Massachusetts Real Estate Law

Bidding Wars Are Back In Greater Boston! Legal And Strategic Guidance For Massachusetts Buyers & Sellers

by Rich Vetstein on March 24, 2012

in Condominium Law, Disclosures, Massachusetts Property Values, Massachusetts Real Estate Law, Offer To Purchase, Real Estate Marketing, Realtors

I cannot believe I’m writing this post, but yes it’s true, the real estate market in Greater Boston, Massachusetts has now come full circle and bidding wars are back. Don’t believe me? Just read this Boston Globe article from today.

Now that bidding wars are back, buyers and sellers have questions, so we’ll try to answer them here. I’ve also asked a few local real estate agents to offer their expertise as well.

What Are The Legal Issues Surrounding Bidding Wars?

A bidding war arises when there are several competing offers for a listing at the same time. There are really no hard and fast legal rules with bidding wars. Contrary to popular belief, a private seller in Massachusetts is not legally obligated to accept the highest offer made during a bidding war. A seller can be as financial prudent or as irrationally arbitrary as she wants in deciding which offer to accept. A seller may decide to forgo the highest offer in favor of a lower offer due such factors as the financial strength of the buyer (i.e., a cash buyer), because the buyer waived inspections, or simply because the buyer wrote the sellers a lovely letter about how wonderful their home is! (Read on for one agent’s advice on letter writing).

Legally, an offer is simply an invitation to negotiate, and provides a buyer with zero legal rights to the property. An offer does not create a legally enforceable contract — unless it is accepted and signed by the seller.

For real estate agents involved in bidding wars, they have an ethical and fiduciary duty to get the highest and best offer for their sellers. There is nothing illegal about a seller or their agent creating a bidding war, so as to pit one bidder against each other. A listing agent is doing a good job for their client in creating such a market for a property. Ethically, a real estate agent must be truthful and honest when communicating with all prospective buyers and cannot make any material misrepresentations, such as lie about an offering price. Agents must present all offers to their clients, however, the ultimate decision to accept an offer always remains with the seller.

There are different ways to manage a bidding war, and again, there are no special legalities for it. Some agents will set a date by which all preliminary bids have to be in. If there are only two bidders, an agent can go back to the lowest bidder and ask if he or she would like to re-bid. An agent can continue that process until one of the bidders backs out. If there are more than two bidders, some agents will set a second round of bidding with a minimum price of the highest bid in the preliminary round. If no one bids in the second round, the agent can return to that high bid. Bidding wars are fast moving, so buyers need to be able to react quickly.

Generally, disgruntled buyers who lose out on bidding wars do not have a legal leg to stand on — unless their offer was accepted and signed by the seller or there is clear proof an agent lied about something important. That is why making your offer stand out in a bidding war is so important.

Buyers: How To Make Your Offer Stand Out In A Crowd

In a bidding war, buyers ask how can they maximize their chance to be the offer the seller accepts? Gabrielle Daniels, of Coldwell Banker Sudbury, offers this great advice on her blog, LiveInSudburyMa.com:

  • Make your offer STRONG. If you know that there are other offers on the property, make your offer financially strong as possible. If you believe the house is worth asking price, offer asking price. Forget about the TV shows that tell you to offer 90 percent of asking. That is ridiculous – UNLESS that is what the house is worth. Every situation is different. Every house is worth something different. There are no “general rules” about what to offer.
  • Be prepared. Have your pre-approval ready. Sign all of the paperwork related to the offer (seller’s disclosure, lead paint transfer, etc.) Write a check, leave a check with your agent. It is better than a faxed copy of the check. Don’t leave any loose ends.
  • Show some love to the house (and the seller). Write a letter to the sellers, tell them why you love the house and why you are the best buyer for the house. Sure, this is a business transaction, but it is one of the most personal business transactions in which you will be involved. Your real estate agent should be able to help you with this.

For more great tips for buyers involved in a bidding war, read Gabrielle’s post, Multiple Thoughts On Multiple Offers.

Sellers, How Can You Take Advantage of Bidding Wars

For sellers in a bidding war market, it all comes down to pricing, as Heidi Zizza of mdm Realty in Framingham explains on her blog, MetrowestHomesandLife.com:

I had a house listing in Natick this past year. The house valued out to around $620,000. We could have gone to market at $629,900 or $639,900 and had many showings that eventually would land us an offer around $610,000 or so. We figured that at that price it would take the average days on market which was (if memory serves correctly) close to 90 days. We decided to go to market at $599,900. The house got so much attention we had a HUGE turnout at the first showing/Open House and had 4 offers by that evening all competing and all over asking. The highest bid was $620,000 and we sold the property in one day. You too can do the same thing. Market your house at a price that is so attractive you will be best in show. Your buyers will let you know it, and you will definitely get an offer, maybe even several!

For those of us in the real estate business who have weathered the storm of the last 4-5 years, this is “all good” as we say! The more bidding wars, the better!

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. They can be reached by email at [email protected] or 508-620-5352.

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Cash Is Just As Good As Money: Massachusetts Cash Real Estate Purchase Advisory

by Rich Vetstein on March 21, 2012

in Closings, Condominium Law, Deeds, Massachusetts Real Estate Law, Offer To Purchase, Purchase and Sale Agreements, Realtors

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 [email protected] or 508-620-5352.

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What The Boston Zoning Board of Appeals Grants, The Courts Taketh Away

by Rich Vetstein on March 18, 2012

in Construction Law, Home Improvement, Massachusetts Real Estate Law, Permitting/Zoning, Real Estate Marketing, Zoning

Sheppard v. Zoning Board of Appeals of Boston: Appeals Court Overturns Variances, But Does Not Order Tear-Down Of South Boston Rehab Project

Disabled Southie homeowner Robert McGarrell wanted to improve his living situation. McGarrell, who suffered chronic emphysema, planned to rehab his dilapidated bungalow style house with a new townhouse style open floor plan enabling him to get around better with his oxygen tank. After discovering that the foundation was crumbling, he had no choice but to do a full gut rehab.

