30 DRE Approved Credit Hours

Transcription

30 D.R.E. Approved Credit Hours
Copyright © 2011
45HoursOnline holds the copyright to this book, Consumer Protection Reader, 2011. As the
copyright holder, we authorize only our customers to use this book. By “customer”, we refer to any
one who has paid for a course or package of courses that includes this book. Customers may
download, copy, and print this book but only for their individual use. Customers may not distribute
this book in any form without our written permission.
Publisher
45HoursOnline
4228 Lobos Road
Woodland Hills, CA 91364
(818) 716-1028 Voice
(213) 477-2095 Fax
[email protected]
www.45HoursOnline.com
Disclaimers
Events and laws may change after publication. Although this publication has been carefully
researched, 45HoursOnline can not guarantee the accuracy of the information contained herein.
Before any suggestion presented in this book is acted upon, legal or other professional assistance
may be advisable.
These courses are approved for continuing education credit by the California Department of Real
Estate; however, this approval does not constitute an endorsement of the views or opinions
expressed by 45HoursOnline.
DRE Course Evaluation
An online evaluation form for this course is available on DRE’s website (www.dre.ca.gov). To access
it, select the hyperlink Course & Instructor Evaluation in the lower right portion of DRE's
homepage. After completing the evaluation, you may electronically submit it to the DRE by clicking
Send Your Evaluation to the DRE!.
PREFACE:
The California Department of Real Estate has approved this course for 30
hours of continuing education under the designation of “Consumer
Protection.” When combined with our five, three-hour mandatory courses
(Ethics; Agency, Trust Funds, Fair Housing, and Risk Management), these
courses provide a complete, 45-hour package of continuing education (CE).
Our 45-hour package provides all CE needed for license renewal except
for salesperson licensees renewing for the first time providing their first day
of licensure was before October 1st, 2007 – these licensees need only 15hours of CE.
This textbook has two sections. The first is “Defensive Real Estate” which
comprises the first 60 pages of this book. This section is an extension of
our three-hour course, Risk Management, 2nd Edition; a parts designed to
help licensees avoid disputes with their clients and both written by Chuck
Milbourne of 45HoursOnline.
The second section is “Consumer Protection Reader” (“Reader”) and it
comprises the remaining 220 pages of the book (about 220 pages). The
Reader is comprised of short articles primarily from two sources: (1) the
DRE’s Real Estate Bulletin and (2) RealtyTimes.com.
Owner of 45HoursOnline
The “Editor”
Articles from DRE’s Real Estate Bulletin are in the public domain while the
articles from Realty Times are owned by Realty Times and used with their
permission. All articles, regardless of source, were written in the four years
prior to August 2010.
The articles from the Reader have been selected and annotated by Chuck
Milbourne (aka, the “Editor”). For the most part, the articles he selected
bring you up to date with changes in the practice of residential real estate
brokerage since your last renewal (four years ago). These articles concern
changes and developments in California real estate law, construction
methods, real estate taxes, appraisal, and other matters of interest to
residential real estate agents and property managers.
This is a margin note.
This course is 300 pages long – the minimum number of pages permitted by
the DRE for a course of 30 hours (their standard is 10 pages per course
hour). These 300 pages do not count this book’s “supplemental material”;
namely: margin notes , the appendix, and the opinions of the Editor. This
supplemental material is not considered part of this course and is, therefore,
not tested in this course’s final exam.
Abbreviations
APR
BPC
®
CAR
CC
CID
CR
DRE
FDIC
GSE
HELOC
HOA
HUD
K
LTV
®
NAR
PMI
RESPA
Annual Percentage Rate
California’s Business and Professions Code
®
California Association of REALTORS
California’s Civil Code
Common Interest Development
Regulations of the Commissioner of the Department of Real Estate
California Department of Real Estate
Federal Deposit of Insurance Corporation
Government Sponsored Entities (primarily, FNMA, FHMLC)
Home Equity Line of Credit
Home Owner Associations
U.S. Department of Housing and Urban Development
One thousand (e.g., $100K is $100,000)
Loan to Value
®
National Association of REALTORS
Private Mortgage Insurance
Real Estate Settlement Procedures Act
This is a margin note.
Typographic Conventions
All margin notes , pictures, and opinion statements are those of the Editor.
