It's a Jungle Out There

Lots of buyers looking, not a lot of inventory.  Bidding wars, multiple offers, lost opportunities.  The March 20, 2016 Business section of the Sunday Boston Globe has much to say about this topic.  Take a look.  Home Buyers' Blues.

Beware! You may be bound by an Unsigned Purchase and Sale Agreement

A recent decision in Massachusetts Superior Court has held that a series of emails between and buyer and seller containing all of the material terms of an offer to purchase, and indicating acceptance of those terms, was sufficient to create a binding contract between the parties, even though the actual purchase and sale agreement was not executed by the parties.  In reaching this finding, the court applied principles of the Uniform Electronic Transaction Act to the ancient statute of frauds law (which requires a contract for the transfer of real estate to be in writing), and concluded that the conduct of the parties in using email to negotiate the terms of the transaction constituted an agreement to conduct the transaction by electronic means.  Since the exchange of emails contained all of the material terms of the deal and the parties expressed an intention to be bound, the Court found that an enforceable contract existed despite the lack of an actual executed purchase and sale agreement.

This case follows a series of prior decisions in which Offers to Purchase have been held binding in cases where the terms are sufficiently complete and definite and the parties intended to be bound at the time.  Many parties erroneously believe that an Offer to Purchase, and now written email negotiations, are just a formality, or an expression of intent, and that a binding contract is created only upon the execution of a final written purchase and sale agreement.  This recent case adds yet another twist to the proposition that the parties may be bound even in the absence of a signed P&S if their email negotiations are comprehensive enough. 

So buyers and sellers beware:  if your Offer, and now your email negotiations, contain all of the material terms and evidence an intention to be bound, you may indeed be bound to such agreement even if you never reach the point of executing a purchase and sale agreement. The law appears to be catching up to the 21^st  century, and some very ancient principles are now being interpreted in the context of modern technology.

To FSBO Or Not To FSBO?

You want to sell your home but you are concerned about the high cost of a broker’s commission on the sale. Should you try to sell it directly, without a broker?

In a good market, a For Sale By Owner transaction (FSBO), may not be very difficult, if you have the time and energy to invest in marketing the house properly. In a slower market, it is much more difficult to get the word out about your home, even with all of the internet resources available in the marketplace. Many who first attempt a FSBO do end up listing with a realtor.
If you are considering a FSBO listing, the following should be considered:

1. Price the home correctly. Regardless of what you think your house is worth, an overpriced property will not sell quickly. Look at recent comparable sales in the area, seek the opinion of experts, and be realistic. A new property on the market generates the most interest.

2. Put your home’s best face forward. Eliminate clutter, remove extraneous furniture, and stage the property to look its very best before showings. Repair any obvious defects, and consider improvements to maximize your property’s appeal.

3. Be willing to spend money on advertising, and use the advertising to get the word out to your target audience.

4. Hold one or more open houses. Advertise these widely, put up signs in the neighborhood, and make it easy for people to find your property. Make sure the house is well lit. Prepare a "fact sheet" showing all of the relevant factual data that a prospective buyer would want to know, and also provide written materials available about the school district, the city or town and other relevant topics. Resist providing any discretionary information about the property, however, as it will be the responsibility of the buyer to do a thorough property inspection.

5. Be flexible about scheduling showings with interested parties at other times.

6. Decide whether you are willing to pay a cooperating fee (generally 2.5 to 3 percent) to a buyer’s broker. If you are, you are likely to widen you potential market and receive inquiries by brokers working with buyer clients.

7. Have a good real estate attorney standing by to assist you when an offer is presented, and consult with that person before accepting a written offer.

If you do go FSBO, be prepared to work hard and invest a lot of time. The value of an experienced and professional realtor is often underappreciated, and once you take on the task of selling your home yourself, you may find that the services provided by a qualified realtor are worth their cost.

Attorney Representation in Residential Purchase and Mortgage Transactions

I represent many buyers of residential real estate, and I am often asked by clients whether or not I can, or should, represent the mortgage lender as well. This is a good question, and one worth spending a moment to discuss.