Abutter Alison Sheppard complained about the perceived impacts of the new house. The front of the new home was 4 feet closer to the front property line, and it extended approximately 4 feet deeper into the lot, bringing it closer to Sheppard’s three-decker house. The proposed house was also larger in mass, having a full second story (under a flat roof) over virtually its entire footprint (with a basement floor opening up to the back yard, as before).

In 1998, McGarrell went to the Boston Zoning Board of Appeals and they told him he needed 5 variances. After revising his design to address some of Sheppard’s concerns, the board granted the variances. Unhappy, Ms. Sheppard appealed to Superior Court.

Approval of Variances Always At Risk of Appeal

The result of this case will not surprise anyone who has experience with Boston zoning and permitting. The Boston Zoning Board of Appeals can be fairly liberal in doling out variances, however, the law says they should be rarely granted only in unique circumstances. I would say 80% of all variances issued by the board are susceptible to reversal on appeal, and the Appeals Court ruled McGarrell’s variances were no different.

The City of Boston has its own special zoning code which is both similar and different from the state-wide zoning code known as Chapter 40A. To obtain a variance, a Boston applicant must show 3 things:

  • Special and peculiar circumstances or conditions of the land or building such as exceptional narrowness, shallowness,  shape of the lot, or exceptional topographical conditions, and that failing to grant zoning relief would deprive the applicant of the reasonable use of such land or structure;
  • For reasons of practical difficulty and demonstrable and substantial hardship, the granting of the variance is necessary for the reasonable use of the land or structure and that the variance is the minimum variance that will accomplish this purpose;
  • Granting of the variance will be in harmony with the general purpose and intent of the zoning code, and will not be injurious to the neighborhood or otherwise detrimental to the public welfare.

The Appeals Court ruled that neither McGarrell’s rectangular lot nor dilapidated home was peculiar in any way to those in the neighborhood. The Court also held that McGarrell could have constructed a smaller home on the existing footprint, and that he could not expand his home vertically “as of right.”

Remedy: Second Chance

For McGarrell, the court left the door open for his new home to stand. Usually, in the case of construction built at the risk of permits being overturned, the court will order the new structure torn down, as in the recently publicized Marblehead mansion. Since the board supported McGarrell’s improvement of a dilapidated structure, the court allowed McGarrell to proceed on an alternative path under another section of the zoning code. The case will go back to the board for further findings, and this 14 year legal odyssey will go on.

Lesson: Get Neighborhood Support Early

The lesson here, as with any Boston zoning matter, is to get the support of the abutters and neighbors as early in the process as possible. Sometimes it’s not always possible, so you have to litigate.

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Richard D. Vetstein is an experienced Boston zoning, variance and permitting attorney who has substantial experience with variance and special permit applications before the City of Boston Zoning Board of Appeals and in Superior Court. Please contact him via email ([email protected]) or tel: 508-620-5352.

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Can Massachusetts Landlords Legally Require That Tenants Buy Renter’s Insurance?

by Rich Vetstein on March 15, 2012

in Disclosures, Insurance, Landlord Tenant Law, Leasing, Massachusetts Real Estate Law, Rental Housing, Safety

Renter’s Insurance Policy Raises Questions

I’ve recently become aware that some Massachusetts landlords are requiring that tenants procure their own policy of renter’s insurance as a condition of leasing. In fact, MSN Real Estate did a nice write up about the practice here. But I am also hearing about a dark side to this practice where some landlords have a kickback arrangement with the insurance provider where the landlord receives compensation for any policy taken out by a tenant.

Renter’s insurance is almost always a good idea, but under Massachusetts law, can a landlord require that a tenant get a policy (if the tenant doesn’t want one) and must it disclose a referral relationship with the insurance provider?

Landlords Should Be Careful About Renter’s Insurance Requirement

In light of recent court decisions, landlords should re-examine the legality of a mandatory renter’s insurance policy requirement.  In the recent Hermida v. Archstone class action ruling, which considered amenity fees under the Massachusetts security deposit statute, the court held that landlords can only charge first and last month’s rent, a security deposit, and a lost key fee at the beginning of a tenancy, and no other types of fees. Any other type of fee or financial obligation required to be paid by the tenant at the beginning of the lease could be deemed illegal under the Mass. Security Deposit law, Mass. Gen. Laws ch. 186, sec. 15B. Accordingly, landlord must be very careful about what and how much they charge tenants at the inception of leases, over and above the standard rent deposits and new key fee. At the very least, renter’s insurance should be optional, and any affiliate or kickback arrangement should be fully disclosed to the tenant. This still may not prevent a landlord from getting sued over a mandatory renter’s insurance requirement.

Renter’s Insurance Still Smart Choice

That said, I always recommend that tenants get their own renter’s insurance policy. It’s fairly inexpensive and provides protection to your personal belongings. Massachusetts law does provide for a minimum of $750 per unit for tenant relocation assistance due to fire displacement. However, that is not nearly enough for the average renter.

Has your landlord required that you purchase renter’s insurance? Have they disclosed any referral relationship? I’d like to hear from you. The practice may well be illegal.

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Richard D. Vetstein, Esq. is an experienced Massachusetts Real Estate Landlord Attorney. For further information you can contact him at [email protected].

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Landlord Held Strictly Liable For Intoxicated Tenant’s Fall Through Defective Porch Guardrail

by Rich Vetstein on March 12, 2012

in Insurance, Leasing, Massachusetts Real Estate Law, Premises Liability, Real Estate Litigation, Rental Housing, Safety

Another Expansion Of Massachusetts Landlord Liability

In yet another case demonstrating Massachusetts’ inhospitable legal environment towards residential landlords, Northeast Housing Court Judge David Kerman has ruled that an owner of a mixed used residential – commercial building is “strictly liable” for a drunk tenant’s fall through a defective porch guardrail. The 17-page ruling is Sheehan v. Weaver, and is embedded below. The imposition of strict liability, sometimes called absolute or no-fault liability, makes landlords 100% liable for the injuries of tenants where there is a building code violation, regardless of whether the tenant was equally at fault for the accident. This is a troubling ruling and another reason supporting the notion that Massachusetts is landlord unfriendly!

