Pitt & Frank Real Estate Blog

Wednesday, October 24, 2012

Wednesday, August 1, 2012

A Few Items To Avoid When Purchasing Real Property With An IRA

DEFINITIONS:

What is an IRA?

An IRA is an Individual Retirement Account. It is an account that holds your investments (ie: stocks, bonds, mutual funds, real estate, precious metals, etc.). An owner of IRA can take advantage of various tax breaks, each having their own set of rules.

How is Real Estate Purchased Using an IRA?

The most common way to purchase real estate with an IRA is by purchasing shares in a Real Estate Investment Trust (REIT). Another method, and the subject at hand, is to purchase via a Self Directed IRA (SDIRA). This is an IRA where the owner makes the investment decisions for the account, not a brokerage firm.

Traditional IRA vs. Self Directed IRA:

In a traditional IRA, a brokerage firm advises the IRA owner and conducts transactions. In a Self-Directed IRA, a custodian works on the investor's behalf preparing the necessary paperwork to set up the IRA, but the investor is responsible for directing the investments.

SELF DIRECTED IRA KEY TIPS:

Keep Your SDIRA Passive: A key component to keeping the tax advantages of the SDIRA is to keep it passive. Arms length transactions are key and it is vitally important that investors only make purchases where they plan to use the property as an investment property that will be occupied by a tenant and not the investor themselves.

Taking Cash Flow Distribution From Your Account: The income provided from an SDIRA is the investor's money, but that does not mean he or she can bypass the IRA and take the money directly from the investment. The custodian of the IRA is responsible for all distributions and all income. Deviating from that process can wipe out the tax protections and advantages and lead to taxes and penalties. The SDIRA is for protection and tax planning and just like a traditional IRA, there are time frames for taking withdrawals and distributions.

Self-Dealing & Non-Arms Length Transactions: Often times investors are interested in the SDIRA for its tax advantages and they are interested in protecting their wealth and assets with entity protections by setting up LLC’s or other legal entities to hold title and create barriers from lawsuits. Unfortunately, these two plans do not always line up. Property can be purchased and titled in the name of an entity and funded with an SDIRA so long as the investor does not own the property before hand. In other words, an investor cannot purchase property, place it in the name of an LLC and then set up an SDIRA to purchase that property from the LLC. The transactions must be arms length in nature meaning an investor cannot buy something from himself or herself or from his or her spouse or children or parents. There are some family member exceptions but they are not pertinent to this post and the custodian would be aware of these.

Separating Expenses From The SDIRA: Two problems can occur when purchasing an real estate with your SDIRA. First, from the very beginning, every cost associated with the purchase must come from the SDIRA. If an investor places earnest money on a property and writes a personal check, then the transaction could be voided and considered outside of the SDIRA. Second, if an investor purchases a property and does not leave a proper amount of reserves in the SDIRA itself, it can lead to problems. With real estate, there are always going to be scenarios where additional costs are going to be incurred. There are rules in place limiting deposits into a SDIRA just as with a traditional IRA and paying for expenses outside of the SDIRA can have major consequences. So when purchasing real estate, make sure there are additional funds in the account to cover any future expenses.

A quality custodian will always should cover these areas thoroughly on the front end and take steps to make sure mistakes are avoided. That being said, knowing the rules and properly preparing to use an IRA can lead to a great investment experience.

Source: realtor.com

Thursday, June 28, 2012

Fiduciary Primer

DECEDENTS' ESTATES

I. Testate - Decedent had a will. The will must be probated.

A. If the will contains specific power to sell real estate (the will must specifically mention real estate), only the Executor or the Administrator With Will Annexed (W/W/A) is needed to convey the real estate and the proceeds shall be payable to the estate.

B. If the will does not give specific power to sell real estate, either:

i. A court order allowing the Executor or the Administrator W/W/A is needed. This is set out at KRS 389A; or

ii. The Executor/Administrator W/W/A can sign as well as all the heirs and their spouses with the proceeds check made payable to the estate. However, this option can only occur after the expiration of six (6) months from the appointment of the Executor/Administrator W/W/A. If the closing is to occur within the six (6) month period, the KRS 389A court order is needed.

II. Intestate - Decedent did not have a will.

A. If an estate is opened and administered:

i. The Administrator needs a KRS 389A court order allowing the estate to sell the real property, or

ii. The Administrator can sign as well as all the heirs and their spouses with the proceeds check made payable to the estate. However, this option can only occur after the expiration of six (6) months from the appointment of the Administrator. If the closing is to occur within the six (6) month period, the KRS 389A court order is needed.

B. If there is no probate:

i. Record an Affidavit of Descent, and

ii. All heirs named in Affidavit of Descent and their spouses must sign the deed conveying the property.

iii. There is a two (2) year wait period from the date of death before this can occur (See KRS 396.011).