Supplemental text added by the Editor to articles written by others is
delimited from the original in one of two ways. When the text consists of
complete paragraphs it is delimited by horizontal lines (as with this
paragraph); otherwise using curly braces {as you see here}. Supplemental
text is part of the course.
Paragraphs set against a light-gray background (as you see here) are
sidebars. Sidebars are explanatory notes and parenthetical content. The
information contained within sidebars is not considered part of the course.
Opinions of the Editor, Chuck Milbourne, are set against a yellow
background (as you see here). Feel free to skip my opinions.
For consistency and economy, the Editor has changed all references to
sections of the California Civil Code to “CC §”; to California Business and
Professional Code to “BPC §”; and to the Department of Real Estate
Commissioner’s Regulations to “CR §”. The symbol ‘§’ may be read as
‘section’ and the symbol ‘§§’ as ‘sections’. “Et al.” (as in “CC §2780 et al.”)
may be read as “all the sections that follow.”
Finally, since it is easy to perform an online search to find the text of
appellate decisions, we do not provide formal citations to the court decisions
we cite. For example, instead of citing “Easton v. Strassburger (152
Cal.App.3d 90, 1984)”; we cite “Easton v. Strassburger (1984).” Unless
stated otherwise, all cases cited are from the California Supreme Court or its
Courts of Appeal.
This document is formatted as a PDF file. Any PDF file may be read online
or on your computer using the ubiquitous and free Adobe Reader from
Adobe Systems. There are many other programs that display and print
PDF files but Adobe Reader is by far the most commonly used.
Adobe Reader is a simple yet powerful online reader. If you are unfamiliar
with its features you should take a few minutes to learn them. By learning
the simple features of Adobe Reader you will be able to make your online
reading more comfortable and productive.
Bookmarks Tab
Search Tool
In particular you should know how to use Adobe Reader’s /Bookmarks\ tab
. This tab is used to navigate through the book’s table of contents. You
should also know how to use its zooming tools (
) to
change the size of text and pages. You will also find it convenient to use
your browser’s <F11> key to toggle in and out of “full screen” mode. Finally,
you will find its Search tool a convenient way to find content particularly
when taking this course’s exams (all exams are “open book”).
Consumer Protection Reader, 2011 Edition
TABLE OF CONTENTS
1
1.1
Defensive Real Estate
Introduction
1
1
1.1.1
1.1.2
1.1.3
1.1.4
1.1.5
Scope
Client Satisfaction
Audience
What is Risk?
Core Problem
1
2
2
3
3
1.2
Dispute Resolution
4
1.2.1
1.2.1.1
1.2.1.1.1
Litigation Concepts
Liability
Vicarious Liability
4
4
4
1.2.1.1.2
Joint and Several Liability
5
1.2.1.1.3
Comparative Negligence
5
1.2.1.2
1.2.1.2.1
Causes of Action
Breach of Fiduciary Duty
6
6
1.2.1.2.2
Misrepresentation
6
1.2.1.2.2.1
Fraudulent Misrepresentation
7
1.2.1.2.2.2
Negligent Misrepresentation
7
1.2.1.2.2.3
Innocent Misrepresentation
8
1.2.1.2.3
Negligence
8
1.2.1.2.3.1
Negligent Nondisclosure
9
1.2.1.2.3.2
Negligent Advice/Referrals
9
1.2.2
1.2.2.1
1.2.2.2
1.2.2.2.1
Methods
Provisions in CAR® Contracts
Informal
Informal Negotiation
10
10
11
11
1.2.2.2.2
Mediation
11
1.2.2.2.3
Small Claims Court
12
1.2.2.3
1.2.2.3.1
1.2.2.3.2
1.2.2.4
1.3
1.3.1
1.3.1.1
1.3.1.2
1.3.2
1.3.2.1
1.3.2.2
1.3.2.2.1
1.3.2.3
1.3.2.4
Formal
Arbitration
Litigation
DRE’s License Discipline
Defensive Real Estate
Risk Avoidance
Avoid Dual Agency
Avoid Vexatious Clients
Risk Reduction
Contract Familiarity
Transaction File
Retention of Records
Document Review