In Massachusetts, a residential mortgage loan must be prepared and closed by an attorney. In this context, the attorney represents the lender, but it is fairly common for a buyer to ask the mortgage lender to permit their own attorney to close the mortgage loan as well. Although a technical conflict, it is a conflict that is regularly waived by both buyer and lender because the interests of both parties are largely the same. Both want clear title, proper documents and all other matters to be in order for closing. It is extremely rare that the interests of buyer and lender become adversarial, but in those rare cares, an attorney acting in dual representation would be required to withdraw. In over 25 years of practicing real estate law, and in representing both buyer and lender in a majority of those cases, I have never been required to withdraw due to a conflict between the parties.

In my view, there are two compelling advantages to a buyer in having the buyer’s attorney close the mortgage loan: quality control and cost savings. From a quality control standpoint, most buyers feel there is comfort in knowing that the attorney they have engaged is also the one responsible for the important pieces of due diligence and preparation needed to get to closing, rather than an attorney other than the one they selected and with whom they may not be familiar. As to cost, regardless of who represents the lender, one of the buyer’s closing costs will be an attorney's fee to the lender's attorney to close the loan. This is generally a fixed fee determined by the lender and the attorney and quoted to the buyer on the good faith estimate of settlement charges. Because an attorney representing only the lender generally will not be involved with any matters outside the scope of the loan closing, a prudent buyer will also engage an attorney to handle the negotiation of the purchase and sale agreement and and any other matters that may arise strictly between buyer and seller. Depending on the buyer’s wishes, this personal representation may end upon execution of the P&S or may continue through and including the closing, and naturally, the buyer will pay a separate fee to the attorney for these services. If two attorneys are involved, there is a probability of overlap in the effort to reach the closing table, and the buyer may feel he or she is paying twice for certain services. Instead, if the buyer’s attorney closes the loan as well, all preparation is consolidated into one effort, thereby reducing any duplication of effort and thus reducing the total legal fees in the transaction.

Most, but not all, lenders will honor a buyer’s request to have their personal attorney close the loan, so long as that attorney is qualified, but remember that this request must be made early in the process before the lender assigns the transaction elsewhere. If you are buying residential real estate financed by a mortgage loan, and your attorney is experienced in the representation of mortgage lenders, I encourage you to consider asking your lender at the time of application to use your own attorney to close the mortgage loan as well. The odds are you will be quite satisfied with the outcome.

Significant Changes to Mortgage Lending Disclosure Rules and Their Impact on Your Closing

The Mortgage Disclosure Improvement Act, which affects all residential mortgage loan applications submitted on or after July 30, 2009, imposes substantial additional compliance obligations on the part of mortgage lenders, in an effort to provide more transparency and fairness and to better protect consumers in making choices about mortgage financing. These new regulations are likely to lengthen the time it takes to close a mortgage loan. It is important that all parties involved in a real estate mortgage transaction understand these new regulations and consider their impact on the timing of the process. Following is a summary of the changes and how they may impact you:

1. A lender is now required to provide a good faith estimate of closing costs (GFE) and an initial Truth In Lending Disclosure Statement (TIL) within three business days after receiving a mortgage loan application. The lender may not collect any up-front fees from a borrower, except for a credit report fee, until the initial GFE and TIL are received by the Borrower.

2. No mortgage loan may close less than seven business days after the date on which the borrower is issued the initial GFE and TIL.

3. A home buyer must be provided with a copy of the appraisal not less than three business days prior to closing.

4. If the Final Truth-In-Lending Disclosure form (TIL) indicates an increase of .125% or more in the Annual Percentage Rate from the APR stated in the initial TIL, there is a mandatory 3 day waiting period before the loan can close in order to give the borrower an opportunity to review and agree to the new numbers.

These new regulations have the potential impact of delaying the timing of closing a mortgage loan. The ordering of appraisals may be delayed until the lender is able to collect the appraisal or application fee. A delayed appraisal may result in a longer time between application and when the lender issues a commitment letter and clears a loan to close. All of this means that the closing date set in a purchase and sale agreement between a buyer and seller may no longer be certain, since it is possible that the lender will be required to delay the closing in order to meet these new disclosure and timing requirements. In certain circumstances, these waiting periods may be waived by the borrower if it is determined to be "necessary to meet a bona fide personal financial emergency". It remains to be seen what constitutes "a bona fide personal financial emergency" and whether individual mortgage lenders will permit waivers as a matter of policy.

