Bar Assn. Lawsuit Targets Kentucky Based Settlement Service Company Employing Local Contract Attorneys
As first reported today by Massachusetts Lawyers Weekly, the bar association for Massachusetts real estate attorneys (REBA) has filed a lawsuit against National Loan Closers, Inc., a Kentucky closing services company, and a Holyoke attorney for allegedly conducting illegal “witness-only” real estate closings. REBA was behind last year’s landmark Supreme Judicial Court ruling in REBA v. National Real Estate Information Services, which held that Massachusetts attorneys are legally required to oversee all residential real estate closings in Massachusetts.
REBA’s suit against National Loan Closers is notable because NLC is alleged to have side-swiped the REBA v. NREIS court ruling by contracting with local attorneys to attend real estate closings. According to the suit, NLC’s model is for these contract attorneys to act similarly to the robo-signers who sign foreclosure documents, as they are simply there to witness and notarize documents and are contractually prohibited from giving legal advice to the parties at closing. Thus, this model runs afoul of the REBA ruling’s mandate that attorneys “substantially participate” in the closing process by reviewing the title and ensuring that title passes legally.
REBA argues, and I agree, that such closings put home buyers and mortgage lenders at risk, erode the public’s confidence in the state’s recording and registration system, and deprive the Massachusetts Interest on Lawyer Trust Accounts program — IOLTA — of thousands of dollars of revenue.
No home buyer wants to close on the single biggest purchase of their life with a contract attorney who knows nothing about the transaction and cannot answer the most basic of legal questions. In the standard model, a supervisory Massachusetts attorney will examine the title and certify under state law that the title is good, clear and marketable, and often that same attorney (or a junior associate with full familiarity with the file and title) will be the closing attorney.
The complaint filed in The Real Estate Bar Association for Massachusetts, Inc. v. National Loan Closers Inc., et al.can be found by clicking here.
The Massachusetts closing attorney is responsible for verifying the correct amount of real estate taxes assessed against the property, collecting sufficient amounts to pay for any outstanding and/or upcoming tax bills, and to adjust between buyer and seller any payments already made by the seller. The way in which Massachusetts real estate tax bills are due and payable, however, often creates confusion for parties at the closing.
For most Massachusetts cities and towns, real estate tax bills are mailed and taxes are collected on a quarterly basis. The fiscal year for property tax is July 1 to June 30. The schedule of mailings, due dates, and the three months each payment covers is outlined on the following chart:
Quarter
Mailed By
Due Date
Payment is For
1st
June 30
Aug 1
July, Aug. Sept.
2d
Sept. 30
Nov. 1
Oct., Nov, Dec.
3rd
Dec. 31
Feb. 1
Jan, Feb., March
4th
March 31
May 1
April, May, June
The confusion is caused because most folks are not aware that the tax bill which is due on Aug. 1 covers taxes due for the preceding month of July and the following month of September.
So, if you are closing on March 1 and the seller has already paid the tax bill due on Feb. 1, the buyer will be responsible for an adjustment due the seller for the 31 days of March.
Now, here’s the kicker. As part of the mortgage escrow account requirement, explained below, the lender will most likely require the borrower to pay the real estate taxes due May 1 in advance, thereby requiring the borrower to bring a lot more to closing than he or she was expecting. The lender wants to ensure that all real estate taxes are paid in advance so no tax lien gets filed on the property. This is very common, but not often explained by the loan officer ahead of time, thereby falling on the closing attorney to break the “bad news.”
Mortgage Escrows
All lenders are now requiring that borrowers establish an escrow account for the payment of real estate taxes, homeowner’s insurance, and mortgage insurance (if lower than 20% down payment). The escrow account is like an insurance policy to ensure that real estate taxes, insurance and PMI is paid by the homeowner. The escrow account will typically be funded with up to 3-4 months of payments in advance, paid at closing. Some lenders will allow for a waiver of the escrow account, but often with an increase in the interest rate.
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…
All of the Massachusetts registries of deeds now offer free online document search capabilities. The main portal for most registries is www.masslandrecords.com operated by the Secretary of State’s Office. Other registries have their own systems.
Here is a handy list of all registries liked to their online search portals:
In the basic search form, you input the property owner’s last name and first name and hit search. For common names, this will often generate too many names results as the search function is not limited to town.
2. By Name/Advanced
In the basic search form, click the Advanced button on the right side. The search will expand to the screenshot above. This is the optimal search method as you can limit the search by town and document type. I usually leave the search on “all document types.”
3. By Book and Page
Massachusetts Registry of Deeds documents are organized by “book and page.” Before electronic records, land records were recorded in actual thick book volumes. The “book” reference refers to the volume number and the page refers to the page number. Each recorded instrument has its own unique book and page reference at the top of the document’s first page. Even with the proliferation of electronic records, the book and page reference is still in operation in Massachusetts.
4. By Property Address
A newer functionality, you can also search by street address. In my experience, however, the results are often inaccurate so I would not rely on this search method.
Search In Action
So, let’s give this a try. Find your registry where you live. Use the Registry County Map if you don’t know. In the basic search form, click advanced. Input your first and last name and click your town in the drop down menu. Press Search. Voilá, there’s a list of all recorded instruments on your title. For viewing and printing, click any of the documents. The details will appear on the right side of the search page. Click View Images and the image will appear in a new window. You can print from there.
Please note that the above is not a substitute from a full title exam by a qualified title examiner and should not be relied upon for any purchase, sale or refinance transactions. A statutory title certification covers a 50 year period and also checks bankruptcy and probate records.
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 isOleg 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.
Plot Plans, also called Mortgage Inspection Plans, were once part of every Massachusetts real estate purchase closing. These days, some lenders do not require them and I will tell you why in this post. However, despite the limitations of a plot plan, I think it’s a good idea for buyers to purchase a plot plan at closing. The typical cost of a plot plan is around $125.00 so it’s affordable.