Faulty Porch Guardrail

The landlord, David Weaver, owned a building with three residential apartments located above a commercial establishment. None of the apartments were owner-occupied. One of Weaver’s residential tenants, William Sheehan, fell through a porch guardrail, several stories onto the asphalt pavement below, suffering serious injuries. There was evidence that Sheehan was intoxicated, however, the connection of the guardrail to its post gave way because it was defective and in violation of the Building Code.

After a four-day trial in the Housing Court, a jury found for the tenant on the negligence claim, awarding approximately $145,000 after a 40% reduction for the plaintiff’s own negligence. The jury also found the landlord strictly liable, assessing $242,000 in damages.

Building Code Violation At Issue

The Massachusetts State Building Code provides for strict (100%) liability for any personal injuries caused by any building code violation at any “place of assembly, theatre, special hall, public hall, factory, workshop, manufacturing establishment or building.” The landlord argued that the primarily residential structure was not sufficiently commercial to be considered a “building” within the meaning of the Building Code’s strict liability provision. But Judge David D. Kerman disagreed:

“[T]he structure in this case may well be at the outer margin of the class of structures that fall within the ambit of the term ‘building’ in the strict liability law,” wrote Kerman. “However, it is my opinion that the mixed residential-commercial four-unit non-owner-occupied structure in this case is ‘commercial’ and ‘public’ enough to fit within the term ‘building’ in section 51.”

The imposition of strict liability resulted in the landlord being hit with the full amount of the $242,000 judgment with no reduction for the tenant’s comparative negligence due to his intoxication. Ouch.

Commentary: Bad Decision

As I stated to Massachusetts Lawyers Weekly, this is a troubling ruling. The Building Code provision, passed in the late 1800’s, was clearly intended to cover structures with a distinctively commercial nature, i.e., “public hall, factory, workshop, manufacturing establishing or building.” The law was not intended to cover a predominantly residential apartment building with commercial/retail on the ground floor, in my opinion.

This ruling will now expand liability for residential developers who have built quite a number of mixed-use residential projects in the last few years. This decision can be read as providing strict liability for anyone injured due to any type of building code violation, however minor. Property managers and commercial insurers should be aware of this ruling, and ensure that there are no building code issues which could cause harm to tenants.

Given the concerning expansion of liability in this case, look for this ruling to get appealed. Judge Kerman is a well-respected judge, and this decision is a close call, but I think he went a bit too far outside the legislative intent behind the law.

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. For more information, please contact him at 508-620-5352 or [email protected].

Sheehan v. Weaver

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Commercial Leasing Update: Landlords, You May Have To Wait A Long, Long Time To Collect Unpaid Rent

by Rich Vetstein on March 10, 2012

in Commercial Leasing, Commercial Real Estate, Leasing, Massachusetts Real Estate Law, Real Estate Litigation

Update (5/3/13): SJC Upholds Ruling, Landlords Should Add Rent Acceleration Clause to Leases

Commercial Landlord Must Wait Out 12 Year Lease Term To Recover For Tenant’s Early Termination

In a decision which underscores the importance of careful commercial lease drafting, the Massachusetts Appeals Court has ruled that under a standard form default indemnity provision in a commercial lease, a commercial landlord must wait out the end of a 12 year lease term to recover unpaid rent from a tenant who abandoned the premises in Year 2 of the lease. The practice pointer here is to always have a current acceleration/liquidated damages clause in your commercial lease. See below for some form language.

The case is 275 Washington Street Corp.. vs. Hudson River Int’l, LLC (Mass. Appeals Court March 9, 2012), and is embedded below.

Dental Practice Goes South Quickly

The landlord and tenant entered into a 12-year lease beginning April 13, 2006, and ending April 16, 2018. The premises, located at 221-227 Washington Street in downtown Boston, were intended for use as a dental practice. Within a year of the lease commencement, the dental practice went under and closed. In May 2008, the dentist told the landlord that he would not be making any further lease payments.

Fortunately, the landlord found a new tenant. A new 10 year lease was signed, covering the remainder of the dentist’s term, but at a lower rent. The landlord sued the tenant for the rent differential.

Standard Indemnification Clause

The lease contained a standard default indemnification clause found in many older standard lease forms such as this:

The LESSEE shall indemnify the LESSOR against all loss of rent and other payments which the LESSOR may incur by reason of such termination during the residue of the term.  If the LESSEE shall default, after reasonable notice thereof, in the observance or performance of any conditions or covenant on LESSEE’s part to be observed or performed under or by virtue of any of the provisions in any article of this lease, the LESSOR, without being under any obligation to do so and without thereby waiving such default, may remedy such default for the account and at the expense of the LESSEE.

Indemnity Provision Lacking

The problem is that under Massachusetts law, recovery under an indemnity clause of a lease cannot be had until the specified term of the lease has ended. The reasoning underlying this legal tenet is that such liability is ultimately “contingent upon events thereafter occurring, because the full amount which the lessee eventually must pay for the remainder of the term cannot be wholly ascertained until the period ends.” Although somewhat reluctant, the Court was bound to follow the law in this instance:

We are cognizant of the concerns raised by this long-established rule barring recovery until the end of the original lease, given the possible intervention of factors, presently unknown, that make the determination of damages uncertain at the present. We also recognize the possibility that this rule, which forces this landlord to wait until 2018 to determine post-termination damages, may in effect make it impossible for the landlord to recover its true damages from this corporate tenant or guarantor, because of the protections afforded by legal processes, such as dissolution or bankruptcy. However, given the present state of the law and the specific terms of the contract to which parties of equal bargaining power agreed, we are constrained, nonetheless, to deny recovery to the landlord under the indemnification clause of this lease.

Time To Change The Old Law?

The Appeals Court, especially the concurring opinion of Justice Kantrowitz, suggested that the time may be ripe for the Supreme Judicial Court to re-examine and modernize the law in this area. So look for this case to possibly go up on appeal.