Communication
© 2011 45HoursOnline, All Rights Reserved
13
13
14
17
19
19
19
22
22
23
23
24
24
25
Page i
1.3.2.5
1.3.2.6
1.3.3
1.3.3.1
1.3.3.2
1.3.3.3
1.3.3.4
1.3.3.4.1
Risk Management Policies
Contrition
Risk Transfer
Deferral to Experts
Importance of Deep Pockets
Advisories
Insurance
Protecting Yourself
25
25
26
26
27
27
27
27
1.3.3.4.1.1
E&O
27
1.3.3.4.1.2
General Liability Insurance
29
1.3.3.4.1.3
Automobile Insurance
29
1.3.3.4.2
Protecting your Clients
29
1.3.3.4.2.1
Title Insurance
29
1.3.3.4.2.2
Homeowners Insurance
30
1.3.4
1.3.4.1
1.3.4.2
1.3.4.3
1.4
1.4.1
1.4.1.1
1.4.1.2
1.4.1.2.1
Risk Retention
High Deductibles
Ignoring Small Risks
Incorporation
30
30
31
31
Home Inspection
31
Actionable Defects
Ten Most Common Defects
Red Flags
Visual
32
32
33
33
1.4.1.2.2
Written
34
1.4.1.2.3
Contextual
35
1.4.1.2.4
Remodels and Repairs
35
1.4.1.3
1.4.1.4
1.4.1.4.1
Water
Fungi
Dry Rot
36
37
37
1.4.1.4.2
Mold
39
1.4.1.5
1.4.2
1.4.2.1
1.4.2.2
1.4.2.3
1.4.3
1.4.4
1.4.4.1
1.4.4.2
1.4.4.2.1
Termites
Seller/Agent’s Home Inspection
Agent’s Visual Inspection
Seller’s Disclosures
NHD
Professional Pest Inspection
Professional Home Inspection
Need
Associations:
American Society of Home Inspectors
40
41
41
42
43
43
45
45
45
46
1.4.4.2.2
National Association of Home Inspectors
46
1.4.4.2.3
National Association of Certified Home Inspectors
46
1.4.4.3
1.4.4.3.1
Using Home Inspectors
Legal Issues
47
48
1.4.4.3.2
Scope
48
1.4.4.3.3
Qualifying Home Inspectors
50
Page ii
1.4.4.4
1.4.4.5
1.4.5
1.4.5.1
1.4.5.2
1.4.5.3
1.4.5.4
1.4.5.5
1.4.5.6
1.4.5.7
1.4.5.8
1.4.5.9
2
2.1
Pre-Inspection
Post-Inspection
Proactive Steps
Past TDS Reports
Experts
Walkthroughs
Builder Warranties
Neighborhood Evaluations
Stigmatized Properties
CLUE Reports
Service Contracts
Home Warranties
Consumer Protection Articles
Law
51
53
53
54
54
54
55
55
56
56
57
57
59
60
2.1.1
2.1.1.1
2.1.1.1.1
Annual Summaries of New Legislation
Federal Legislation
Mortgage Forgiveness Debt Relief Act of 2007
60
60
60
2.1.1.1.2
Housing and Enconomic Recovery Act of 2008
60
2.1.1.1.2.1
Housing Assistance Tax Act of 2008
61
2.1.1.1.2.2
FHA Modernization Act of 2008
61
2.1.1.1.2.3
Federal Housing Finance Regulatory Reform Act of 2008:
61
2.1.1.1.2.4
HOPE for Homeowners Act of 2008
61
2.1.1.1.2.5
Mortgage Disclosure Improvement Act of 2008
62
2.1.1.1.3
Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE) 62
2.1.1.1.4
Home Affordable Modification Program (HAMP)
62
2.1.1.2
2.1.1.2.1
State Legislation
2006 Legislation
63
63
2.1.1.2.2
2007 Legislation
65
2.1.1.2.3
2008 Legislation
68
2.1.1.2.4
2009 Legislation
72
2.1.2
2.1.2.1
2.1.2.2
2.1.2.3
2.1.3
2.1.3.1
2.1.3.2
2.1.3.3
2.1.3.4
2.1.3.5
2.1.3.6
2.1.4
2.1.4.1
2.1.4.2
2.1.4.3
2.1.5
2.1.5.1
DRE Regulations
Broker’s Maintenance of Records
Clarifying the license ID number disclosure requirement
Broker supervision: The buck stops here
License
The Administrative Disciplinary Process
Moral Turpitude No Longer a Requirement for License Revocation
Mortgage Brokering in California
Real Estate Auctions
SAFE Mortgage Licensing Act
Real Estate License Can Be Easily Lost
Fair Housing
Federal Court Rules on Internet Housing Discrimination Case
Realty Viewpoint: Fair Housing Groups Need To Be Regulated
Housing Group Targets Steering Via Schools
Trust Fund Handling
Are you collecting an advance fee?…more to know
74
74
77
78
82
82
85
85
89
91
94
95
95
97
99
101
101
Page iii
2.1.5.2
2.1.5.3
2.1.6
2.1.6.1
2.1.6.2
2.1.6.3
2.1.6.4
2.1.6.5
2.2
2.2.1
2.2.1.1
2.2.1.2
2.2.1.3
2.2.1.4
2.2.1.5
2.2.1.6
2.2.1.7
2.2.1.8
2.2.1.9
2.2.1.10
2.3
2.3.1
2.3.1.1
2.3.1.2
2.3.2
2.3.2.1
2.3.2.2
2.3.2.3
2.3.2.4
2.3.2.5
Advertising requirements for brokers handling escrow
Are appraisal fees and credit report fees trust funds?