While it is not nearly as accurate as a full instrument land survey, a plot plan will give the buyer a visual of the lot lines, the approximate location of the home and accessory structures, and any easements running through the land. Also, when you go to sell your property, a plot plan is helpful for prospective buyers to review as part of the marketing package.
What Is A Plot Plan?
A plot plan, also called a Mortgage Inspection Plan, confirms the following information:
Does the house or building, as well as accessory structures (pools, sheds, etc), conform to the local setback zoning by-laws?
Does the house or building, as well as accessory structures, fall within the FEMA flood hazard zone (which would require flood insurance)?
Are there any building encroachments?
Are there any recorded easements running through the property?
In addition to answering these questions, a plot plan includes helpful reference information such as the deed book and page numbers, property plan numbers, land court plan numbers (if applicable), assessor map and lot numbers and F.E.M.A. rate map numbers. This information can be very helpful to the homeowner and a potential buyer as well.
How Is A Plot Plan Prepared?
It is important to point out that a plot plan is NOT a land survey, and is not prepared using standard instrument survey instruments. A plot plan is prepared using visual inspection and measuring tapes only. A physical inspection of the dwelling’s exterior is made, with tape measurements to show the approximate location of the dwelling. The preparer will review the recorded deed and plan(s) obtained at the Registry of Deeds or town offices to determine the lot configuration. Information from the field is merged with record information to create a drawing of the property (the plot plan) and the approximate location of the dwelling on the lot. The flood zone is determined. A quality review performed by Professional Land Surveyor.
The accuracy of a plot plan is usually within two to three feet. The field work involved in preparing the Mortgage Inspection Plan does not include the setting of property line stakes. Therefore, although tape measurements are sufficient to make zoning and flood hazard determinations, the plan should not be used as a substitute for a “Building Permit Plot Plan” or to determine property lines. A plot plan cannot be used as a substitute for a full instrument land survey.
What is Not Provided by a Mortgage Plot Plan?
As stated before, a plot plan has its limitations, which is a reason cited by lenders for not requiring them, such as:
No representation is made as to the accuracy of the depicted property lines.
No attempt has been made to verify the boundary configuration or, typically, the mathematical correctness of the legal property description.
Property corners can not be located based on this type of plan, therefore no fences, hedge rows or other improvements can be determined or located.
The location of any improvements shown are approximate, and therefore any planned construction should not be based on the locations as shown.
What is a Certified Plot Plan, Boundary, Land or Instrument Survey?
An accurate instrument land survey involves the location of established monuments or survey control points, which are then mathematically tied in to the property being surveyed. This process utilizes sophisticated, state-of-the-art equipment, and precisely locates both the property lines and the improvements on the property in relation to those property lines. The cost of a full instrument survey can range from $1,000 to $5,000, depending on the property. You can use a land survey for construction, Land Court, and Registry of Deeds plans.
How Do I Get A Plot Plan?
If your lender requires a plot plan at closing — check your Good Faith Estimate or closing cost worksheet — it will order one for you and you’ll have it at closing. If your lender does not require a plot plan, speak to your closing attorney and they will gladly order one for you!
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.
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?
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.
QuickBooks Enterprise hosted on Citrix Virtual desktop is an perfect example of an accounting software used by real estate agents which lets you put a signature on a document without the hassles of scanning, printing, signing, and faxing. Instead, you can simply view documents online and add your signature electronically.
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?
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.
The deed is the cornerstone of property ownership in Massachusetts and throughout the country. In Massachusetts, there are three types of deeds: a quitclaim deed, a warranty deed, and a release deed. By far the most common deed used in Massachusetts is the quitclaim deed (scroll down for example below), and I’ll focus on that in this post.
Quitclaim Deed Covenants
The quitclaim deed is by far the most common and standard form of deed for Massachusetts residential real estate conveyances. Quitclaim deeds in Massachusetts are similar to “special warranty deeds” in other states. A quitclaim deed carries with it statutory quitclaim covenants by the seller as provided in Mass. Gen. Laws ch. 183, § 17: “The grantor, for himself, his heirs, executors, administrators and successors, covenants with the grantee, his heirs, successors and assigns, that the granted premises are free from all encumbrances made by the grantor, and that he will, and his heirs, executors, administrators and successors shall, warrant and defend the same to the grantee and his heirs, successors and assigns forever against the lawful claims and demands of all persons claiming by, through or under the grantor, but against none other”.
Taking Title
How would you like to take title? This is an important question that buyers must consider. For single individuals, there really is no choice. You take title individually. For married couples, there are three choices: (1) tenancy by the entirety, (2) joint tenants with rights of survivorship, or (3) tenants in common.
Tenancy by the Entirety
This is often the best choice for married couples, and only husband and wife can benefit from this type of ownership. In a tenancy by the entirety form of ownership, 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. In the example, below you can see how the Obamas take title as tenants by the entirety.
Joint Tenants
Like tenants by the entirety, a joint tenancy with rights of survivorship provide that the surviving spouse or joint tenant automatically succeeds to ownership, by-passing probate. You don’t have to be married to create a joint tenancy. These are common when siblings share property or as between elderly parents and their children. Unlike a tenancy by the entirety, joint tenants can “partition” or split ownership of the property through a court process.
Tenants in Common
The least used type of ownership, in a tenancy in common, there is no right of survivorship. So when a tenant in common passes, their interest goes to their surviving heirs and the property must be probated for further sale or mortgage. Most folks want to avoid probate like the plague. Like a joint tenancy, a tenancy in common can be split or “partitioned” by court order.
Purchase Price
All deeds must recite the consideration or purchase price paid. So if you are looking to hide the amount you paid for your home, forget about it. The purchase price is also used to calculate deed/transfer taxes due the seller which is $4.56 per $1,000. For more info about deed/transfer taxes read I Have To Pay Tax On Selling My Home?!
Legal Description
Every deed must adequately describe the property conveyed. In the diagram below, you can see the formal legal description called a “metes and bounds” description. This will often reference a plan of the land recorded with the registry of deeds or reference markers on the property such as stone walls, surveyor points, etc. The deed may also recite easements, restrictions, covenants or takings on the property. It will also recite the last prior deed to track ownership.