TRUSTS

If real property is held in trust, it is imperative to determine the validity of the trust and how it pertains to the transaction at hand. A copy of the original trust agreement must be obtained and reviewed. To determine if it is a valid trust for purposes of the real estate transaction, here are some things to look for:

• Name of trust

• Named trustee

• The trust is revocable

• The borrower is both the settlor and the beneficiary of the trust

• If sale, trustee has power to sell real property and remove property from the trust

• If refinance or purchase, the real estate owned by the trust may be used as collateral for a loan

• The trustee is authorized under the trust to encumber the subject real estate

• The trust appears to be validly created and is duly existing under KY law; document is signed and notarized

POWER OF ATTORNEY

It is entirely acceptable for a purchaser or a seller to use a power of attorney at the closing on the purchase of real estate. However, most lenders and title insurance companies have certain criteria they expect to be met when it comes to the content of the power of attorney document.

Listed below are a few of these:

The power of attorney document should be specific to the transaction. The POA should mention the real estate to be purchased or sold. When mentioning the real estate, it is good form to include the legal description as well as the property address. Also, there should be a specific reference to the note and mortgage which are to be executed by the purchaser at closing. This should include the name of the lender as well as the amount financed.

While it is acceptable for the POA to grant the power to execute certain general closing documents, it is a good idea that the POA specifically grant the power to execute the note, mortgage and deed as well as any documents which the lender feels need specific mention.

The POA should also be a durable one. This means it needs specific language that it will remain in effect despite the subsequent disability of the principal, the person granting the powers.

Remember, these are guidelines and there may be exceptions. If you need further information we are always available

Wednesday, June 27, 2012

Listing Real Estate Agent's Duty to the Buyer

     Interesting case from the Kentucky courts: Waldridge v. Homeservices of Kentucky, 2011 Ky. App. LEXIS 81 (Ky. App. April 29, 2011)

     The court held that a sellers' real estate agent owes a duty to a buyer to not commit fraud by either misrepresenting a material fact or failing to disclose a material fact of which he or she has actual knowledge and of which the buyer is unaware.

     The Waldridges contacted an agent to assist with their search for a new home. They ultimately purchased a new home which was listed for sale by the same company. Prior to the purchase of the home, the sellers had noted on the disclosure statement that prior water damage had occurred due to a sump-pump failure. In fact, the home had been owned by four previous owners, who experienced water damage and flooding, all since the home was built in 1988, and the damage and risk of flooding was much worse than what was noted on the disclosure. The listing company had been involved with the property for all of its previous sales.

     The court considered whether the listing company or its agent could be liable for fraudulent conduct despite having no contractual relationship with the buyer. The court found that, even in the absence of a fiduciary duty, a real estate agent hired by the seller is expected to be honest and owes a duty to third parties involved in real estate transactions. The court ultimately remanded the case for further fact-finding but suggested that both the listing company and its agent could potentially be liable under these facts. The court found that it was plausible that the listing company had actual knowledge of the extent of the flooding due to its previous involvement with the sales of the home. The court further held that a fact question remained as to whether the listing company or its agent knew that the disclosure was false because it was clear that the sellers knew the damage was worse than they reflected on their disclosure statement.

Monday, April 30, 2012

GOOD FUNDS VS. COLLECTED FUNDS

The following information comes courtesy of Stewart Title. There is sometimes confusion at a real estate closing about whether there are funds to close. Unfortunately, unless you are a banker, it can get quite confusing as different terms are bandied back and forth. The following provides good insight into the information the title agent must take into account relating to the receipt and the disbursement of funds at closing.

Good Funds"Good funds" laws provide a statutory definition of acceptable escrow deposit instruments. These laws generally regulate the types of funds that a title company or escrow agent can accept and/or the minimum length of time that such funds must remain on deposit in a bank before they can be disbursed. For example, "good funds" laws may require wired funds, cashier's check, certified check or teller's check to be deposited, and/or may limit the amount of personal checks that are permitted. "Good funds" requirements are the minimum state-imposed standards relating to escrow practices. They are not a safe harbor. They do not override banking procedures and collection practices. For example, certain types of checks may be deemed "good funds" under your laws, but such checks nevertheless may be subject to stop payment orders and be uncollectable or unavailable for withdrawal from the bank of deposit under certain circumstances.

Issuing offices sometimes assume that they can disburse funds immediately after they have received checks satisfying the "good funds" criteria in their jurisdiction, without regard to whether or not the funds are actually available for withdrawal and/or have been actually collected and finally settled into their escrow account. However, that assumption is incorrect. Compliance with "good funds" requirements may not protect you from loss in the event a check is dishonored and returned to you unpaid.

"Good funds" is primarily a title and escrow term. "Good funds" should be distinguished from "available funds" and "collected funds", which are banking terms.