Fraud
The Recovery Account
Misrepresented Loan Docs Might Result in Forgery Charges
COMMISSIONER’S MESSAGE – Loan Modification Scams
Homeowners and private investors – beware!
Undisclosed Short Sale Payments May Lead to Trouble
Taxes
112
Primary Residences
Housing Counsel: Deducting Interest When You Are Not on Title
If You Claim a Home Office, Watch Out for Hidden Tax
Are You Leaving a Tax Deduction on the Table?
Housing Counsel: Federal Judge Tells IRS to Have a Heart
Congress Limits Gain Exclusion on the Sale of Some Primary Residences
Some IRS Balm for Short Sales of Homes
Tax Rules for Foreign Investors
New Law Will Ease Withholding Burden for Sales of Non-Residences
IRS Issues Vacation Home Ruling
Are You a Real Estate Professional? Maybe Not, Says IRS
Industry
102
103
105
105
107
108
109
111
112
112
114
116
117
118
120
121
123
125
126
128
2.3.2.6
2.3.3
2.3.3.1
2.3.3.2
2.3.4
2.3.4.1
2.3.4.2
2.3.5
2.3.5.1
2.3.5.2
2.3.5.3
2.3.5.4
2.3.5.5
2.3.5.6
2.3.6
2.3.6.1
2.3.6.2
2.3.6.3
2.3.6.4
2.3.6.5
Profession
128
A Direct Plea to the Mortgage Industry
128
California Realtors to Pay Political Assessment
129
Government Policy
131
What Is The Fed’s “Discount” Rate And Does It Affect Housing?
131
Washington Report: Seizure of Fannie and Freddie
133
California: Land of Sunshine and a Year of FREE Living
134
Feds Help Speed Up Your Mortgage Modification
135
CA Homeownership Without Mortgage Payments: HOA’s Pay For CA Mortgage
Moratoriums
138
CA Governor Signs New $10K Home Buyer’s Credit Bill
139
Demographics
140
Housing Affected by Demographic Trends
140
Multigenerational Households Go Back to the Future
141
Economy
143
Real Estate Sky Won’t Fall: Here’s Why
143
Real Estate Outlook: No Recession In Sight
145
Technology
146
Vacation Rental Marketing Needs Spawn Cottage Industry
146
Property Owners Embrace Automation
148
Condo Trends: Wireless Solutions Latest Amenity for Condo Dwellers
150
Future Architects Design Sustainable Architecture
151
Don’t Forget Solar, Your Customers Still Want It
152
Green Building Becomes Mainstream
154
Building Trends
156
Warming Up to the Needs of Today’s Homebuyers and Owners
156
Traditional Living Room Obsolete?