Drafting, Fees, Notaries, Etc.
In Massachusetts, local practice is for the seller’s attorney to draft the deed. The registry of deeds charges a fee of $125 to record the deed which the buyer pays. All deeds must be notarized by a notary public who must verify the sellers’ identification through a state issued driver’s license or acceptable form of identification. The notary must also confirm that the sellers are signing the deed voluntarily by their own free act and will. Once the closing is finished, the closing attorney will courier the deed to the registry of deeds, perform a final title run-down, and record the deed, mortgage and other documents. The sale is then official!
What happens if the property you have under agreement is wiped out by a tornado, burns down or is otherwise subject to a casualty?
Yesterday’s horrific tornadoes — which leveled parts of Springfield and Central Massachusetts — demonstrate the power and fury of Mother Nature and how little control we have over natural disasters. Our thoughts and prayers go out to everyone affected by the tornadoes….
The tornadoes were also a stark reminder to me that an extremely important part of my job as a real estate attorney is disaster planning. Although most buyers and Realtors don’t like to think pessimistically (and neither do I), we always have to plan ahead for the worst case scenario.
Which bring us to the topic of this post. What happens if the property you have under agreement is wiped out by a tornado, burns down or is otherwise subject to a casualty?
The Standard Form Casualty & Insurance Provisions
Let’s start with the basic concept that the buyer does not own the property until the closing occurs, money is exchanged and the deed/mortgage is recorded with the registry of deeds. The purchase and sale agreement is there to govern the parties’ relationship and the property from the time the offer is signed until the closing. The seller retains ownership and control over the property during this period of “under agreement.”
Seller Must Keep Property Insured
The standard form Massachusetts purchase and sale agreement contains two important provisions dealing with homeowner’s insurance and casualty. First, the standard form provides that the seller must keep the existing homeowner’s insurance coverage in place. A good buyer’s attorney will insert language that the “risk of loss” remains with the seller until the transaction closes, to ensure that if a tornado levels the home, that loss is the seller’s responsibility.
Opt Out/Election
Second, the standard form spells out what happens if there is a casualty. If the house is deemed a causualty loss, the buyer has the option of terminating the agreement and receiving his deposit monies back. However, the buyer has the option of proceeding with the transaction and can require the Seller to assign over to the buyer all of the insurance monies available. Depending on the amount of coverage available and the cost to re-built, this may not be a bad situation, but it’s the buyer’s call.
As a “belt and suspenders” measure, I also add the following provision to my purchase and sale rider to ensure that the buyer is protected in case of a disaster:
Notwithstanding any provisions of this Agreement to the contrary, in the event that the dwelling and/or other improvements to the Premises are destroyed or substantially damaged by fire or other casualty prior to the delivery of the deed, the cost to repair which exceeds $10,000.00, BUYER may, at BUYER’S option, terminate this Agreement by written notice to SELLER, whereupon all deposits made hereunder shall be forthwith refunded, all obligations of the parties hereto shall cease, and this Agreement shall become null and void without further recourse to the parties hereto.
Although natural disasters are rare, a certain amount of disaster planning must be done for every Massachusetts real estate transaction. Think of a real estate attorney as part of your insurance policy to protect you in a worst case scenario.
The day has finally come and it’s time to close on the purchase of your property. You will need to bring the following to the closing:
Funds For Closing. If you need to bring cash to the closing, you must bring to closing a bank or certified check PAYABLE TO YOURSELF for the balance of the figure shown on line 303 on your HUD-1 Settlement Statement: Cash From Buyers. This is for fraud prevention, and you’ll endorse the check over to the closing attorney at the closing. The closing attorney should provide you with this number at least 24-48 hours prior to closing. Accordingly, if you need to move funds around from investments accounts, etc., do so well in advance of the closing, and be prepared to make a bank run to obtain that bank/certified check!
Homeowner’s Insurance Binder. At closing, you need a homeowner’s insurance binder showing the first year premium paid. If you are purchasing a condominium unit, you will need to provide us with the Master Insurance Binder, and depending on the type of loan you use, you may need an HO-6 policy covering the interior of your unit. The closing attorney will typically get an insurance binder ordered ahead of time, but this should be on your “to-do” list.
Your state issued driver’s license with picture or other picture identification. Some lenders now require a second form of i.d. Your closing attorney will advise you of this.
If a sale of your present home is required by your new lender, you must bring the HUD-1 Settlement Statement and a copy of the Deed from that transaction.
Good Faith Estimate. You should bring the Good Faith Estimate of closings costs that your lender originally provided to you during the loan application process. That way, you can ensure that the final closing costs match up to those originally quoted to you.
Draft HUD-1 Settlement Statement. You should have received a preliminary HUD-1 Settlement Statement from the closing attorney’s office. Due to lender delays, it is not uncommon to receive this the night before or the morning of closing, although this is obviously not ideal. Compare the prelim HUD to the HUD you are signing at the closing table.
Your Smile. Yes, bring your smile. It’s a happy day, and despite all the tumult and stress you are finally purchasing your home!
Seller’s Closing Checklist
Sellers will need to bring the following to the closing:
Massachusetts or state issued driver’s license
Keys to home and alarm codes/information
Smoke detector and carbon monoxide detector certifications from local fire department. Your Realtor should assist you with this.
Signed Deed from you to the buyers. Your attorney should have drafted the Deed.
Title V Inspection Report for septic system
Evidence of repairs (if applicable)
Final water/sewer bill and reading (paid) and final oil bill and statement from oil company as to amount remaining in tank. You will need to make the request at least 2 weeks prior to closing.
Copy of last paid real estate tax bill.
6D certificate for condominium unit showing that condo fees are paid up.
It’s also a nice gesture to give the new buyers the name of your landscaper, septic company, private trash hauler, handyman, etc. I’m sure your workmen will appreciate it also.