Available Funds / Available Balance
"Available funds" (sometimes referred to as "funds available for withdrawal") refers to funds that a depositary bank (your bank) makes available to a depositor (you) when a deposit is made, based upon a schedule. However, the term "available" is potentially misleading.

Issuing offices sometimes assume that they can disburse funds immediately after such funds appear as "available" on their statement or online. However, that assumption is incorrect. The deposit of a check into your account at your bank does not mean that funds have actually been transferred to your bank or to your account. Deposited funds can be considered "available for withdrawal" from your bank well before a check has been presented for payment or paid by the paying bank (also known as the "drawee bank" - the bank upon which a check is drawn). Deposited funds are made conditionally available (e.g., for withdrawal) by your bank to you as a provisional credit to your account, based upon the likelihood that the funds will eventually be collected. If the paying bank ultimately declines to pay a check (for example, if the paying bank determines that a check is counterfeit or if there are insufficient funds in the drawer's account), your bank will eventually reverse the provisional credit, and the "available funds" will be debited - deducted - from your account. It may take several days, perhaps weeks, for this reversal to occur. Checks drawn on foreign banks can take even longer.

The term "available balance" refers to the total amount that your bank will make available to you. However, the "available balance" is not the amount of funds that have actually been collected.

Collected Funds / Collected Balance "Collected funds"(sometimes referred to as "actually and finally collected funds") refers to funds that result from the process of "collection". "Collection" is the presentation of a check to a paying bank and the actual payment of the funds by the paying bank. Final collection from the paying bank and final settlement of the funds into your escrow account can take several days, or potentially weeks, to be completed. If a check is counterfeit, it may be quite some time before you become aware that the deposit cannot be "collected," and that the provisional credit to your account will be reversed.

The term "collected balance" refers to the depositor's (your) balance minus deposited checks in the process of collection (i. e., minus checks that have not been actually paid by the paying bank). "Collected funds" are actual funds, not provisionally "available" funds.

Concerns Relating to Counterfeit Bank Checks and Certified ChecksCheck fraud schemes often involve counterfeit bank checks (e.g., cashier's checks or teller's checks) and/or certified checks. A cashier's check is a check drawn by a bank on its own funds and signed by a bank officer. A teller's check is a check drawn by a bank either on another bank or payable through or at another bank. A certified check is a check drawn by a depositor on his checking account carrying the signature of a drawee bank officer certifying the check to be genuine and guaranteeing its payment. Both bank checks and certified checks are generally considered "good funds" and are often readily accepted. A cashier's check is the industry preference over either a teller's check or certified check, because a cashier's check is generally easier to verify and more difficult to place a stop payment on.

Funds from bank checks or certified checks can be made "available" by your bank for provisional credit to your account on an expedited basis. However, such checks can be counterfeit, and it can be quite some time before they are discovered to be fake. Subtle alterations in the coding of the checks can slow the processing and discovery of the counterfeit. Perpetrators rely upon this gap to execute their schemes.

The following fact pattern is not uncommon: A perpetrator delivers a counterfeit bank check to a victim (e.g., an escrow office). The escrow office deposits the fake bank check into their account. The amount of the deposit is made "available" by the victim's bank shortly thereafter. While the counterfeit check is being processed by the banking system, and before the depositor/victim becomes aware of the fraud, the perpetrator requests the return of the funds by wire transfer or electronic funds transfer . There is frequently a feigned urgent need, and the perpetrator pressures the depositor/victim to wire the funds immediately, to the perpetrator or to an accomplice. Since the funds from the counterfeit check have been made provisionally "available" by their bank, the depositor/victim mistakenly assumes that they are collected funds, and sends the wire. At some point, the counterfeit check is presented for payment to the paying bank, and the paying bank declines to pay it. A notice of nonpayment returns through the banking system, and ultimately the depositor/victim learns that the check was fake. The depositor's bank reverses the provisional credit and deducts the amount of the deposit from the victim's account.

The only way to assure that funds are immediately collected and irrevocable is to require deposits to be made to your account by federal wire.

Electronic Funds Transfers
An electronic funds transfer ("EFT") through the Automated Clearing House ("ACH") poses special concerns. Funds deposited through ACH are subject to an extended time for settlement: 3 - 60 days, depending upon the nature of the credit. During that time, the ACH credit is subject to reversal by the originator. An "ACH debit block" will not protect against such reversal. Therefore, you should not accept deposits to escrow by ACH unless you implement special procedures, as described below.

Tuesday, February 28, 2012

Summary of Kentucky Foreclosure Laws

The laws that govern Kentucky foreclosures are found in different sections of the Kentucky Revised Statutes, Chapter 426.