158
Going Green: Improving Energy Savings with Insulated Siding
159
New Homes: Radio-Controlled Lighting Hits the U.S. Market
160
Environmentally Sensitive and Cost-Effective Concrete Gaining Ground
161
Page iv
2.4
2.4.1
2.4.1.1
2.4.1.2
2.4.2
2.4.2.1
2.4.2.2
2.4.2.3
2.4.2.4
2.4.2.4.1
2.4.2.5
2.4.3
2.4.3.1
2.4.3.2
2.4.3.3
2.4.4
2.4.4.1
2.4.4.2
2.4.4.3
2.4.4.4
2.4.5
2.4.5.1
2.4.5.2
2.4.5.3
2.4.5.4
2.4.5.5
2.4.5.6
2.4.5.7
2.4.5.8
2.4.5.9
2.4.5.10
2.4.6
2.4.6.1
2.4.7
2.4.7.1
2.4.7.2
2.4.7.3
2.4.7.4
2.4.8
2.4.8.1
2.4.8.2
2.5
2.5.1
2.5.1.1
2.5.1.2
2.5.1.3
2.5.2
2.5.2.1
Financing
Credit
Credit Consequences of Home Loss
Debunking Credit Score Myths
GSEs
Investor Report: Condo Loan Rules
Washington Report: Congress Pressures FHA
Realtor® Organization Opposed FHA Anti-Flipping Rule
Investor Report: REO Listings
Little Known Player Helps FHA Provide Much Needed Trust-Building
Guidelines for Condominiums
163
163
163
164
165
165
166
167
169
170
About the CalFHA
172
Mortgages
173
Ins, Outs Of Equity Sharing
173
Get The Facts Before You Opt For A Reverse Mortgage
175
Who Owns My Mortgage?
177
Mortgage Shopping
178
Mortgage Pre-Approval versus Mortgage Pre-Qualification
178
Credit Scores Remain Misunderstood
180
New Fannie Mae Owner-Occupancy Rules Will Help Boost Investor Sales
181
Landmark Consumer Protection Law Heavy with Strong Mortgage Rules
182
Distressed Properties
184
Lenders Views on Chapters 7 and 13
184
Facing Foreclosure? Know Your Options!
185
Court Action Will Increase Market Exposure for Distressed Property Sales
189
Disclosures for “REOs”
191
New California Law Addresses Various Foreclosure Problems
192
Fannie Mae Announces New Policy for Renters in REO Properties
194
How Much Does a Foreclosure Cost
195
San Diego Real Estate 2010 Forecast: The Year of the Strategic Mortgage
Default
196
New Federal Law Re Mortgage Relief Providers
199
Mortgage Lenders Can’t Always Obtain Deficiency Judgments
200
Mortgage Disclosures
203
Washington Report: Good Faith Estimate Mortgage Disclosures
203
Appraisals
204
Appraisals are Just a Mouse-Click Away
204
New California Law Aims to Take the Heat Off of Appraisers While Protecting
Consumers
205
Avoiding the unlawful influence of appraisers
207
Realtors Seek to Make All Appraisals Portable
209
Title Insurance and Escrows
210
California Site Allows Title Insurance Price Comparisons
210
California Legislation Takes Aim at Errant Title Reps
212
Risk Management
Insurance
Buyer Tip: Get Home Warranty Funded by Seller
What Your Homeowners Insurance Does, Doesn’t Cover
Home Warranty May Come in Handy
Risk Reduction
Beware of hiring unlicensed contractors!
214
214
214
215
217
219
219
Page v
2.5.2.2
2.5.3
2.5.3.1
2.5.4
2.5.4.1
2.5.4.2
2.5.4.3
2.5.4.4
Checklist Manifesto Has Relevance For Real Estate
Dispute Resolution
Californa Court Holds That Mediation Provision “Means What It Says”
Disclosure and Contingencies
Realty Reality: When Sellers Leave a Mess
Housing Counsel: No Deposit, No Contract
Trivial is in the Eye of the Beholder
Court Decision Raises Questions About “Free Look” Period in California
Purchase Contract
What Exactly Is Mello-Roos? California Home Buying Information
Past Homeowner Association Lawsuit May Be A Material Fact
Golf course disclosures
Civil Litigation
Court Rejects Expert Mold Testimony
Short Sale Tactics May Bring on Legal Liabilities For Agents
Contracts
Lease-Option Should Specify Terms of the Sale
Non-Refundable Deposit Can’t Always Be Kept
California Realtors Introduce New Purchase Contract
How Shall We Count The Days?
Agency and Ethics
Must Agents Provide Translated Documents?