Before you close, don’t forget to:
Fill out change of address forms
Notify utility companies of move out
Discontinue phone service and cable
Leave all appliance warranties and instructions in the house (these are usually left in a kitchen drawer so they will be easily found by the new owners)
Notify insurance agent of closing date in order to cancel present policy
If you are purchasing a new home at the same time, make sure you get a copy of the fully signed HUD-1 Settlement Statement
“The only things certain in life are death and taxes.” — Benjamin Franklin
Massachusetts Deed Stamps / Transfer Tax
Much to every Massachusetts home sellers’ chagrin, there is a state tax on selling your home. Sometimes called deed stamps, transfer tax or excise tax, it’s a tax nevertheless, and sellers must pay it at closing. For every Massachusetts county except Barnstable and the Islands, the tax is $4.56 per thousand of the purchase price on the deed. For example, for a $500,000 purchase, the seller must pay $2,280 in taxes. That’s not chump change! In Barnstable County, the tax is $5.70 per thousand. Dukes (Martha’s Vineyard) and Nantucket counties charge an additional 2% land bank fee.
On the HUD-1 Settlement Statement, the transfer/deed tax will appear on line 1203.
The tax does not apply to transactions up to $100.00. That is why most “gift” transfers or between husband and wife recite consideration for $10.00 or the like, so as to avoid the deed/transfer tax.
Sellers, make sure you factor in this transfer tax, as well as the broker commission, when calculating the amount of your sale proceeds.
Ruling Mandates That Attorneys Take “Substantive Participation” In All Massachusetts Residential Transactions
The long awaited ruling from the Massachusetts Supreme Judicial Court in case of Real Estate Bar Association (REBA) v. National Estate Information Services (NREIS) has just come down. The ruling can be read below. The net effect of the Court’s ruling is to reaffirm Massachusetts attorneys’ long-standing role to oversee the closing process and conduct closings. For more background, please read my prior post, Battle Between Massachusetts Closing Attorneys vs. Settlement Service Providers Argued Before SJC.
This case pits Massachusetts real estate closing attorneys vs. out of state non-attorney settlement service providers which are attempting to perform “witness or notary” closings here in Massachusetts. At stake is the billion dollar Massachusetts real estate closing industry.
Quick Analysis
Massachusetts attorneys must be present for closings and take active role in transaction both before and after the closing. The substantive ruling from the court was a huge victory for Massachusetts real estate closing attorneys and their continued, long standing involvement in the residential real estate industry. The court requires “not only the presence but the substantive participation of an attorney on behalf of the mortgage lender.” This is what Massachusetts real estate attorneys have been fighting about for consumers in the face of out of state settlement companies who have tried to conduct closings with “robo-attorneys” and notaries who cannot explain complex legal documents to parties at the closing table. The court stated:
The closing is where all parties in a real property conveyancing transaction come together to transfer their interests, and where the legal documents prepared for the conveyance are executed, often including but not limited to the deed, the mortgage and the promissory note. The closing is thus a critical step in the transfer of title and the creation of significant legal and real property rights. Because this is so, we believe that a lawyer is a necessary participant at the closing to direct the proper transfer of title and consideration and to document the transaction, thereby protecting the private legal interests at stake as well as the public interest in the continued integrity and reliability of the real property recording and registration systems.
Applies to Both Purchases and Refinances. The court made no distinction between purchase and refinance transactions. The same essential functions of the attorney — examining and ensuring marketable title, handling the mortgage proceeds under the “good funds” law, and ensuring that the mortgage is properly recorded and the prior mortgage is discharged — are the same in both a purchase and refinance. Accordingly, in my opinion, the ruling applies to both purchase and refinance transactions.
No “Robo-Attorneys” Allowed. NREIS’ business model is to hire part-time, contract attorneys on an as-needed basis to conduct closings. Basically, these are kids right out of law school who get a call to drive to a closing they know nothing about for $100 or less a pop. Although they are licensed attorneys, these lawyers are really no different than the “robo-signers” in the foreclosure industry because they did not participate in the transaction from the start, they did not examine the title, or do anything to manage the transaction. Here’s what the court said about this practice:
Implicit in what we have just stated is our belief that the closing attorney must play a meaningful role in connection with the conveyancing transaction that the closing is intended to finalize. If the attorney’s only function is to be present at the closing, to hand legal documents that the attorney may never have seen before to the parties for signature, and to witness the signatures, there would be little need for the attorney to be at the closing at all. We do not consider this to be an appropriate course to follow. Rather, precisely because important, substantive legal rights and interests are at issue in a closing, we consider a closing attorney’s professional and ethical responsibilities to require actions not only at the closing but before and after it as well.
Analyzing title and rendering an opinion of clear and marketable title must be conducted by attorneys. Certifying good, clear and marketable title is the fundamental function of the real estate attorney in Massachusetts, and required by law for purchase transactions under Chapter 90, section 70. NREIS was attempting to out-source this function to out of state companies and non-lawyers, in avoidance of Mass. law.
Attorneys are required to draft deeds. The court held “because deeds pertaining to real property directly affect significant legal rights and obligations, the drafting for others of deeds to real property constitutes the practice of law in Massachusetts.”
Attorneys must effectuate the transaction. The court also ruled that only licensed attorneys have duty to effectuate a valid transfer of the interests being conveyed at the closing. This includes ensuring that the deed and mortgage are properly recorded; that the exchange of funds is properly made and that prior mortgages and liens are properly paid off and discharged.
Title abstracts, title insurance and other administrative functions are properly delegated to non-attorneys. The court also correctly recognized, consistent with modern practice, that many functions in the real estate transaction don’t have to be performed by an attorney. Included in this exempted list of functions are the preparation of title abstracts by title examiners at the registries of deeds, the issuance of title insurance policies, and the preparation of closing documents & the HUD Settlement Statement. Real estate attorneys typically use title examiners and paralegals at lower costs to perform these functions.