Kentucky is a lien theory state. This means the property acts as security for the underlying loan. The mortgage is the document that places the lien on the property. It is filed to evidence the underlying loan and the specific terms of repayment which are set forth in the promissory note. There is no power of sale mortgage provision recognized in the KRS. In order to foreclose on a mortgage, the lender must go to court in what is known as a judicial foreclosure proceeding. A lis pendens is recorded in the deed records at the time the foreclosure complaint is filed. It provides public notice that the property is being foreclosed upon. During the foreclosure proceeding, the court will issue a final judgment of foreclosure. The property will then be sold as part of a publicly noticed sale.

Before the property is sold at foreclosure sale, the sale is usually advertised for sale for at least three weeks prior.

Kentucky does have a limited statutory right of redemption, which allows a party whose property has been foreclosed to reclaim that property by making payment in full of the sum of the unpaid loan plus costs and ten percent interest. There is a one year time limit to exercise this right and the right is only available if the foreclosure sales price is less than two-thirds of the appraised value. Also, the right of redemption can be sold or assigned to a third party.

A deficiency judgment may be obtained when a foreclosed property is sold at a public sale for less than the loan amount that the mortgage secures. In this case, the borrower still owes the lender for the difference between what the property sold for at the foreclosure sale and the amount of the original loan. Deficiency judgments are only available in the event that the borrower was personally served with the foreclosure complaint and/or was served, but did not file an answer.

Tuesday, February 21, 2012

Summary of Indiana Foreclosure Laws

The laws that govern Indiana foreclosures are found in Article 29, Chapter 7 of the Indiana Code

Indiana is a lien theory state. This means the property acts as security for the underlying loan. The mortgage is the document that places the lien on the property. It is filed to evidence the underlying loan and the specific terms of repayment which are set forth in the promissory note. There is no power of sale mortgage provision recognized in the Indiana Code. In order to foreclose on a mortgage, the lender must go to court in what is known as a judicial foreclosure proceeding. During this proceeding, the court will issue a final judgment of foreclosure. The property would then be sold as part of a publicly noticed sale.

Before the property is sold at foreclosure sale, the sheriff must advertise the sale by publication once per week for three (3) consecutive weeks in a newspaper of general circulation. The initial publication must be made thirty (30) days before the date of sale. The borrower/homeowner must be served notice in accordance with the Indiana Rules of Trial Procedure governing personal service.

Indiana doesn't have a post sale statutory right of redemption, which allows a party whose property has been foreclosed to reclaim that property by making payment in full of the sum of the unpaid loan plus costs. However, there is a pre-sale right to redemption after the issuance of the judgment.

A deficiency judgment can be obtained when a foreclosed property is sold at a public sale for less than the loan amount that the underlying mortgage secures. In this case, the borrower still owes the lender for the difference between what the property sold for at the foreclosure sale and the amount of the original loan.

Monday, January 30, 2012

FTC Will Not Enforce Provisions of MARS Rule Against Real Estate Professionals Helping Consumers Obtain Short Sales

The Federal Trade Commission will forbear from enforcing most provisions of its Mortgage Assistance Relief Services (MARS) Rule against real estate brokers and their agents who assist financially distressed consumers in obtaining short sales from their lenders or servicers.

As a result of the stay on enforcement, real estate professionals will not have to make several disclosures required by the Rule that, in the context of assisting with short sales, could be misleading or confuse consumers. As more and more American homeowners seek short sales, it is especially important that the Rule not inadvertently discourage real estate professionals from helping consumers with these types of transactions.

The MARS Rule was issued pursuant to authority granted by Congress in 2009. The issuance of the Rule followed numerous FTC and state enforcement actions against companies that claimed to be able to obtain from consumers’ mortgage lenders or servicers a loan modification or other relief to avoid foreclosure. The Rule covers companies or individuals, among others, who assist consumers in obtaining approval of a short sale from their lender or servicer.

A short sale occurs when a home is sold for an amount less than the balance owed on the mortgage loan, and the lender or servicer agrees to accept the proceeds of the sale instead of pursuing foreclosure. Short sales can benefit consumers by allowing them to escape from a mortgage that they cannot afford, while avoiding foreclosure. Many real estate professionals assist distressed homeowners by providing both traditional services associated with selling their homes (e.g., listing the property) and working to seek lender or servicer approval of a short sale.

The MARS Rule requires companies offering mortgage assistance relief services to disclose certain information to consumers about the services they provide, bans collection of advance fees, and prohibits false or misleading claims. After the Rule went into effect, a number of real estate professionals who help consumers with short sales raised concerns about complying with the Rule. These professionals pointed out that some of the required disclosures could confuse consumers or could be inaccurate in this context.