Agents Have Obligations to Honor Client Confidences
Contract Clauses Don’t Void Broker Responsibility
Agency Relationships Need to Be Clear
2.5.4.5
2.5.4.6
2.5.4.7
2.5.5
2.5.5.1
2.5.5.2
2.5.6
2.5.6.1
2.5.6.2
2.5.6.3
2.5.6.4
2.5.7
2.5.7.1
2.5.7.2
2.5.7.3
2.5.7.4
2.6
Home Ownership
2.6.1
2.6.1.1
2.6.1.2
2.6.1.3
2.6.1.4
2.6.1.5
2.6.1.6
2.6.1.7
2.6.1.8
2.6.1.9
2.6.1.10
2.6.1.11
2.6.1.12
2.6.2
2.6.2.1
2.6.2.2
3
3.1
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.1.7
Page vi
Bell, Kay
Bell, Wayne
Block, Julian
Carr, Anthony
Chongchua, Phoebe
Davi, Jeff
Evans, Blanch
228
230
232
233
234
234
236
237
237
238
240
241
242
242
243
245
246
248
Home Improvement and Maintenance
Real Deal: Faux Wood Flooring
Who Says Concrete has to be Ugly and Boring?
New Tankless Hot Water Heaters
When Houses Reach the Big Five-O
What Do I Need to Know about the Plumbing?
Roofing Projects Require Due Diligence
What’s Hot & What’s Not in Bathroom Redesign
Love The House, Hate The Traffic Noise – There Is Hope!
Pop Off Popcorn Ceilings
Have an Eco-Friendly Home? Make Sure Buyers Know It
Tips for a Successful Garage Sale
Renovation Projects For Older Housing Must Follow EPA Rules
Home Safety
Don’t Let Your Home Pipe in a Fire Hazard
What is a GFCI Electrical Outlet?
Appendix
Author Bios
220
222
222
223
223
225
226
248
248
249
251
252
254
257
259
260
262
263
265
266
268
268
269
272
272
272
272
272
273
273
273
274
3.1.8
3.1.9
3.1.10
3.1.11
3.1.12
3.1.13
3.1.14
3.1.15
3.1.16
3.1.17
3.1.18
3.1.19
3.1.20
3.1.21
3.1.22
3.1.23
3.1.24
3.1.25
3.1.26
3.1.27
3.1.28
3.1.29
Fialk, David
Fletcher, David
Goreman, Gary
Harney, Kenneth
Hill, Carla
Hunt, Bob
Kass, Benny
Kayzar, Brett
Kennedy, Diane
Kouremetis, Dena
Lieberman, Stuart
Mantor, George
Miller, Peter
Mosca, Peter
Nash, Mark
Perkins, Broderick
Reed, David
Roberts, Ralph
Rodriguez, Steve
Russer, Michael
Savage, Henry
Schwartz, Bob
274
274
275
275
275
276
276
276
277
277
277
277
278
278
279
279
280
280
281
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282
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Page vii
1
DEFENSIVE REAL ESTATE
1.1
INTRODUCTION
This first section of the Consumer Protection Reader, “Defensive Real
Estate,” is a continuation of our three-hour course, Risk Management, 2nd
Edition. Both courses are designed to help California residential real estate
brokers avoid disputes with their clients. Specifically, this section is
concerned with disputes in which clients claim to have sustained damages
from errors and omissions made by their brokers.
We need to stress this is not a course about your legal responsibilities. THIS
COURSE IS DESIGNED TO HELP YOU AVOID DISPUTES WITH YOUR CLIENTS. We
maintain that client dissatisfaction is the root cause of lawsuits.
1.1.1
SCOPE
Litigation: Legal action or
process taken for full or partial
debt recovery.
Before beginning, let’s define our terms and scope.
By “dispute” we mean any claim for damages by a client against his broker.
Disputes may be resolved directly by the parties via discussion and
Civil Litigation: Dispute
resolution via a Court of Law (i.e., negotiation; or by neutral third-parties using the procedures of mitigation,
in California a Superior Court).
arbitration, or civil litigation. In this course, we use the terms “litigation ”
and “sue” to refer to both arbitration and civil litigation .
By “errors and omissions” we refer to losses claimed by clients for injurious
acts made in good faith by their brokers when conducting authorized
business for their client’s benefit. These are the losses typically covered by
professional liability insurance (aka, errors & omissions insurance).
