requirements of the local zoning code unless he acquired land from McPherson. Hurtubise approached McPherson, explained his need, and proposed a land trade, offering to convey to McPherson a portion of the front of his (Hurtubise’s) property in exchange for the portion of McPherson’s land at which Hurtubise intended to erect the new storage shed. McPherson agreed to the proposal and the parties shook hands.

Hurtubise proceeded with his plans for construction of the new building. He obtained a building permit and began to excavate along the border of McPherson’s lot. During the seven to eight weeks of construction, Hurtubise saw McPherson at the site. McPherson never objected to the location of the new building. Hurtubise eventually constructed a 300 x 30-foot storage shed for $39,690.

After construction, McPherson objected and accused Hurtubise of taking more land than he initially had represented. McPherson informed Hurtubise that an exorbitant payment of $250,000 would resolve the dispute which Hurtubise refused to pay. McPherson then notified the town that Hurtubise’s new building encroached on his property. The town’s building commissioner revoked Hurtubise’s building permit and ordered him to cease occupancy of the storage shed. After McPherson threatened to demolish the building, Hurtubise brought suit to enforce the oral agreement.

Exception To Written Contract Rule

As mentioned above, to be enforceable, real estate contracts for the sale of property must be in writing and signed by the seller, at minimum. As Judge Mitchell Sikora wrote in the opinion, “however an equitable qualification puts some flexibility into the joints of the Statute.” An oral agreement for the sale of land can be valid if the party seeking enforcement, in reasonable reliance on the contract and on the continuing assent of the party against whom enforcement is sought, has so changed his position that injustice can be avoided only by specific enforcement. In non-legalese, this means that if you start a construction project and spend thousands of dollars upon the promise of a land deal, albeit not in writing, you may be able to enforce that promise.

Because Hurtubise just sat by idly and watched McPherson construct his shed at considerable cost without objection, the court ruled that he couldn’t then complain there wasn’t a written agreement, in an attempt to wriggle out of the land swap deal. The court then ordered Hurtubise to convey McPherson the land necessary to build the shed.

This case is one of the very few instances where a court has upheld an oral hand-shake real estate agreement. The take-away: make sure your real estate contracts are always in writing and signed!

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Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous real estate contract breach cases in Land Court and Superior Court. Please contact me if you are dealing with a Massachusetts real estate contract legal dispute.

Hurtubise v McPherson Case

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iStock_000003014021XSmal.jpgCaveat Emptor: “Let The Buyer Beware”

Caveat Emptor is an old common law rule which means “Let the Buyer Beware.” In plain English, it means that home buyers are on their own when it comes to the condition of the property. If there is a defect of any kind, it becomes the buyer’s problem, not the seller’s.

Most home buyers are unaware that in Massachusetts, with a few exceptions, the rule of Buyer Beware is still alive and well. That is why in the vast majority of transactions, buyers choose to have the property inspected by a licensed home inspector. And it’s also why there is a contingency in the offer or purchase and sale agreement giving the buyer the right to opt out of the agreement if there are serious issues.

But what happens if the home inspector misses a broken A/C unit, or the sellers concealed that the basement flooded, or the Realtor didn’t tell the buyers there was a Level 3 sex offender next door? These are all thorny disclosure issues.

Private Sellers: No Duty to Disclose

A private seller has no legal duty in Massachusetts to disclose anything about the property (except for the presence of lead paint). Yes, you read that correctly. He doesn’t have to say boo. Will that assist the buyer in selecting the home for purchase? Maybe not. But if the basement floods, the seller does not have to say anything about it.

A seller, however, cannot affirmative misrepresent a material fact about the property. That is, if the seller is asked a direct question, such as “has the basement ever flooded?” and he answers “never” when it has, he has lied and can be held liable for that.

Most agents will insist that Sellers fill out a Statement of Property Condition (see below) which will fully disclose just about every conceivable condition of the premises. However, the standard form does contain small print language purporting to limit the agent and seller from disclosure liability.

Real Estate Agents: Heightened Duty

Under Massachusetts consumer protection regulations governing real estate brokers, a broker must disclose to a buyer “any fact, the disclosure of which may have influenced the buyer or prospective buyer not to enter into the transaction.” This is somewhat of a subjective standard; what may matter to one buyer may not matter to another. If a broker is asked a direct question about the property, she must answer truthfully, accurately, and completely to the best of her knowledge. Further, a broker cannot actively avoid discovering the details of a suspected problem or tell half-truths. This is why most Realtors err on the side of full disclosure, as suggested in Bill Gassett’s blog.

As for that Level 3 sex offender living next door, I would advise the listing agent to disclose that fact. The Massachusetts Supreme Judicial Court has held that off-site physical conditions may require disclosure if the conditions are unknown and not readily observable by the buyer and if the existence of those conditions is of sufficient materiality to affect the habitability, use, or enjoyment of the property and, therefore, render the property substantially less desirable or valuable to the objectively reasonable buyer. I think a dangerous sex offender would be something a buyer would want to know about, wouldn’t you?

Home Inspectors

In 1999, Massachusetts joined a growing number of states that require home inspectors to be licensed. There is now a state Board of Registration of Home Inspectors. Home inspectors are now required to carry at least $250,000 of errors and omissions insurance. The board is empowered to suspend licensed home inspectors for violations of the statute or regulations and to impose civil penalties on persons purporting to conduct a home inspection without the required license.

A home inspector is one of the most important referrals your Realtor will give you. Most agents know which inspectors are great and which are terrible. If you are the unfortunate victim of an incompetent home inspectors, they can be sued civilly for breach of contract or negligence.

Massachusetts Sellers Disclosure//

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