At this time, the Commission has announced that it will not enforce most of the provisions of the MARS Rule against real estate professionals who are engaged in obtaining short sales for consumers. The stay applies only to real estate professionals who: 1) are licensed and in good standing under state licensing requirements; 2) comply with state laws governing the practices of real estate professionals; and 3) assist or attempt to assist consumers in obtaining short sales in the course of securing the sales of their homes. The stay exempts real estate professionals who meet these requirements from the obligation to make disclosures and from the ban on collecting advance fees. These professionals, however, remain subject to the Rule’s ban on misrepresentations.

The Commission stated that the stay does not apply to real estate professionals who provide other types of mortgage assistance relief, such as loan modifications. In addition, the FTC will continue to enforce the Rule and Section 5 of the FTC Act, which prohibits unfair and deceptive practices, against all other providers of mortgage assistance relief services.

FTC

Changes in HAMP - Home Affordable Modification Program

Recently, new changes have been enacted regarding the HAMP program. HAMP was originally designed to help borrowers with a higher debt load by offering incentives to banks to reduce the principal on mortgage loans. HAMP was supposed to help 4 million mortgage borrowers when it was introduced in February of 2009, but it has helped fewer than 1 million homeowners.

Here are a few of the changes:

1. HAMP was extended until December of 2013 - it was originally set to expire at the end of this year.

2. Eligibility has been expanded - originally, there was a floor for the borrower's debt ratios set at 31% of the borrower's income. This is no longer the case. The new guidelines allow for a more flexible approach without the hard floor.

3. Eligibility has been extended to owner's of rental property - HAMP originally applied solely to owner occupied property; this is no longer the case.

4. The balance reductions incentives to lenders have been tripled - New HAMP guidelines will pay lenders between 18 and 63 cents for every dollar of reduction of the mortgage principal balance, up from 6 and 21 cents.

5. Fannie Mae and Freddie Mac loans are now included - Fannie and Freddie loans had not been included in the principal reduction plans, previously.

The changes in HAMP do not take effect until April.

CNN-Money

The Home Affordable Refinance Program (HARP)

In 2009, the Home Affordable Refinance Program was established for Fannie Mae and Freddie Mac loans. It allows home owners to refinance their homes, even if the value of the home has decreased. Homeowners with a loan owned by Freddie Mac or Fannie Mae have the opportunity to refinance with any participating lender. The Home Affordable Refinance Program (HARP) has been extended until December 31, 2013.

The following criteria must be met to qualify for the Home Affordable Refinance Program:

1. HARP refinances apply only to Fannie Mae or Freddie Mac mortgages.

2. The homeowner must be able to afford the new lower payment.

3. The current mortgage must be current with no late payments in the past twelve (12) months.

4. Payments on the new loan must be more stable than on the existing loan.

5. The maximum loan to value (LTV) cap has been removed on home owners looking to refinance in to a fixed rate mortgage. It was originally set at 125%.

6. Homeowners can refinance with an adjustable rate mortgage (ARM), so long as the maximum LTV does not exceed 105%.

A participating HARP lender can determine if a loan is owned by Fannie Mae or Freddie Mac and can further evaluate eligibility.

Friday, August 26, 2011

Pitt attends National Symposium in Chicago

Michael Pitt recently returned from the 3 day, 2011 Planning for the Generations Symposium in Chicago, where more than 400 estate planning attorneys from around the country gathered to advance their knowledge and discuss new strategies. Mike noted in particular that the knowledge he gained in how to incorporate advance asset protection strategies into estate plans will enable him to assist his clients to better protect the assets they have accumulated and give his clients greater peace of mind that those assets will be there always for their needs and the needs of their families.

“Estate planning today is a thoughtful, ongoing process … no longer merely a document created in a single legal transaction,” said Pitt. “Our goal at Pitt & Frank is to provide a high level of asset protection for out clients, so they can sleep better at night, not having to worry about preservation of their assets.”

Michael Pitt and Christine Emison of Pitt & Frank are members of WealthCounsel, a national, collaborative organization of estate planning attorneys dedicated to providing a comprehensive, client-centered approach to estate planning.

Monday, August 15, 2011

You Got the Tax Credit When You Purchased in 2009/2010 - What Happens When You Sell?

Repaying the Credit

Q. When must I pay back the credit for the home I purchased in 2009?

A. Generally, there is no requirement to pay back the credit for a principal residence purchased in 2009 or early 2010. The obligation to repay the credit arises only if the home ceases to be your principal residence within 36 months from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being your principal residence.

Q. If I claim the first-time homebuyer credit for a purchase in 2009 or early 2010 and stop using the property as my principal residence before the 36 month period expires after I purchase, how is the credit repaid and how long would I have to repay it?

A. If, within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full amount of the credit is due at the time the income tax return for the year the home ceased to be your principal residence is due. The full amount of the credit is reflected as additional tax on that year's tax return. Form 5405 and its instructions will be revised for tax year 2009 to include information about repayment of the credit.