As a buyer, realtor or buyer’s attorney, you would be well advised to include a clause in your purchase and sale agreement which grants an extension of the stated closing date if required by the mortgage lender in order to satisfy these new regulations. Without that, a buyer might be caught in that no-man’s land between having a contractual obligation to close on a stated date or forfeit a deposit, but not yet having mortgage funds available from the lender. Query whether such a circumstance will qualify as a "bona fide personal financial emergency" which permits a waiver of the notice periods.

Hopeful Signs For the Real Estate Market

Today's Boston Globe reports an uptick in the number of residential properties going under agreement in the last week. Interest rates are at historical lows, and it seems that previously cautious buyers are beginning to take action. Sellers are encouraged by the news and the number of properties going on the market is on the increase. This is good news for all of us in the real estate industry. Read the entire article here: http://www.boston.com/business/articles/2009/03/25/real_estate_listings_on_rise_some_feel_a_thaw/

So You Want To Buy A House?

Whether you are a first-time or repeat buyer, the process of purchasing real estate can be daunting. Following is a basic step-by-step primer of the components of closing on your new home.

When you are ready to begin looking seriously for a property to buy, it will be to your advantage to have a pre-approval letter in hand from a mortgage lender which verifies the purchase price you can afford and the amount of mortgage for which you will qualify. A pre-approval letter will make your offer more attractive to a seller since it affirms your ability to consummate the purchase. You may obtain a pre-approval letter from any mortgage lender, and while you are not then obligated to use that lender for your actual purchase, if you establish a relationship with a lender at an early stage, the loan officer can be an additional resource for you throughout the process.

Pre-approval letter in hand, you find the house of your dreams and you want to submit an Offer. Many buyers feel that this is the time to engage the services of a qualified real estate attorney; others work with the realtor and wait to hire the attorney until the Offer is accepted. The realtor or attorney will assist you in preparing an Offer, most likely on the standard "Offer to Purchase Form" customarily in use. The Offer will contain the business terms, such as price, amount of deposit, and dates, should include a contingency for satisfactory home inspection, and may also include contingencies for mortgage financing and other matters. The assistance of an experienced realtor or attorney is indispensable in preparing an Offer which contains all of the appropriate protections for a buyer. Negotiations may ensue until the parties come to agreement on the final terms and execute the Offer document.

In Massachusetts, unlike in some other states, the Offer to Purchase is a preliminary document which is later superceded by a more comprehensive Purchase and Sale Agreement. Do not, however, be fooled into thinking the Offer is not a binding contract; courts have enforced executed Offers to Purchase even in cases where the parties failed subsequently to enter into a Purchase and Sale Agreement. Most Offers contemplate a period of one to three weeks to finalize and sign the P&S. If you have not already hired an attorney, now is the time to do so. In the period between Offer and P&S, you should have the property fully inspected by a qualified home inspector. The inspector will give you a written report and flag any items of concern; you may then elect to negotiate price adjustments or repairs with your seller as a condition of closing. If you are not satisfied with the results of the inspection or cannot reach resolution with the seller, under the inspection contingency you have the right to terminate the Offer and recover any deposits paid to that point. It is important that you address any and all concerns regarding property condition during this time, and that any terms you negotiate with the seller be incorporated into the P&S. With certain exceptions, once you sign the P&S, you are essentially agreeing to accept the condition of the property "as is" and may not thereafter raise issues relating to property condition except to the extent that it represents a change since the date of the Purchase and Sale Agreement.

So you now have an executed Purchase and Sale Agreement – congratulations! If you have not already settled on a choice of mortgage lender, you should do that without further delay and submit a complete mortgage application by any applicable deadline in your mortgage contingency, if any. At the time of application, your lender should give you a Good Faith Estimate of Settlement Charges, setting out the closing costs you will expect to pay. That document, and the Truth In Lending Disclosure Statement, allow you to compare loan products among various lenders. Your lender will process your application and issue a Loan Commitment Letter. If you have a mortgage contingency deadline in your P&S, be sure you receive your written Loan Commitment Letter before that deadline expires.