We use the term “alleged” to acknowledge that claims against brokers are
often without merit. Allegations may be based on faulty memory, unrealistic
expectations, ignorance of the law, or unworthy motives such as envy,
regret, and unjust enrichment.
By “clients” we refer to buyers and sellers to whom brokers owe duties
based on statutory, contract, or common law.
By “California residential real estate brokers” we refer to broker licensees
and their associates who act as agents to facilitate the sale of homes for
their clients. It should be understood that unless we qualify the reference to
“brokers” we mean “employing brokers” and their associates whether
licensed as salespersons or brokers.
Specific Performance: A court
order for the parties to perform to
the terms of their contract.
Injunction: A court order to
By “real estate transactions” we are concerned almost exclusively with the
buying and selling of residential real estate; that is, the process of matching
a buyer to a seller and negotiating a real estate transfer between them.
Other activities for which a real estate license is required such as property
management and loan brokerage are not discussed in this section.
Page 1
prohibit or compel an activity.
Declaratory Relief: A resolution
of legal rights made by a court of
law.
By “damages” we refer to any award to compensate the injured party for his
losses. Most often money judgments are awarded but other types of
awards include “specific performance” , “injunction” , and “declaratory
relief” .
1.1.2
CLIENT SATISFACTION
Consider two successful transactions: one brokered by Sally; the other by
Frank.
Sally helps a naïve young couple purchase their first home. In
brokering the purchase, Sally flagrantly breaks the law and acts
unprofessionally. She misrepresents the condition of her seller’s
home, she hires her brother-in-law to perform the home inspection;
she takes a kickback from the mortgage broker, and she insists the
sellers not make any mention of their troublesome neighbors. Six
months after the close of escrow, the young couple is delighted with
their new home.
“Expecting the world to treat you
right because you are a good
broker is like expecting a shark
not to eat you because you are a
vegetarian.”
– Robert Bass (attorney)
Frank represents another naïve young couple purchasing their first
home. In contrast to Sally, Frank is the very model of the
professional real estate agent. He adheres rigorously to NAR®’s
Code of Ethics and California’s Real Estate Law. Frank serves his
buyers with selfless loyalty. He negotiates vigorously to get his
clients the best deal possible. The month following the close of
escrow, the couple learns that the local primary school is ranked
among the 10% of the poorest performing schools in the state.
Which agent, Sally or Frank, has the greater risk of being sued? Of course,
it is Frank – the model agent.
We have begun with this contrived example to emphasize this point:
A transaction becomes risky only when the client
becomes unhappy with it.
The client may be unhappy with his home, his loan, his neighbors, or his
neighborhood. He may be disappointed, upset, resentful, regretful, or even
outraged. His reasons may be logical or illogical; rationale or emotional.
Regardless of the reason, once a client becomes unhappy with his
purchase he tends to see himself as a victim and then to seek redress from
whomever he perceives responsible for his losses.
Fortunately, for Frank (the model agent); if his buyers sue him his chances
of prevailing are much better than they would be for Sally should she be
sued. But nothing is for sure when disputes are litigated.
1.1.3
AUDIENCE
We have chosen to write this course in a conversational style. “We” are
45HoursOnline and “you” are the broker. Please understand that by
“broker” we mean the employing broker of a real estate brokerage or any of
his agents acting on his behalf or under his supervision – this, of course,
Page 2
includes salespersons and associate brokers working under the employing
broker’s license. The employing broker may also be a corporation licensed
by the DRE.
We have chosen to address this section to the “broker” rather than the
“licensee” because the broker is legally liable for any actions taken under
his authority.
1.1.4
WHAT IS RISK?
For our purposes, we define risk narrowly. We use the term “risk” to refer
to the probability your client will become significantly unhappy with his
transaction. Here are some examples of situations which increase risk:
A buyer discovers his new home has significantly less square
footage than he was led to believe by the listing broker.
A seller discovers he sold his house for 20% below its market value.
A buyer discovers he has noisy neighbors: one plays the bagpipes;
another breeds roosters.
A seller carries a second and soon after the transfer learns his
buyer had lost his job six months before the close of escrow.
A buyer discovers when he moves in that the seller removed the
home’s beautiful chandelier.
When the buyer or seller’s expectations are not met, his recourse is to seek
redress from you. If you don’t agree, you have a dispute.