Q. When does my home stop being my main home?

A. Here are examples of when your home stops being your main home:

     1. You sell the home.
     2. You transfer the home to a spouse or former spouse in a divorce settlement.
     3. You convert the entire home to a rental or business property.
     4. You converted the home to a vacation or second home.
     5. You no longer live in the home for the greater number of nights in a year.
     6. Your home is destroyed or condemned.
     7. You lose your home in foreclosure.
     8. You die.

Q. When do I have to repay the credit?

A. You repay the full or part of the credit as an additional tax on your tax return when the home stops being your main home during the 36-month period following the date you purchased your home.

     You must repay the full credit when:

     1. You sold your main home to a related person or entity
     2. Your home is destroyed, condemned or disposed of under threat of condemnation and you do not purchase or rebuild a replacement home within two years.
    3. You converted the entire home to a rental or business property.
     4. You converted the home to a vacation or second home.
     5. You no longer live in the home for the greater number of nights in a year.

     You may have to repay the full or a part of the credit when:

     1. You sold your main home to a non-related person or entity.
     2. You repay the amount of the credit up to the amount of your capital gain. Note: when calculating gain or loss on your main home if you received the first-time homebuyer credit, you reduce your basis by the amount of the credit. See Publication 551, Basis of Assets, for more information.
     3. You lost your home in a foreclosure.You must repay the credit only up to the amount of gain.

Divorced Persons

If you (transferor spouse) transfer your main home to a spouse or former spouse (transferee spouse) under a divorce decree, the transferee spouse who keeps the home is responsible for repayment of the entire credit if, during the 36-month period after the purchase of the home, the home ceases to be his or her main home. You (transferor spouse) are not responsible for any repayment of the credit.

Source: http://www.irs.gov/

Monday, July 11, 2011

Short Sale Basics

1. What is a "Short Sale?"

A "short sale" typically occurs when an owner has no equity in the property under any reasonable measurement of value. Secured creditors are asked to voluntarily accept "short" payoffs in full satisfaction of their liens in order to facilitate a sale of the property at a price insufficient to pay all liens in full. Unlike a foreclosure, there is no legal leverage requiring secured creditors to release their liens upon the sale regardless of the amount of recovery for their liens, so cooperation and consent of all secured creditors is necessary.

2. Advantages of a "Short Sale"

In theory, unlike a foreclosure property, the property is marketed privately at its best potential value in the marketplace.  Also, while a typical short sale may take longer than a conventional third party sale to accomplish, the timeline is usually much shorter than current foreclosure actions are taking.

3.  Title Company Procedure is the Key to a Successful "Short Sale"

Prior to closing, the title company works with the secured creditors, both mortgage holders and lien holders, to insure that all items will be released from the property upon completion of the short sale closing. This function typically requires much more scrutiny by the title company. What may normally be an administrative function in obtaining a full payoff figure from a lender graduates to a more legally and conditional contractual agreement by the lender to even consent to a compromised payment. Involuntary lien holders (judgments, mechanics', tax liens, etc.), who are never pre-disposed to be cooperative in obtaining full payoffs and releases anyway, may be even more recalcitrant in their cooperation with a short sale.  The title company must exercise extreme diligence in obtaining unambiguous and clear releases of liens prior to closing because in most cases little to no consideration is being received in exchange for such releases. Upon the agreement of all secured creditors in writing to the title company, the closing can take place.

Friday, May 20, 2011

Combining the GFE and TIL Disclosures

The Consumer Financial Protection Bureau (CFPB) announced recently that it has created two alternative prototype forms that are designed to combine the consumer disclosures required by the Truth in Lending Act and the Real Estate Settlement Procedures Act (RESPA).

The CFPB will use both in a testing process that will last for several months in preparation for the formal proposal of a single form. The agency said that it plans five rounds of evaluation, comment and revision before settling on a final form. The process will use forms in both English and Spanish.

The prototypes both offer disclosures for a $216,000 adjustable rate mortgage loan. They combine the disclosures required by the current RESPA Good Faith Estimate of Closing Costs and the current Truth in Lending disclosures in two-page formats. By selecting the right options, it is possible not only to review the two prototypes but also to comment on which of the two is better and why. The CFPB's webpage (LINK) also offers separate comment possibilities for consumers and industry participants.

The testing and public feedback process will enable the CFPB to revise the design and adjust the content based on how it works for consumers to develop a single form that will officially replace the dual TIL and RESPA disclosure requirements.

Source: jdsupra.com

Wednesday, May 11, 2011

Indiana Law - Statute of Limitations

Detailed below are a few of the various time thresholds set out in Indiana law that you may run into when reviewing a title to real property located in Indiana.