In Massachusetts, closings are conducted by attorneys rather than by title or escrow companies. The attorney who represents the lender and acts as settlement agent may be your attorney, or it may be a different attorney selected by the lender. It is quite common that one attorney represents both the buyer and the lender, and although this does technically constitute a possible conflict of interest, this conflict is regularly waived by the parties because the interests of the buyer and lender are very much the same. For a buyer, I believe there are two advantages to having your attorney handle the entire transaction. The first is for peace of mind—you no doubt have shopped carefully for a qualified and recommended attorney to represent you, so it only makes sense to have that attorney handle the important roles of examining title, preparing documents, and acting as settlement agent. If the lender chooses another attorney for those responsibilities, you have no input on quality control. The second advantage is lower cost. One of the closing costs customarily paid by a borrower (unless you get a "no-closing-cost" loan) is the attorney’s fee for the lender’s attorney. If two attorneys are involved, there is a certain amount of overlap which is likely to result in some duplication of fees paid. If your attorney also represents the lender, you eliminate that duplication of effort, which results in a lower total legal fee. In selecting a lender, it is always worth requesting, or even requiring, that your attorney also be permitted to represent the lender and serve as settlement agent.

Once your loan application is submitted, you can take a bit of a breather, as most of the work from then on belongs to the attorneys. The one exception is that you must procure homeowners insurance coverage to take effect as of the closing date. You will be required to pay the premium for the first year in full, and to provide the lender prior to closing with an insurance binder evidencing the coverage and naming the lender as an additional insured.

Prior to closing, the attorney will arrange for a title professional to search and examine the public records for information related to the property's title. The attorney will notify the seller of any defects in title, and those must be dealt with before the property can change hands. Closing will not occur until title to the property is clear. The one exception is that outstanding current mortgages taken out by the seller from institutional lenders may be paid off out of sale proceeds with the Mortgage Discharge to be recorded after the closing. It is the attorney’s responsibility to attend to this and follow up to record the proper Discharges.

Finally the day of closing will approach. The settlement agent will prepare the HUD-1 Settlement Statement. The "HUD", as it is known, outlines all of the costs for both the buyer and seller associated with the closing. Your costs will include those items shown on the original Good Faith Estimate (with possible modifications), as well as costs originating out of the attorney’s office. You will be offered the option to purchase an Owner’s Policy of Title Insurance, which I do recommend (see previous blog entry on this topic). You will be provided with a copy of the HUD in advance of closing and asked to obtain one bank check for the total amount due. It will not be necessary to bring multiple checks to closing; instead, it is the job of the settlement agent to divide your funds and disburse them in accordance with the HUD.

On closing day, all parties will meet at the office of the lender’s attorney or at the applicable registry of deeds. You will sign a seemingly endless number of documents that will be explained by your settlement agent, including, most importantly, a Promissory Note, which is your promise to the lender to repay the funds being advanced, with interest, and a Mortgage, which puts a lien on the property to secure your obligations under the Promissory Note. The seller will deliver a Deed which transfers title to your name. Following signing of all documents, the attorney will arrange for the recording of the Deed and the Mortgage at the applicable registry of deeds. The recording of the documents is the final step in the process and represents the moment when everything is completed. Upon recording, you become the new owner of both a house and the debt that you incurred to purchase it. Welcome to the American Dream!

Do I REALLY need that owners title insurance policy?

I am often asked by home buyers whether they really need to buy owners title insurance. The answer is an unequivocable "absolutely". I know insurance is one of those products that people love to hate—you spend a lot of money on something you hope you will never need, but isn’t that the point? Owners title insurance provides a whole lot of protection on the most valuable investment most people will make in their lives. The premium is paid only one time, at the purchase of the policy, and the protection remains in effect, with an inflation factor on the coverage, for as long as you own the home. Not such a bad deal.

So what does owners title insurance cover? In my view the most important thing it insures against is human error. In preparing for a purchase, a title search will be done at the registry of deeds. Said registry of deeds is run by humans, and errors in the indexing of documents are inevitable. If a name is misspelled, or some other irregularity occurs as a document is input into the system, it may not thereafter show up in a chain of title search. Among other things, title insurance protects against many defects in title that a proper registry search would not reveal.