Solution: Acceleration/Liquidated Damages Clause

The lease in this case did not contain the more current acceleration/liquidated damage clause which provides that upon a rent default, all unpaid rent is automatically due through the end of the lease term as liquidated damages. I recommend language such as this to prevent what happened to the landlord in this case:

If LESSEE shall default in the payment of the security deposit, rent, taxes, substantial invoice from LESSOR or LESSOR’s agent for goods and/or services or other sum herein specified, and such default shall continue for ten (10) days after written notice hereof, and, because both parties agree that nonpayment of said sums when due is a substantial breach of the lease, and, because the payment of rent in monthly installments is for the sole benefit and convenience of LESSEE, then in addition to the foregoing remedies the entire balance of rent which is due hereunder shall become immediately due and payable as liquidated damages. The Parties acknowledge and agree that (i) the liquidated damages hereunder is the best estimate of such damages which would accrue to Lessor in the event of Lessee’s default hereunder; (ii) said deposit represents damages and not a penalty against Lessee.

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. For more information, please contact him at 508-620-5352 or [email protected].

275 Washington Street Corp v. Hudson River International LLC (Mass. App. Ct.)

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Massachusetts Appeals Court Rules That Lost Promissory Note Renders Mortgage Unenforceable

by Rich Vetstein on March 2, 2012

in Foreclosure, Massachusetts Real Estate Law, Mortgages, Real Estate Litigation, Title Defects, Title Insurance

Case Underscores Importance of Safeguarding Loan Documents And Getting Subordinations

JPMorgan Chase & Co. v. Casarano, Mass. Appeals Court (Feb. 28, 2012) (click to read)

In a decision which could impact foreclosure cases involving missing or lost loan documents, the Appeals Court held that a mortgage is unenforceable and must be discharged where the underlying promissory note securing the mortgage could not be found.

Seller Second Mortgage Financing

This case involved an unconventional second mortgage for approximately $15,000 taken back from a private seller. The homeowner subsequently refinanced the first mortgage several times, but the refinancing lenders’ attorneys never obtained a subordination from the second lien-holder. That was a mistake. The first mortgage wound up in Wells Fargo’s hands which realized that due to the lack of recorded subordination, the second mortgage was senior to its first mortgage.

Alas, a title claim arose and the title insurance company had to step in and file an “equitable subrogation” action. In this type of legal action, a first mortgage holder asks the court to rearrange the priorities of mortgages due to mistake, inadvertence or to prevent injustice.

Where’s The Note?

The second mortgage holder had lost the promissory note which secured its mortgage, and notably, could not locate a copy of it. The mortgage itself referenced the amount of the loan and the interest rate but was silent on everything else, including the payment term, maturity date, and whether it was under seal. The second mortgage holder argued that enough of the terms of the missing note could be “imported” from the mortgage, but the Appeals Court disagreed, reasoning that there wasn’t enough specificity on key terms to enforce the mortgage.

Lesson One: Safeguard Original Loan Docs

This decision underscores the importance of safeguarding original promissory notes and other debt instruments, or at a minimum keeping photocopies so that if enforcement is required, the material terms of the original can be proved to the satisfaction of the court. With all the paperwork irregularities endemic with securitized mortgages these days, missing or lost promissory notes and loan documents have become more prevalent. This decision is potentially problematic for those foreclosures where the original promissory note is lost. The standard Fannie Mae form mortgage does not spell out the loan terms with specificity, instead, it references the promissory note. Indeed, the Fannie Mae mortgage does not even reference the interest rate. Based on this decision, a mortgage without sufficient evidence of a promissory note could be rendered unenforceable and un-forecloseable.

As an aside, a lender who lacks an original promissory note could rely upon Uniform Commercial Code Section 3-309, which provides:

(a) A person not in possession of an instrument is entitled to enforce the instrument if (i) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred, (ii) the loss of possession was not the result of a transfer by the person or a lawful seizure, and (iii) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process. (b) A person seeking enforcement of an instrument under subsection (a) must prove the terms of the instrument and the person’s right to enforce the instrument. If that proof is made, section 3-308 applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.

Lesson Two: Get Subordinations For Junior Liens

This decision also underscores the importance of getting a subordination agreement for second mortgages and other junior lien-holders when closing refinances. A subordination agreement is a contract whereby a junior lien-holder agrees to remain in junior position to a first mortgage or other senior lien-holder during a refinancing transaction. Otherwise, the first in time rule of recording would elevate a junior lien-holder to first, priority position after a refinance. If a subordination was obtained and recorded here, this case would not have occurred.

Disclaimer:  I drafted the original complaint in this case while working at my previous law firm. I had long since left when the case was decided at the Appeals Court.

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Richard D. Vetstein, Esq. is a Massachusetts real estate and title defect attorney. He can be reached by email at [email protected] or 508-620-5352.

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Lawmakers To The Rescue? Legislation Filed To Fix “Ibanez” Foreclosure Title Defects

by Rich Vetstein on February 28, 2012

in Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages, Title Defects, Title Insurance

Update (2/6/14):  Legislation to Fix Ibanez Defects Much Closer to Passage

Update (8/3/12): Foreclosure Prevention Act Signed, But Fails To Address Ibanez Title Problems

Massachusetts Senate Bill 830 Addresses Toxic Foreclosure Titles

Finally, Massachusetts lawmakers have taken action to help innocent purchasers of foreclosed properties in the aftermath of the U.S. Bank v. Ibanez and Bevilacqua v. Rodriguez decisions, which resulted in widespread title defects for previously foreclosed properties. The legislation, Senate Bill 830, An Act Clearing Titles To Foreclosed Properties, is sponsored by Shrewsbury State Senator Michael Moore and the Massachusetts Land Title Association. Full text is embedded below.

The bill, if approved, will amend the state foreclosure laws to validate a foreclosure, even if it’s technically deficient under the Ibanez ruling, so long as the previously foreclosed owner does not file a legal challenge to the validity of the foreclosure within 90 days of the foreclosure auction.

The bill has support from both the community/housing sector and the real estate industry. Indeed, the left-leaning Citizens’ Housing and Planning Association (CHAPA), non-profit umbrella organization for affordable housing and community development activities in Massachusetts, has filed written testimony in support of the bill.

Properties afflicted with Ibanez title defects, in worst cases, cannot be sold or refinanced. Homeowners without title insurance are compelled to spend thousands in legal fees to clear their titles. Allowing such foreclosed properties to sit and languish in title purgatory is a huge drain on individual, innocent home purchasers and the housing market itself.