Mortgages - The statute of limitations, IC 32-28-4-1, for the viability of a mortgage is reviewed with the terms of the mortgage to determine if the mortgage has expired. Mortgages executed after September 1982 have a ten (10) year life from the date of maturity. Mortgages executed prior to September 1982 have a twenty (20) year lien life from the date of maturity. If the mortgage is silent as to a maturity date, the mortgage remains viable twenty (20) years after the mortgage execution regardless of the mortgage's signing before or after 1982. If the execution date is not apparent from the mortgage, the lien will survive twenty (20) years from the mortgage's recording date.

Judgments - A judgment lien attaches to real property when the judgment has been entered and indexed in the judgment docket. IC 34-55-9-2. An Indiana judgment as well as a state tax warrant survive ten (10) years after the rendition of the judgment. However, this time period may be extended due to an appeal, injunction, bankruptcy, the judgment debtor's death, or upon agreement of the parties. A federal judgment does not need to be indexed in the same manner as a state judgment. It must be recorded with the county recorder and due to the Federal Debt Collection Procedures act of 1990, it has a twenty (20) year life.

Mechanics Liens - IC 32-28-3-1 et al governs the procedures and lien time frame for a valid and viable mechanic lien. The following criteria must be satisfied: 1) Pre-lien notice requirements with a residential property where a non owner contracts for the labor. 2) Sixty (60) day recording requirement from the last day of work or supply for mechanic's lien on residential property. 3) Ninety (90) day recording requirement from the last day of work or supply for mechanic's lien on commercial property. 4) The recorded notice of intent to hold a mechanic's lien meets the form requirements of the statute. 5) Whether recorded no lien contract is enforceable. A property owner can request by certified mail that the lien claimant foreclose the mechanic's lien. if the foreclosure is not instituted within thirty (30) days, the property owner can file an affidavit to void the mechanic's lien. The statute also requires the foreclosure of the mechanic's lien within one (1) year of the recording date.

Leases/Land Contracts - Under IC 32-23-8-1 et al a lease is null and void after a period of one year when rental payments, development, or oil/gas production have ceased.

Thursday, April 28, 2011

Re-Post: Decedent's Estates and the Sale of Real Property

We get many questions regarding the sale of real property that occurs after the title holder is deceased. For the most part, we have to follow the guidelines of our title insurance underwriters. These guidelines evolve from a combination of Kentucky case law and the KRS, as well as risk analysis and assessment. Included below is a simple outline that details the steps needed and action required when the title holder of real property is deceased.

I. Testate - Decedent had a Will. The Will must be probated.

    A. If the Will contains specific power to sell real estate (the Will must specifically mention real estate), only the Executor or the Administrator With Will Annexed (W/W/A) is needed to convey the real estate and the proceeds check shall be payable to the estate.

    B. If the Will does not give specific power to sell real estate, either:

        i. A court order allowing the Executor or the Administrator W/W/A is needed. This is set out at KRS 389A; or

        ii. The Executor/Administrator W/W/A can sign as well as all the heirs and their spouses with the proceeds check made payable to the estate. However, this option can only occur after the expiration of six (6) months from the appointment of the Executor/Administrator W/W/A. If the closing is to occur within the six (6) month period, the KRS 389A court order is needed.

II. Intestate - Decedent did not have a will.

    A. If an estate is opened and administered:

        i. The Administrator needs a KRS 389A court order allowing the estate to sell the real property, or

        ii. The Administrator can sign as well as all the heirs and their spouses with the proceeds check made payable to the estate. However, this option can only occur after the expiration of six (6) months from the appointment of the Administrator. If the closing is to occur within the six (6) month period, the KRS 389A court order is needed.

    B. If there is no probate:

        i. Record an Affidavit of Descent, and

        ii. All heirs named in Affidavit of Descent and their spouses muse sign the deed conveying the property.

        iii. There is a two (2) year wait period from the date of death before this can occur (See KRS 396.011).

Remember, these are guidelines and there may be exceptions. If you need further information we are always available.

Tuesday, April 26, 2011

Tenancy in Common v. Joint Tenancy

A. TENANCY IN COMMON

    1. Nature of the Tenancy: Each tenant has an undivided interest in the property, including the right to possession of the whole. when one co-tenant dies, the remaining tenants in common have no survivorship rights. Equal shares are not necessary for tenants in common.

    2. Alienability: Each co-tenant can transfer his interest in the same manner as if he were the sole owner.

    3. Presumption: In Kentucky, a tenancy in common is presumed, unless there is language to the contrary in the vesting instrument.

B. JOINT TENANCY

    1. Nature of the Tenancy: Joint tenants own an undivided share of the property and the surviving joint tenant has the right to the whole estate. The right of survivorship is the distinctive element of a joint tenancy.

    2. Four Unities: To be joint tenants, the tenants must take their interests:

        a. At the same time

        b.  By the same instrument (title)

        c. With identical interests

        d.  With an equal right to possess the whole property.