The case will move back to federal court where it started for more fact-finding unless it can be settled. There were several unanswered questions because the record was not adequately established. It remains to be seen whether NREIS and its ink can adopt their business model to the SJC’s holding. It’s possible it can be done, but they will have to hire a group of attorneys to manage the system.
Annual Percentage Rate (APR), Amount Financed, Finance Charge, and Total Payments…the Truth In Lending Disclosure Statement is one of the most challenging disclosure forms to explain to borrowers at a Massachusetts real estate closing. I like to call it the “Confusion In Lending” Statement because the form is what happens when the government attempts to recalculate your interest rate and closing costs in a way most human beings would not even consider.
To explain the Truth In Lending Disclosure, we’ll use a dummy form for a $500,000 purchase transaction with a $400,000 loan (20% down payment), a 30 year fixed rate loan at 5.00% at a cost of 1 point.
Annual Percentage Rate
The confusion begins. The Annual Percentage Rate, or APR, as you can see is not 5.00%, which is the contract interest rate for the loan. Why? Because the APR does not use the loan amount for its calculations but rather the “Amount Financed.”
Amount Financed
And the confusion continues. The Amount Financed is not the $400,000 loan amount, but is about $6,600 less than the loan amount. That is because the Amount Financed equals the loan amount ($400,000) less prepaid loan and closing fees and payments. Fees included in the amount financed are: points, lender fees such as underwriting, process, tax service, mortgage insurance, escrow company fees, prepaid interest to end of closing month, and Homeowners Association fees. All of these fees are added up and subtracted from the loan amount to reach the Amount Financed figure. Note that depending on when the loan closes in the month, and fees from third parties such as escrow companies the Amount Financed will vary and therefore so will APR.
How The APR Is Calculated
Now that we have the Amount Financed, we can calculate the APR. For a 30 year fixed loan such as this, the true loan amount is amortized for the loan period using the interest rate. In our example $400,000 amortized for 30 years at 5.00% has a payment of $2,147.29 per month paying principal and interest.
To calculate the APR, we use the same payment –$2147.29 every month for 30 years– to pay off an Amount Financed of $393,372.22 (loan amount less costs) to reach an APR of 5.141%. So the APR is higher than the interest rate because the Amount Financed is lower than the loan amount for the same monthly payment and term.
ARMs–Adjustable Rate Mortgages
If you are taking out an adjustable rate mortgage (ARM), you may as well just throw the Truth in Lending Disclosure out the window. The TIL is allowed to be based on the introductory interest rate through the entire life of the loan. Your adjustable rate mortgage, however, will reset its interest rate after 3, 5, 7, or 10 years depending on the type of product. There’s no way to predict where interest rates will be in the future, so the Truth in Lending Disclosure is inherently inaccurate for ARMs.
Explaining the Truth in Lending Disclosure is one of the many functions of a Massachusetts real estate closing attorney. In other states which aren’t required to use closing attorneys, they will not explain these complicated forms to you.
In Massachusetts, buyers and sellers typically use the standard form purchase and sale agreement created by the Greater Boston Board of Real Estate. This form has been around since the late 1970’s and last updated in 1999–which might as well be 100 years ago in real estate life. Along with the standard form, attorneys for sellers and buyers customarily add specialized Riders to the agreement which modify the standard form and add contingencies particular to the deal.
A Vastly Changed Landscape
The legal and mortgage financing landscape has changed so much in the last few years, with Fannie Mae and regulatory agencies issuing a new policy what seems like every other week, and short sale and REO transactions becoming much more prevalent. With the recovering market and new appraisal guidelines, some homes are not appraising out. Moreover, lenders have tightened underwriting requirements considerably. As a result, borrowers have more difficulty qualifying for mortgage loans, it takes longer to get a loan commitment, and there are often delays in getting the loan “cleared to close.” All these changes in the real estate landscape require re-thinking of the standard form purchase and sale agreement and the associated riders.
As experienced Massachusetts real estate attorneys, it shouldn’t come as a surprise to know that we are on top of the latest changes in the Massachusetts and national real estate landscape, and have adapted our legal forms accordingly. I’ll go through 3 recent changes that I’ve adopted in my practice.
Low Appraisal Contingency
These days, appraisals are administered is a completely different fashion. New rules – the Home Valuation Code of Conduct (HVCC) – hold appraisers to higher standards and sharply limit communication between appraisers and lenders. Mortgage professionals can no longer select their “hand-picked” appraiser now; there is basically a random lottery system to select the appraiser. The downside of this lottery is that the appraiser may not be very familiar with the town or neighborhood being appraised. So the appraisal may fall short of the agreed-upon selling price.
I always insist on this provision to protect a buyer against the risk of the property not appraising out.
Appraisal– The buyer’s obligations, hereunder, are contingent upon the BUYER’s lender obtaining an appraisal of the property in an amount at least equal to the purchase price of the premises.
What happens if the property doesn’t appraise for asking price? Sometimes you can ask for a second appraisal or bring different comparable sales to the appraiser’s attention and he can revise the appraisal. Sometimes, the parties must re-negotiate the purchase price. Talk to your lender and Realtor about the options. This provision, however, gives the buyer an “out” if a low appraisal cannot be overcome.
The Condominium, the Unit, and the Condominium Documents (including but not limited to the Master Deed and By-Laws/Trust) shall conform to the requirements of Federal National Mortgage Association (“FNMA” or “Freddie Mac”), Federal Housing Administration (“FHA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) or other secondary mortgage market investor, and shall otherwise be acceptable to BUYER’s mortgage lender.
Rate Lock Expirations
Delays happen. There may be a title problem which the seller needs a few days or weeks to correct. But what if your rate lock will expire and you are facing a higher interest rate loan? This provision protects the buyer in this situation:
MODIFICATION TO PARAGRAPH 10: 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.
There are many other contingencies and new provisions that I use, but I cannot give them all away!
Many home buyers today still need to sell their current homes and use the sale proceeds for their next purchase. Often, there is a closing in the morning on the “sell,” and a closing in the afternoon on the “buy.” This is called a “piggyback” or “back to back” sale.