A recent case in point:  I was recently contacted by a nice couple who bought a Metrowest condominium in 2008 after it had been foreclosed. Little did they know that the foreclosure suffered from an “Ibanez” title defect. Unfortunately, the lawyer who handled the closing did not recommend they buy owner’s title insurance. They have been unable to track down the prior owner who went back to his home country of Brazil, and now they are stuck without many options, unable to refinance or sell their unit. This bill will help people like this who have helped the housing market by purchasing foreclosed properties, and improving them.

The bill is now before the Joint Committee on the Judiciary. Please email them to show your support of Senate Bill 830.
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Richard D. Vetstein, Esq. is a Massachusetts real estate and title defect attorney. He can be reached by email at [email protected] or 508-620-5352.

Massachusetts Senate Bill 830

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Real Estate Industry Braces For Another Overhaul Of HUD-1 Settlement Statement And Truth-In-Lending (TIL) Disclosures

by Rich Vetstein on February 22, 2012

in Consumer Financial Protection Bureau, Disclosures, Fannie Mae, HUD, Massachusetts Real Estate Law, Mortgages, RESPA

Final product will be a combination of both the final Truth in Lending (TIL) form and the HUD-1 Settlement Statement — a dramatic change from the existing forms.

For the second time in as many years, the federal government is substantially overhauling two of the most important disclosures given to mortgage borrowers, the Truth in Lending Disclosure and the HUD-1 Settlement Statement. The revisions are mandated by the Dodd-Frank Act. The new Consumer Financial Protection Bureau is in charge of re-designing and testing the new forms.

Most real estate industry professionals are unaware that these new changes are on the horizon. The new forms are expected to be implemented in 2013 after rule-making and industry comments are completed.

If you want to track the CFPB’s activity on these forms, I highly recommend the CFPB Monitor. The CFPB’s “Know Before You Owe” website also has updates and is pretty good for a government site.

Here is the new prototype HUD-1 Settlement Statement:

20120220 Cfpb Basswood Settlement Disclosure

What do you think about the new forms? At first, glance it is easier to read, understand and explain to borrowers. We’ll keep track of this important issue.

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A Different Type Of Tear-Down: Court Orders Million Dollar Marblehead Manse Demolished For Zoning Violation

by Rich Vetstein on February 21, 2012

in Construction Law, Massachusetts Real Estate Law, Permitting/Zoning, Real Estate Litigation, Zoning

Post image for A Different Type Of Tear-Down: Court Orders Million Dollar Marblehead Manse Demolished For Zoning Violation

Expensive Lesson–Build At Your Own Peril

After a 16 year long saga, wealthy Marblehead mansion owner Wayne Johnson’s battle to save his house from a court-ordered wrecking ball has come to an end. The underlying legal saga is convoluted and complicated, but the end result was swift and destructive — the million dollar mansion is now rubble.

Johnson’s battle started in 1995 when he recorded a plan dividing his land into two lots. One lot contained an existing single-family dwelling. The second lot contained a garage. The house lot complied with all zoning dimensional requirements, but the garage lot didn’t comply with lot width requirements. The Building Inspector incorrectly determined that the garage lot complied with all applicable zoning requirements.

Johnson’s neighbors appealed the Building Inspector’s decision, arguing that the new house would greatly diminish their valuable ocean views. The local zoning board allowed the issuance of a building permit. After the building permit issued, the plaintiffs filed an appeal in Land Court and asked for an injunction to prevent construction on the garage lot. The Land Court judge warned Johnson that proceeding with construction was at his peril. In a decision by another judge in May, 2000, the court ordered the building permit to be revoked. However, the court ruled that the house could remain in place while Johnson attempted to obtain appropriate zoning relief.

Johnson, however, was unable to obtain zoning relief. After several unsuccessful appeals, the Land Court ordered Johnson to remove the house by October 4, 2010. Johnson failed to comply with that order, and the neighbors attempted to hold Johnson in contempt. With the threat of contempt and possible jail looming, Johnson finally threw in the towel.

The Land Court ruling can be read here: Schey v. Johnson and is embedded below.

More Press:
Schey v. Johnson

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Massachusetts Landlords: Be Aware Of “The Professional Tenant”

by Rich Vetstein on February 19, 2012

in Landlord Tenant Law, Massachusetts Real Estate Law, Real Estate Litigation

Avoid The Professional Tenant Like The Plague

Using best practices to screen and select good tenants is the most important thing a Massachusetts landlord can do to avoid costly non-payment and eviction problems down the road, as I have posted about on this Blog. As the saying goes, an ounce of prevention is worth a pound of cure.

In my 14 years of practice, I have come across a sub-set of tenants which are extremely dangerous to Massachusetts landlords. They should be avoided like the Plague. I like to call them Professional Tenants.

Let me give you the profile of a typical Professional Tenant. (This is a generalization based on my personal experience, but it’s fairly accurate).

  • History of eviction history and/or delinquency with prior landlords
  • Surprising (and dangerous) knowledge of Massachusetts landlord-tenant law
  • Background in real estate, engineering, contracting
  • Marginal to bad credit: prior history of nonpayment collections, judgments or bankruptcies
  • Gaps in rental history
  • Non-existent or incomplete prior landlord references

The Professional Tenant’s Scheme

Shortly after moving in, they will start to complain about small issues with the rental property. Some will complain to the local board of health to have the landlord cited for code violations. (The state Sanitary Code can trip up even the most conscientious landlord.) Then the Professional Tenant will stop paying rent, claiming they are “withholding rent” due to bad property conditions. Of course, these tenants completely ignore the smart practice that any withheld rent be placed in an escrow account. Then the Professional Tenant will assert the landlord violated the last month rent and security deposit law, and ask for their deposit back, trying to set up the landlord for a triple damage claim.

In the meantime, months go by and the Professional Tenant has failed to pay any rent and the minor code violations, if any, are repaired. The landlord is forced to start eviction proceedings, only to be met with a slew of counterclaims and defenses from the Professional Tenant. The Professional Tenant then sends the landlord a myriad of document requests and interrogatories which automatically delays the eviction hearing by 2 weeks. If the Professional Tenant is really savvy, they will demand a jury trial, which in most small District Courts can delay the eviction by weeks and typically months. Meanwhile, the entire time, the Professional Tenant has still not paid any rent.