    3. Creation: A joint tenancy can be created only by express words in an instrument.

Wednesday, April 13, 2011

Real Property Held in Trust and How it Affects A Transaction Involving That Real Property

If real property is held in trust, it is imperative to determine the validity of the trust and how it pertains to the transaction at hand. A copy of the original trust agreement must be obtained and reviewed. To determine if it is a valid trust for purposes of the real estate transaction, here are some things to look for:

• Name of trust

• Named trustees

• The trust is revocable

• The borrowers are the settlors and the beneficiaries of the trust

• If sale, trustee has power to sell real property and remove property from the trust

• If refinance or purchase, the real estate owned by the trust may be used as collateral for a loan

• The trustees are authorized under the trust to encumber the subject real estate

• The trust appears to be validly created and is duly existing under KY law, document is signed and notarized

Wednesday, March 30, 2011

Covenants of Title

Normally, the extent of the grantor's liabilities for some defect in title is governed by the covenants of title contained in the deed. If the deed contains no covenants of title, the grantor or seller is not liable if the title fails.

Various types of deeds are used to convey interests in property. Some warrant title and some do not. Although different jurisdictions may have peculiar local terminology (for example, the language and form of a deed in Indiana does not resemble the language and form of a deed in Kentucky), under standard classification deeds can be divided into three main types:

GENERAL WARRANTY DEED - A General Warranty Deed warrants title against defects arising before as well as during the time the grantor or seller held title.

SPECIAL WARRANTY DEED - A Special Warranty Deed warrants title against defects arising during the grantor's tenure and not defects arising prior to that time. The grantor is guaranteeing only that he or she has done nothing to make title defective.

QUITCLAIM DEED - A Quitclaim Deed warrants nothing. The grantor merely transfers whatever right, title, or interest he or she has.

Federal Trade Commission Rule Requiring Short Sale Disclosures

The Federal Trade Commission ("FTC") has issued a final rule that may impact real estate professionals that represent clients involved in short sale transactions. The rule requires the professional to make certain disclosures to consumers if they negotiate a short sale with a lender, advertise short sale experience or take upfront fees from short sale sellers. the Mortgage Assistance Relief Services ("MARS") rule took effect on January 31, 2011.

The MARS rule covers short sale negotiations. The FTC has determined that the term "negotiate" includes communications with a lender about the possibility of a short sale transaction involving a consumer's loan. A short sale transaction is a transaction where: 1) The title to the property changes; and 2) The sales price is insufficient to pay all the liens; and 3) The seller does not provide funds to clear the liens on the property; and 4) The lender agrees to allow the sale to occur by releasing the liens on the property.

The MARS rule contains the following definitions:

Mortgage Assistance Relief Service - A service, plan or program offered or provided to the consumer in exchange for consideration that provides services in relation to a consumer's mortgage, including negotiating a possible loan modification, directing a consumer to stop or otherwise alter the amount of his or her mortgage payments, modifying the consumer's payment arrangements, or negotiating a short sale of a dwelling on behalf of a consumer.

Mortgage Assistance Relief Service Provider - Someone who provides, offers to provide or arranges to provide, any mortgage assistance relief service.

There are three disclosures required by the MARS rule:

1. General Commercial Communications Disclosures - A real estate professional that advertises MARS services which is not directed at a specific consumer will need to include in all advertisements a clear and prominent disclosure with the following:

IMPORTANT NOTICE (in two point-type larger than the font size of the disclosure):(Name of company) is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating.

2. Consumer-Specific Commercial Communications - This is required in all communications that the MARS provider directs to a specific prospective clients. These disclosures need to be made by the real estate professional that represents a seller in a short sale transaction. They must be made prior to the MARS provider beginning mortgage assistance services on behalf of the consumer. The time when the real estate professional needs to provide this disclosure will vary as a real estate professional may not be aware that the transaction will need to be a short sale until far into the listing process. Once the professional becomes aware that a transaction is a short sale, the disclosure should be provided to the consumer. This disclosure must provide the following:

IMPORTANT NOTICE: (in two point-type larger than the font size of the disclosure): You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender [or servicer]. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us (insert amount or method for calculating the amount) for our service. (Name of company) is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating.

3. Disclosure When Providing an Offer of Mortgage Relief - This is to be provided at the time the real estate professional presents a client with the lender's short sale approval letter. The disclosure must be provided on a separate page and state:

IMPORTANT NOTICE: Before buying this service, consider the following infomation (in two point-type larger than the font size of the disclosure): This is an offer of mortgage assistance we obtained from your lender [or servicer]. You may accept or reject the offer. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us (same amount as disclosed previously) for our services. If you stop paying your mortgage, you could lose your home or damage your credit rating.

Please remember to work with your attorney to draft and prepare the disclosure you need to comply with this important FTC rule.

Source: Kentucky Association of Realtors