Back in the boom days, we were doing piggyback transactions all the time, and lenders were able to offer special programs, like bridge loans, to facilitate these back to back transactions. The days of bridge loans, no-docs, and 100% financing may be over, according to Mortgage Network’s Mark Maoicca, but piggyback transactions are still going on, but in a changed market.
There are numerous factors and variables to consider when doing a piggyback transaction, from a legal, financial/lending and marketing perspective. There can be at least 11 different people involved – buyer, seller, 2 agents, up to 3 attorneys, loan officer, appraiser, home inspector and contractor.
Sales/Marketing
There are a number of considerations on the sale/marketing side according to Jon Ufland and Chuck Silverton of Prudential Unlimited Realty. When to put your home on the market so as to ensure a quick sale? Statistics show that the most sales activity in the Greater Boston area occurs in March, April and May, with families trying to get settled before the summer and back to school season ends. December through February is the dead zone. Getting a pre-sale home inspection and comparable market analysis before putting your home on the market are two good tips suggested by Jon and Chuck.
Lending
According to Mark, lenders are no longer offering bridge loans or 100% financing, which helped cash strapped sellers to close on their new purchases. Also, home equity lines are tougher to qualify for. No income verification and stated income loans are just about long gone for the recently self-employed. Mark also says that the days of “washing the rent” on income properties is over. You need a 2 year history of rental income for qualification purposes. You also need to factor in the required real estate tax and insurance escrow reserve in your mortgage payment affordability analysis.
Bottom line, confer with your loan officer and financial planner as early as possible in the process before putting your house on the market! Get those financial ducks lined up before….
Coordination & Control
The piggyback transaction works best when one person takes on the role of “project manager.” It’s usually your real estate agent or attorney. Communication and coordination is the recipe for a successful piggyback transaction.
On the legal side, the overriding goal is to keep your buyer’s feet to the proverbial coals on the sale while protecting your deposit on the buy. It may seem like common sense, but it’s best to hire the same attorney to handle both transactions. An experienced attorney will line up the two mortgage contingency deadlines so that your buyer will obtain a firm loan commitment as soon as possible (with no contingencies, especially the sale of other property), and you have sufficient time on your purchase to get your own firm commitment while protecting yourself from any worst case scenarios like job loss, defective title, etc. The attorney should always be on top of these important deadlines so he or she can ask for extensions and otherwise exercise any opt out rights. Failure to do that can result in the loss of your deposit. Delays are common today in the tighter lending environment.
The Big Day
As the closing day approaches, everyone gets into high gear, with the agents coordinating smoke certs and pre-closing walk-throughs, the attorneys drafting preliminary HUDs, deeds, and coordinating wires, and loan officers sending closing packages. Speaking of wires, your attorney should be able to coordinate a wire of your sale proceeds into the IOLTA account of the purchase closing attorney, so you have good funds to close.
The closing day is about as hectic as you can get. I suggesting giving your attorney a power of attorney so he or an associate can attend the closing on the sale, get on record, coordinate the funds, and you can deal with moving and attending the purchase closing in the afternoon.
Jon, Chuck, Marc, Rich and Mark have all worked together as a team on piggyback transactions. Don’t hesitate to contact us if you need expert assistance.
Are Electronic Contracts And E-Signatures On The Way?
Catching my eye this week was a recent New York Times article discussing a New York state court opinion regarding the legal effect of e-mail in real estate contracts. The ruling reaffirmed that e-mail may carry the same weight as traditional ink on paper contracts.
It made me think about the future of real estate contracts and how they will look. Will the common practice of executing four original purchase and sale agreements be replaced by some type of electronic PDF document with electronic signatures? (I hope so. They are in the West Coast now). Same for the standard Offer to Purchase? What about the stack of disclosures and loan documents signed at closings? (There must be a better way). And mortgages are already being electronically recorded in several Massachusetts counties.
I wonder how closings will be conducted in 2021?
Congress and state legislatures have already laid the groundwork for electronic real estate contracts and e-signatures. In 2000, Congress enacted the E-SIGN law which validated certain contracts in electronic form and electronic signatures. In 2004, Massachusetts adopted the Uniform Electronic Transactions Act (UETA), which is essentially updates the 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 exempts several types of contracts and disclosures (e.g., wills), but not real estate contracts.
Old Traditions & The Statute of Frauds
But old traditions are hard to change, especially when it involves real estate. As every first year law student learns, Massachusetts real estate contracts are governed by the Statute of Frauds. This doctrine, originated in old English common law, says that any contract for the sale of real estate must be in writing and “signed by the party to be charged therewith.” One can make a compelling argument that secured electronic contracts and signatures serve the purpose of the Statute of Frauds by providing some objective evidence, other than word of mouth, that there really has been a binding deal.
I haven’t found any cases dealing with the interplay between the UETA and the Statute of Frauds. And there’s something about that “wet” ink signature on real paper that gives people security and comfort. The same is true for our beloved Greater Boston Real Estate Board standard form Offer and P&S. We’ll have to see how the issue plays out in the courts.
But if you can purchase a Ferrari online through E-Bay, why can’t you buy a home using a secure electronic contract? How do you think technology will affect real estate in the future? What would you like to see change in the industry?
One of the most important jobs of the closing attorney during a Massachusetts refinance or purchase transaction is to fully explain the numerous closing costs that a borrower (and seller) must pay at closing. The best way to explain Massachusetts real estate closing costs in a blog post is the same way we would explain it at the closing–by reviewing the HUD-1 Settlement Statement line by line.
Prior to the closing, you should have received a Good Faith Estimate of closing costs from your lender. A good mortgage professional will always explain closing costs before you arrive at the closing table. The Good Faith Estimate or GFE will be a precursor of what you’ll be charged at closing, and certain closing costs cannot vary by more than 10% from the GFE. Bring your GFE to the closing to compare it with the HUD Settlement Statement.