The benefit of owners title insurance is more often not that it indemifies for a loss, but rather that it provides "costs of defense" in the event of a claim. In truth, most title defects are fixable, and it is rare that a property owner experiences a total loss of title. Costs of defense means that if an insured defect in your title is discovered, the title insurance company will step in and take the responsibility to cure it. One of the most common uses of title insurance is the situation when you are about to sell your house, and a few days before closing you are notified that an old mortgage from a prior owner in the chain of title was never discharged, or that the discharge was in some manner defective. Without owners title insurance, odds are the closing will get postponed while you scramble to track down a lender who may have merged 4 times since the original transaction in order to get the correct discharge. If you have an owners policy, on the other hand, in most cases your title insurer will agree to indemnify the new buyer, lender and title insurance company and clean up the problem, without any delay in closing.

Title insurance companies have developed several different levels of policy coverage, and they do vary somewhat among the companies. In addition to insuring clear title, the standard owners policy insures against (a) forgeries in documents; (b) incompetency or incapacity of a signatory; (c) missing signatures; (d) undisclosed (but recorded) prior mortgages, liens, easements or restrictions; (e) errors in legal descriptions; (f) lack of a right of access; and
(g) deeds not properly recorded.

"Extended" or "enhanced" policies, which are available for about 10% more, also cover against such additional defects (depending on the policy) as: (a) off-record matters, such as claims for adverse possession or prescriptive easements; (b) encroachments; (c) off-record liens such as mechanics' or estate tax liens; (d) certain violations of land use (subdivision and zoning) laws; and (e) certain post-policy occurrences.

The loan policy that you will be required to purchase for your lender as part of your closing costs does not provide you as owner with any protection, so don’t be fooled. You need your own owners policy. If you purchase both the loan and owners policies simultaneously, the combined premium is discounted from the total amount which would be paid if they were purchased separately. Premiums are calculated at a fixed dollar amount per thousand of coverage, and in Massachusetts the premiums at present are the same among all title insurance companies.

So the next time you are buying a property and are asked whether you want the owners title insurance coverage, say yes. Don’t be "penny wise and pound foolish" and use this opportunity as a place to save on closing costs. Be sure to include the owners policy premium when calculating your probable total purchase expenses, and do the smart thing and buy the owners policy. Yes, it is one of those products that you hope you never need, but if it turns out you do need it and did not get it, you will be sorry.

Tip for Real Estate Practitioners in Middlesex County

If you are a practitioner in Greater Boston handling transactions in cities and towns whose land records are maintained at the Middlesex North Registry of Deeds in Lowell (Billerica, Carlisle, Chelmsford, Dracut, Dunstable, Lowell, Tewksbury, Tyngsborough, Westford and Wilmington), you will be happy to know that you no longer have to travel up to Lowell to record your closing documents for recorded land. Effective November 3, 2008, the recording counter at the Middlesex South Registry of Deeds in Cambridge will accept in-person land recordings for the North Middlesex District. This does not pertain to registered land documents or plans, but this new convenience is likely to save you at least a few trips north each year.

HUD Announces Mortgage Reforms

For those of you in the real estate industry, whether as a mortgage lender, broker, attorney or consumer, this news is big. For the first time in more than 30 years, HUD (the U.S. Department of Housing and Urban Development) has announced mortgage reforms designed to help consumers better understand the mortgage process, allow them to compare a variety of different products, and protect against increases in closing costs once disclosed. HUD has revised the long-used “Good Faith Estimate of Settlement Charges” (GFE) and the form settlement statement (HUD-1) used at closings to provide clearer and more easily understandable information to consumers. The new forms and regulations go into effect on January 1, 2010.

The new rules include the following:
1. The GFE will be easier to read and provide simpler disclosures regarding loan term, interest rate information and prepayment penalties.
2. The GFE will set out closing costs in detail, display all prominently and group them into major categories to prevent “junk fees” and allow consumers more easily to compare different loan offers.
3. Changes to closing costs between the GFE and settlement statement are limited as set out on the GFE. The final settlement statement form has been revised so that each line on the final statement will make reference to the relevant line from the GFE.
4. Payments from lenders to mortgage brokers must be disclosed in clearer detail.
5. Lenders must provide the GFE to borrowers three days after receipt of all necessary information.

For more information, or to see the revised forms, visit
http://www.hud.gov/news/release.cfm?content=pr08-175.cfm.

I think these are welcome changes. Admittedly this puts a greater burden on those in the industry to get the information right the first time, but the new forms are far easier to understand and will remove much of the mystery in the mortgage loan process. I am all for anything that helps the clients to be informed participants in their own transactions.