Months and thousands of dollars in attorneys’ fees later, the landlord finally gets his day in court. And the Professional Tenant doesn’t show up, leaving the landlord with a worthless judgment for thousands in unpaid rent and a trashed apartment.

Screen and Screen Again

The sad thing is that because Massachusetts landlord-tenant law is so tenant friendly, there is not much a landlord can do to avoid this situation, other than not rent to the Professional Tenant in the first place! Once a landlord has signed a lease with a Professional Tenant, they are stuck until the tenant violates the lease. My advice to landlords is to make screening the most important thing you do as a landlord, and do the following:

  • Invest in good credit history checks.
  • Follow up with landlord references
  • Check employment info
  • Check prior bankruptcies
  • If someone seems fishy, they probably are

If you find yourself stuck with a Professional Tenant, give me a call. There are certain things an experienced eviction attorney can do to prevent or minimize these shenanigans. At least you will be fighting back against what I perceive as scam artists.

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Richard D. Vetstein, Esq. is an experienced Massachusetts landlord tenant and eviction attorney. Please contact him with any questions.

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SJC Requests Friend-Of-The-Court Briefs In Important Foreclosure Case of HSBC Bank v. Matt

by Rich Vetstein on February 18, 2012

in Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages, Title Defects

In yet another move evidencing the Supreme Judicial Court’s ongoing concern over the impact of the foreclosure crisis in Massachusetts, the SJC is soliciting friend-of-the-court briefs in the next important foreclosure case, HSBC Bank v. Jodi Matt.

As we wrote about in our prior post here, the SJC is considering whether a lender holding a securitized mortgage has standing to even begin a foreclosure action in the Land Court under the Servicemembers Civil Relief Act–one of the first steps in the Massachusetts foreclosure process. The SJC will ostensibly decide whether lenders holding mortgages held in a securitized pool, with questions whether they in fact were validly assigned those mortgages, can start foreclosures in Massachusetts. The lower court Land Court opinion can be read here.

The text of the Court’s announcement is as follows:

February 17, 2012 – ANNOUNCEMENT: The Justices are soliciting amicus briefs. Whether the Land Court judge correctly concluded that a bank had standing to commence an action to determine whether the defendant (alleged to be in breach of her mortgage obligations) was entitled to the benefits of the Servicemembers Civil Relief Act, on the ground that the bank had a contractual right to become the holder of the note and mortgage. The case is tentatively scheduled for argument in May.

For more information about how to submit a friend of the court brief, go to the SJC Website.

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate litigator and attorney. Please contact him if you are dealing with a Massachusetts foreclosure title dispute.

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Massachusetts Registries of Deeds Planning Class Action Against MERS To Recoup Recording Fees

by Rich Vetstein on February 15, 2012

in Liens, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages, Title Defects

Banker and Tradesman is reporting that Bristol, Plymouth and Norfolk County Registrars of Deeds plan to file a class action suit against Mortgage Electronic Registration System (MERS), aiming to recoup land recording fees they believe they are owed. B&T reporter Colleen Sullivan reports that:

The counties are being represented by Bernstein Liebhard LLP, a New York firm specializing in class actions which has already brought a similar suit on behalf of all the counties of Ohio. John Mitchell, a Bristol County commissioner, said the board considered pursuing a claim last year, but decided to hold off until the national mortgage settlement between the banks and the states’ attorneys general was resolved. But as it became clear that the vast bulk of the funds in that settlement would go towards foreclosures and loan modifications, he said the county decided to pursue the matter. Bristol County officials estimate the county may have lost out on millions of dollars in fees over the past decade because of the alleged use of MERS as a kind of private registry among large banks. A rough calculation prepared by county officials last year came up with a figure of between $3.1 million and $6.5 million lost, using a conservative estimate of one or two additional non-recorded assignments per MERS- registered property.

“Over the last month, we were approached by [Bernstein Liebhard] and other firms….they already had Norfolk and Plymouth, and we thought it made sense to get as many counties together,” Mitchell told Banker & Tradesman. Mitchell said he wasn’t sure if the remaining Massachusetts counties with county-level governance would join the suit. The relatively small size of counties like Nantucket and Dukes would mean far smaller sums at stake.

County-level governance was abolished in Massachusetts in eight of the state’s 14 counties around the turn of the century. Only Barnstable, Bristol, Norfolk, Plymouth, and Dukes retain county boards; Nantucket has a combined city-county government. The remaining boards retain the right to bring independent actions in court.

“We’re familiar with their claims, and there’s no merit to them,” said Janis Smith, spokeswoman for MERS. Smith said that by registering under the MERS name, banks fulfill the purpose of having a registry, that is, alerting the public of any existing leins on a property. “MERS does not eliminate or replace county records, and the recording fees are paid,” she said. “The MERS business model is legal in all 50 states and has been affirmed by Massachusetts courts.”

“I commend the counties,” said John O’Brien, the registrar of deeds in Essex County, who has been an active critic of MERS for the past two years. O’Brien was the first public official in Massachusetts to calculate how much the MERS system may have cost the state in allegedly lost recording fees, coming up with a figure of $22 million for his county alone. “If I had the authority, I would have filed this suit two years ago.”

The other registries fall under Secretary of State William Galvin’s jurisdiction. O’Brien said he plans to petition the legislature to recover his ability to bring suit on behalf of Essex County as one of its elected officials.

The Registrars are reportedly incensed that the MERS private recording system has deprived them of millions of recording fees. We will keep tabs on this important case.

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Condominium Bait and Switch Scheme Nets First Time Buyers Big Recovery

by Rich Vetstein on February 14, 2012

in Closings, Condominium Law, Disclosures, Massachusetts Real Estate Law, Real Estate Litigation, Realtors

Six Year Litigation Odyssey Ends With $872,000 Payout

After six years of litigation over a deceptive bait-and-switch condominium purchase scheme, a Cambridge couple has forced the listing broker in the deal to pay them $872,000 in compensation. The case is Oleg Batishchev v. Brenda Cote and others (click to download).