HUD First Page, Borrower’s Column
We’ll use an actual HUD from a recent transaction, deleting the parties and property of course. This is a purchase for $250,000, reflected in line 101. The buyer is taking out a loan of $243,662.00 (line 202) to finance the sale. This is a FHA low down payment loan where the borrower must pay FHA mortgage insurance.
The total settlement charges, which are fully broken down on page 2 of the HUD (get to that down below), paid for by the borrower are $7,758.09, line 103. Because the closing took place on Jan. 31, in the middle of the tax fiscal quarter, real estate taxes on line 106 must be adjusted and paid for by the borrower through the end of the quarter, 3/31. As is customary in Mass., the borrower is also paying for home heating oil paid for by the seller and left in the tank (line 109–$241.20).
Line 120 tallies up the total amount due from the borrower at closing. Deducted from that number is the buyer’s deposit of $2,500 (line 201), and the buyer’s new loan of $243,662.00 (line 202). This borrower also fortunately received a seller closing cost credit of $5,708.93 (line 204) and a lender closing cost credit of $609.16 (line 205). Those credits really helped this borrower defray the closing costs.
In this transaction, there is a difference of $6,250.00 between the gross amount due from the borrower less the amounts paid by or for the borrower, which must be paid at at the closing (line 303). The borrower must bring a certified or bank check payable to himself (for fraud protection) for that amount to the closing.
Page 2 of the HUD
Page 2 of the HUD Settlement Statement itemizes all of the various closing costs, both from the borrower’s and seller sides.
Line 700 Series–Broker Commissions
In Massachusetts, the seller pays the real estate broker commission. Here, the seller is paying a total of 5% of the purchase price, or $12,500.
Line 800 Series–Lender Closing Costs
In this transaction, the lender is charging an “origination fee” of $1,735.00. This is the fee for procuring the loan. The lender has also charged the borrower for an appraisal for $425.00 but the initials “POCB” means it was paid for outside closing by the borrower. There are also small charges for a credit report and flood certification.
Line 900–Daily Interest and Mortgage insurance
The borrower is responsible for paying interest on the new mortgage loan from the closing date to the first day of the following month. That’s why most closings take place at the end of the month. The borrower is charged one day of interest of $32.54 (line 901). As this borrower is not putting 20% down, this particular loan requires mortgage insurance of $2,412.50 paid at closing by the borrower (line 902).
Line 1000–Escrow Reserves
The vast majority of mortgage lenders require borrowers to fund a real estate tax and homeowner’s insurance escrow account. Occasionally, a lender will waive the escrow for a fee or small interest rate increase. This is an aspect of closing costs that many borrowers have difficulty understanding.
The escrow account helps you and the lender anticipate and manage payment of property expenses by including these expenses as a portion of your monthly mortgage payment. Think of the escrow account as a small savings account for these expenses. An incremental amount of these expenses is added to your monthly mortgage payment, in order to cover these expenses when they are due. The lender will pay, on your behalf, the real estate taxes due on a quarterly basis, as well as the homeowner’s insurance for the following year.
Each year, your escrow account is reviewed to determine if the amount being escrowed each month is sufficient to pay for any change in your real estate taxes or homeowner’s insurance premiums. At closing, the closing attorney will collect sufficient funds to start your escrow account, typically 2-3 months worth of real estate taxes and up to a 12 months of homeowner’s insurance. In this case, the borrower must fund the escrow account with $817.12 (line 1001), which consists of 3 months of homeowner’s insurance and 2 months of real estate taxes. Remember, when you sell your home (or refinance) you will recoup your escrow account monies.
Line 1100–Title Charges
The line 1100 series shows the fees associated with the title examination, closing attorney fees and title insurance. In all transactions the lender requires the borrower to pay for lender’s title insurance and the settlement or closing fee to the closing attorney. In this transaction, the borrower has opted to purchase his own owner’s title insurance policy which protects the owner’s property and is highly recommended for many reasons. Read our post on title insurance here. So the borrower is charged $1,799.00 plus $477.50 for all the title work, closing attorney and both lender’s and owner’s title insurance premiums. The fee for reviewing and drafting the purchase and sale agreement is also included in the settlement fee on line 1102.
Line 1200–Gov’t Fees
The county registry of deeds imposes fees for the recording of the deed ($125) and mortgage ($175) which the borrower pays. The borrower also paid recording fees for an “MLC” which is a municipal lien certificate and a declaration of homestead. The seller pays the fee for the release ($75). The seller also pays a state transfer tax of $2.28 per $500.00 of value.
In Closing…
That’s basically it. Remember that closing costs differ widely between lenders, loan products, loan amounts, and closing attorneys. Make sure you ask to review the HUD Settlement Statement prior to the closing. It should be ready the day before or that day. Again, you should always speak to your mortgage professional about closing costs before you arrive at the closing table.
If you would like to speak with our office about handling your purchase or refinance transaction, please contact us at [email protected] and check out our website at www.titlehub.com. Thanks!
Today, the Massachusetts Supreme Judicial Court heard arguments in the closely watched case of The Real Estate Bar Association of Massachusetts, Inc. (REBA) v. National Real Estate Information Services, Inc. (NREIS). This case pits Massachusetts real estate closing attorneys versus out of state non-attorney settlement service providers which are attempting to perform “witness or notary” closings here in Massachusetts. At stake is the billion dollar Massachusetts real estate closing industry.
Unauthorized Practice of Law?
I wrote previously about the case in this post. Massachusetts’ long standing practice is for licensed attorneys to oversee and conduct the residential real estate closing process. NREIS’s business model is to outsource the vast majority of those functions to back office workers who aren’t trained attorneys. REBA argues that this practice violates Massachusetts common law and consumer protection statutes requiring that attorneys perform the most vital functions of a real estate closing transaction, such as certifying and analyzing title, preparing the deed, handling the transfer of good funds, where necessary, and conducting the closing.
The case was originally brought in federal court, where NREIS won and obtained a $1Million attorney fee award. But the federal appeals court overturned that ruling, and asked the Massachusetts Supreme Judicial Court to answer the question of whether and to what extent a residential real estate transaction and closing is the “practice of law” required to be performed only by a licensed attorney.