The case started in 2005, after the first time home buyers paid $683,385 for a condominium unit from Perception Ventures LLC. The couple believed they were buying a newly renovated unit on the right side of the building. Victimized by what the trial judge called a “preposterous fraud,” the developer, the listing broker and the seller’s attorney tricked them into buying a unit on the left side of the building which was beset with such substantial and egregious workmanship defects as to render it virtually uninhabitable.

After a two week jury trial by Attorneys John Miller and Jonathan W. Fitch of the Boston firm Sally & Fitch, the developer and his agents were held liable under the Massachusetts Consumer Protection Act, Chapter 93A. The case dragged on through two appeals, and was finally concluded with the payment of $872,000 from the listing broker.

The couple had previously settled with the sellers’ lawyers for $150,000 and, following a one week jury trial on damages, had also received a damage award of more than $425,000 against their own closing attorney for her malpractice.

What troubles me most about this case is that the attorneys got caught up in this scheme, either intentionally (in the case of the seller’s attorney) or by failing to recognize the shenanigans going on (in the case of the buyers’ attorney). The lesson to be learned is that if there’s smoke, there’s usually fire.

For more information about the case, read Sally & Fitch’s press release here.

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Richard D. Vetstein, Esq. is an experienced Massachusetts Real Estate Litigation Attorney who has litigated hundreds of cases in the Massachusetts Land and Superior Courts. For further information you can contact him at [email protected].

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Apartment “Amenity Use Fee” Ruled Unlawful In Class Action Against Archstone Properties

by Rich Vetstein on February 11, 2012

in Disclosures, Landlord Tenant Law, Leasing, Massachusetts Real Estate Law

Federal Judge Rules $475 Apartment Amenity Use Fee Violates Massachusetts Security Deposit Law

Some large apartment owners, such as Archstone Properties, have been charging tenants a separate “amenity use fee” for use of the community pool, workout room, media center and other amenities, or a separate “move-in” fee or pet fee. The fees can be rather hefty; several hundred dollars in many cases. Well, a federal judge recently struck down these fees as illegal under the Massachusetts Security Deposit Law. What’s more, the judge has allowed a class action to proceed against Archstone Reading apartment complex which may be on the hook for thousands if not millions in refunds to tenants. Other apartment complexes may have legal exposure if they used similar amenity use fees.

Massachusetts Amenity Fee Class Action

The case is Hermida v. Archstone Properties (D. Mass. Nov. 29, 2011). The case arose out of a $475 amenity use fee charged by Archstone Properties in their Reading, Massachusetts apartment complex. The judge ruled that under Massachusetts law, landlords can only charge tenants for: (1) first month’s rent, (2) last month’s rent, (3) a security deposit, and (4) a key installation fee. The additional amenity use fee is illegal, Judge Young ruled, if it is required, not optional, and charged up front, i.e, a condition to renting. Judge Young also approved the case for class action status.

The class action attorney handling the case, Matthew Fogelman, Esq., is also investigating whether other apartment complexes and landlords have charged similar amenity use fees, move in fees and/or pet fees, for potential class actions against those apartment complexes. If you were ever charged a separate amenity use fee, move-in fee, or pet fee as part of your rental lease, please email me at [email protected] and I will put you in contact with the case attorney. You could be entitled to a refund of several hundred dollars and possibly additional compensation.

Alert: Property managers are asking tenants to sign releases to get a refund of their amenity use fees. DO NOT SIGN ANY RELEASE OR WAIVER FORM UNTIL YOU HAVE CONSULTED WITH AN ATTORNEY. YOU COULD BE WAIVING YOUR RIGHT TO COLLECT THE MAXIMUM AMOUNT OF COMPENSATION.

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Richard D. Vetstein, Esq. is an experienced Massachusetts Real Estate Litigation Attorney who has litigated hundreds of cases in the Massachusetts Land and Superior Courts. For further information you can contact him at [email protected].

This post may be considered “attorney advertising.”

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Why Is The Massachusetts Association of Buyers Agents Scaring Short Sale Buyers?

by Rich Vetstein on February 8, 2012

in Massachusetts Real Estate Law, Short Sales

Short Sales Remain A Good Bargain For Educated Buyers

I was shocked to see this headline today in Banker and Tradesman: Buyers’ Agents Caution: Stay Away From Short Sales, If You Can. Behind this sensationalist headline is the Massachusetts Association of Buyer’s Agents (MABA) which is “warning buyers to say away from short sales.” Say what?!

Sam Schneiderman, the President of MABA states in the article that:

“But even though short sales are taking up a greater share of the market, many buyers aren’t fully aware of the trials and tribulations involved in the transactions. Buyers are thinking short sales are great deals – but it hangs you up for two months, three months, six months,” he said. “Whatever your timetable is, it’s bound to not co-operate. . . Even though banks have made efforts to speed up shorts in recent months, Schneiderman says such problems are endemic to the short sale process, with the buyer almost always left hanging while the bank frets and bickers with the seller and any second or third lien holders. “

Perhaps the MABA’s press release got “lost in translation” and Banker & Tradesman ran with a provocative headline, as Mr. Schneiderman suggests in his comment below. The article certainly spawned a fair amount of negative commentary.

The one thing we can all agree on is that potential short sale buyers must be educated on all of the risks and possible delays inherent with a short sale. The same is true for buyers’ agents who are likewise inexperienced with short sales. Short sales are growing segment of the Massachusetts market, and are predicted to be even hotter in 2012 with lenders trying to unload a stagnant inventory of distressed real estate. Scaring potential buyers (and inexperienced agents) with short sale war stories isn’t going to help anyone.

In response to the article, Andrew Coppo of Greater Boston Short Sales LLC, says:

“As somebody who exclusively negotiates Massachusetts short sales, this article is precisely the reason why agents need to be educated further if they plan on taking short sale listings or showing a short sale listing to a potential buyer. If not, they are doing their client a disservice. Short sales require much more work than a traditional sale, but commissions are typically the same, and in some cases less, therefore not all agents are willing to invest the extra time and effort needed to obtain short sale approval. A majority of agents undertake these transactions before fully understanding the lenders’ specific requirements and procedures. The problem is not short sales, but rather the number of inexperienced agents attempting to handle these types of transactions.

As someone with an extremely high short sale success rate, I do my homework upfront to make certain that the seller first qualifies for the short sale. I also make certain to give both the buyer and seller a reasonable time frame in which to expect to receive short sale approval. That way, everyone is on the same page and you avoid having the buyer walk away prior to giving the lender a reasonable opportunity to receive all necessary approvals from underlying investors. My company has helped hundreds of real estate agents get their short sales closed. Depending on the lender, and the amount of lien holders, we can typically get a short sale approved in the first sixty (60) days. If the buyer is not willing to remain a party to the transaction for the requisite sixty days, they are not the “highest and best offer” and their offer should never be presented to the lender.”

Andrew is spot on. By definition, short sales are a unique type of transaction and riskier than normal transactions. That is why the purchase price is usually discounted. Sometimes, short sales are not approved. But most often they are. Agents have to educate buyers about the time process inherent with a short sale. You are not going to close a short sale in 30 days. There could be, and often are, some delays.

I recently authored a post on how to properly write up sales contracts for short sales which was re-published by Banker and Tradesman. The risks can be properly managed. I, and the experienced short sale agents with whom I work, have successfully closed hundreds of short sales, with minimal delay.

I hope the next press release issued by MABA on short sales is more positive.

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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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Supplemental and Friend-Of-The-Court Briefs Filed In Eaton v. Federal National Mortgage Ass’n (Fannie Mae)

by Rich Vetstein on January 31, 2012

in Fannie Mae, Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages, Title Defects, Title Insurance

Update (6/22/12): SJC Issues Final Opinion (click to read)

For interested legal observers of the foreclosure crisis, it really doesn’t get any better than this.

Supplemental and amicus curie legal briefs have been filed in much awaited case of Eaton v. Federal National Mortgage Ass’n, and they make for great reading. The briefs were filed in response to the SJC’s concern, mid-appeal, over whether an adverse ruling against foreclosing lenders will have a disastrous impact on foreclosure titles and, if so, whether its ruling should be applied prospectively rather than retroactively. Click here for our past posts on the case.

Notably, the Federal Housing Finance Association, the congressional conservator of the bailed out Fannie Mae and Freddie Mac, filed a rare amicus brief and laid a shot across the SJC’s bow. It suggested that the congressional bailout law would trump an adverse decision by the SJC to the extent that it interfered with Fannie and Freddie’s mission to secure the health of U.S. secondary mortgage market. This is the first time that I’m aware of the federal agency intervening in a particular foreclosure case.

Not surprisingly, Fannie Mae, FHFA, and REBA (Real Estate Bar Ass’n) and the other industry groups argue against a retroactive application of an adverse ruling, claiming that it would have a disastrous effect on homeowners with foreclosures in their titles.

Eaton (which cited this Blog), the legal services groups and foreclosure defense groups say that the sky will not fall down if the unity rule is applied retroactively; indeed, foreclosures in Mass. have increased post-Ibanez. They also argue that the law is the law, and it’s the lenders fault for creating a securitization scheme in violation of the law, so they should have to deal with the repercussions.

I have also attached REBA’s and Attorney Glenn Russell’s (lead counsel in U.S. Bank v. Ibanez) submissions on the recent Land Court ruling in Wells Fargo v. McKenna where the Land Court Judge Gordon Piper held that Massachusetts does not require the unity rule.

A final decision is expected in February or March.

Click here for the particular brief:

Real Estate Bar Ass’n (REBA) Brief      REBA Letter re. McKenna case

Land Title Ass’n Brief

WilmerHale Legal Services Brief

Appellee Henrietta Eaton Brief (citing this Blog)

Fannie Mae Brief

Federal Housing Finance Ass’n Brief

Ablitt Schofield PC Foreclosure Law Firm Brief

McDonnell Property Analytics Brief

Professor Adam Levitin Brief

National Foreclosure Defense Group Brief

Attorney Glenn Russell Foreclosure Defense Brief (Part 1 and Part 2)

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate litigator and attorney. Please contact him if you are dealing with a Massachusetts foreclosure title dispute.

 

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Buyer Loses $31,000 Deposit After Refusing To List Current Residence For Sale As Financing Condition

by Rich Vetstein on January 30, 2012

in Massachusetts Real Estate Law, Mortgages, Offer To Purchase, Purchase and Sale Agreements, Real Estate Litigation

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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New Trends Emerging In Massachusetts Short Sale Legal Practice

by Rich Vetstein on January 24, 2012

in Foreclosure, Massachusetts Real Estate Law, Offer To Purchase, Purchase and Sale Agreements, Realtors, Short Sales

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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Federal Judges Read Law Blogs (Including This One!)

by Rich Vetstein on January 18, 2012

in Massachusetts Real Estate Law

Judge William G. Young

I just wanted to pass along a neat story from a colleague evidencing the growing trend of judges turning to law blogs in their research of opinions. Federal Judge William Young spoke yesterday at a real estate bar association meeting about his recent and somewhat controversial opinion in Culhane v. Aurora Loan Servicers which considered the very complex maze that is Mortgage Electronic Registration System (MERS). I covered the case in this blog post.

Judge Young discussed the process by which he and his law clerks “learned the law,” and said it included tuning into “the blogs,” mentioning this blog by name. (My colleagues at Rackemann Sawyer’s Land Use Monitor should also be included). Judge Young also apparently read my post dissecting his ruling, stating that “he calls them the way he sees them,” and “everyone is entitled to their opinion.” I’m flattered that Judge Young would even consider reading this blog, and for lack of a better phrase, I think it’s pretty cool!

With blogs providing timely legal analysis so much faster than the traditional law reviews published by law schools, it’s not surprising that judges such as Judge Young are turning to them as a resource. Kevin O’Keefe of legal blog publisher LexBlog has been tracking such instances for awhile now, and it’s widespread throughout the country, with judges even citing law blogs in written opinions. Lawyers should take note of this when preparing their cases.

I’m happy to be a resource for Massachusetts real estate law. If I can contribute in the slightest way to the administration of justice and the development of our jurisprudence, I am very grateful.

~Rich

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