Questions From the Bench & Analysis
A favorable decision also upholds the notion that attorneys are vital to the conveyancing system, protect consumers, and cannot simply be outsourced to a non-trained drone. We’ve seen disastrous results when untrained folks try to perform legal tasks with the foreclosure robo-signing scandal. And the SJC may be sensitive to this having just heard the Ibanez foreclosure case.
Several of the justices weren’t buying NREIS’s argument that its non-attorney back office processors never make legal judgments, but instead simply “flag issues.” Justice Cowen raised several examples of situations requiring an attorney’s trained eye, such as analyzing a title examination, analyzing title defects, and ensuring that loan documents, the deed and mortgage are in the correct form.
Justice Cowen said that NREIS couldn’t delegate everything to a paralegal. At some point an attorney had to make the final call. And I think that is where the Court will end up on this case–hopefully!
Justice Gants and Spina both showed their studying of the conveyancing process in asking whether NREIS needed to have attorneys certify title (they do under state statute) and analyze a title rundown (yes, again).
Don’t bet against the SJC ruling against real estate attorneys in this case. After all, the justices are attorneys themselves. And they are humans. Whether they admit it or not, they are naturally inclined to favor their brethren of the bar.
Why This Case Is Important To Mass. Consumers
The purchase of a home is usually the most important investment most families will ever make. Home buyers and sellers, as well as lenders, rely on the training, professionalism, and integrity of attorneys to ensure that their property rights are protected. The reason that only lawyers can give legal advice is to protect the public. It gives the buyer and lender someone to hold accountable if there are mistakes. These multiple levels of protection permit buyers, sellers and lenders to confidently and reliably close loans worth hundreds of thousands of dollars every day. Non-attorney closings only hurt the consumer. In recent years, the real estate closing process has become as more complicated than ever. In “witness only” or “notary” closings, the non-attorneys who conduct the closings do nothing more than witness the execution of the closing documents, and cannot provide any legal guidance. What happens if an issue arises at closing requiring legal analysis? The closing attorney has the training to resolve it. The non-attorney closer will just sit there and can do nothing. Lastly, due to increased competition, there is no difference in cost between non-attorney closing companies and real estate attorneys.
In addition to the parties’ briefs, the SJC has received nearly 20 friend of the court briefs, virtually all of which support REBA’s position that NREIS is engaged in the unauthorized practice of law. SJC briefs can be found here. The webcast is found at the Suffolk Law School website.
The SJC should issue a final ruling in several months.
In a huge victory for Massachusetts real estate closing attorneys, a unanimous First Circuit federal appeals court has overturned a controversial lower court ruling which had opened the door for non-attorneys to conduct controversial “witness” or “notary” real estate closings in Massachusetts. The lower court ruling threatened to overturn long-standing statewide practice under which attorneys conduct real estate closings, and open the door for the influx of “notary” or “witness” closings where buyers and sellers receive no legal guidance during the closing.
The First Circuit decision is found here. The lower court ruling is here.
Massachusetts Courts Have Final Say
The First Circuit ruled that the Massachusetts state Supreme Judicial Court has the final say on whether attorneys must conduct real estate closings under rules governing the unauthorized practice of law. The case will now move to the SJC, which may be more hospitable to the real estate attorneys’ position. The federal appeals court also vacated a $900,000 attorney fee award against REBA.
REBA’s Position
REBA and its members believe that non-attorney closings only hurt the consumer. In recent years, the real estate closing process has become as more complicated than ever. A myriad of Fannie Mae guidelines, disclosure requirements, and RESPA rules require the parties to review, understand and execute dozens of dense legal forms and disclosures. In an attorney conducted closing, a trained lawyer will carefully review each document with the parties and answer any questions which may arise. (Click here for our post on everything a closing attorney does). In “witness only” or “notary” closings, however, the non-attorneys who conduct the closings do nothing more than witness the execution of the closing documents, and cannot provide any legal guidance.
“The purchase of a home is the most important investment most families will ever make,” REBA President Thomas Moriarty has said. “Home buyers and sellers, as well as lenders, rely on the training, professionalism, and integrity of attorneys to ensure that their property rights are protected. The reason that only lawyers – who are those trained in the law – can give legal advice is to protect the public,” Moriarty said. “This requirement gives the buyer someone to hold accountable. These multiple levels of protection permit buyers, sellers and lenders to confidently and reliably close loans worth hundreds of thousands of dollars every day.”
The Cost Factor: Debunking The Myth
The appeals court also dismissed the closing company’s claim that requiring attorneys to conduct closings was an unconstitutional restraint on trade which would result in higher closing costs. As REBA President Tom Moriarty notes, and I can personally attest, the typical attorney’s charges in connection with a closing have steadily fallen as a result of increased efficiency and competition. This is not a situation where there is one company that controls the market. There are thousands of attorneys throughout the Commonwealth who provide conveyancing and settlement services, and the competition among them is fierce. The typical closing fees are similar or less than those charged by the closing companies.
My Take
As a real estate attorney who has worked tirelessly to build my own practice, I have a rather huge professional stake interest in this case. Despite this, I cannot see how, for the same cost, borrowers and home buyers would benefit from having a non-attorney drone sit at a closing and simply notarize the dozens of complicated legal forms and refuse to answer any legal questions which may arise. This is especially the case where the legal landscape keeps getting more and more complex. Further, a non-attorney notary cannot resolve many last minute closing issues which often arise, such as title issues, hold-backs, and indemnifications. Closings will become more inefficient and mistake prone.
This is, after all, the largest single purchase in most people’s lives. It’s not the time for do it yourself (DIY).
For more information about the unauthorized practice of law issue, please visit the REBA website.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With 25 years in practice, he was voted a "Super Lawyer," a "Top Lawyer" by Boston Magazine and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
Bar Assn. Lawsuit Targets Kentucky Based Settlement Service Company Employing Local Contract Attorneys