1.1.5
CORE PROBLEM
The root cause of litigation in real estate brokerage is the industry’s
compensation system. The law compels the broker to act as a fiduciary –
putting the interests of his clients before his own – but the broker is only
paid if he closes the deal. The compensation system acts as a corrupting
influence on brokers and, even more so, on the broker’s associates who
are more concerned with short term income than long term reputation.
Unlike other fiduciaries; attorneys, CPAs, home inspectors, doctors,
psychologists, structural engineers to name but a few; brokers are paid not
on an hourly or on per-job basis, brokers are paid on a contingency basis.
This conflict of interest, inherent in the industry, will not be removed until
the industry changes its compensation system. Because previous attempts
by brokers to work on a non-contingent basis have been failures, the
evolution of a non-contingent payment system must be viewed as a distant
possibility.
In this section, we assume you are incorruptible; that your foremost
consideration is always what is best for your client; in other words, we
assume you are a “true fiduciary.”
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1.2
DISPUTE RESOLUTION
Today’s client; tomorrow’s
plaintiff.
The only certain way of avoiding legal disputes is to make sure your clients
are satisfied with their transactions. A satisfied client rarely sues no matter
how flagrantly his agent may have breached his fiduciary duties.
This section describes legal topics to help you practice defensive real
estate. These topics are 1) your legal duties as a fiduciary, 2) the legal
concepts of “liability” and “cause of action,” and 3) the formal dispute
resolution methods: mediation, arbitration, and civil litigation.
1.2.1
LITIGATION CONCEPTS
Two legal concepts need to be understood: 1) liability, 2) cause of action.
1.2.1.1
LIABILITY
There are several forms of liability you need to know:
You may be found liable for the actions of your employees and
subagents (“vicarious liability”);
you may share a portion of the liability with other defendants
(“contributory liability”);
if jointly liable with other defendants, you may be singled out by the
plaintiff to pay his entire judgment (“joint and several liability”); and
your liability may be reduced to the degree that your plaintiff shares
blame for his injuries (“comparative negligence”).
1.2.1.1.1
VICARIOUS LIABILITY
Vicarious liability arises out of the common law doctrine of respondeat
superior – the responsibility of the superior for the acts of his subordinates.
In the context of a traditional real estate brokerage transaction:
The
“
“
“
seller
broker
salesperson
cooperating broker
is vicariously liable for the acts of his
“
“
“
broker.
salesperson.
cooperating broker
cooperating salesperson
Note that in this chain of liability, the seller is vicariously liable for
everyone involved – even for the actions (within the scope of agency) of the
cooperating agent, a person he may not even know. This is one of the
problems of the traditional agency model.
Vicarious liability applies only to those acts performed by subordinates
within the scope of the superior’s agency. For example, suppose a Good
Samaritan agent conducts a garage sale for her aged and forgetful seller
and then negligently sells her client’s original Picasso for $5.00. The Good
Samaritan’s broker could not be held vicariously libel for negligence since
the task of conducting a garage sale is not within the scope of the broker’s
agency but the Good Samaritan could be sued.
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1.2.1.1.2
JOINT AND SEVERAL LIABILITY
As of June 2008, there were
216,000 members of the State
Bar of California, 160,000 of
which were on active status
(Wikipedia: “State Bar of
California).
You need to understand the concept of “joint and several liability;” aka, the
“deep pocket rule.” Once you grasp this legal concept you will understand
why lawyers sue every person conceivably responsible for their client’s
injuries.
Judgment Proof: A defendant or
judgment debtor who has no
assets or income from which a
judgment can be satisfied.
Suppose a former client sues you and his home inspector to recover the
$100,000 he had to spend to remove the toxic mold the home inspector
failed to find in his attic. At trial, the buyer proves the home inspector you
recommended is an illegal alien without home inspection experience and
that he was drunk when he conducted his inspection. The former client also
proves that you should have known the inspector had no experience and
that he was an alcoholic. If the court awards the $100,000 to the plaintiff
and determines you are 1% liable while the home inspector is 99% liable,
the plaintiff can recover the full amount of his judgment from you alone.
After you have paid the plaintiff his $100,000 award, your legal recourse is
to collect from the home inspector’s portion the $99,000 he owes you and,
should he fail to pay you, for you to sue him for a money judgment.
California’s Proposition 51 (1986)
abolished joint and several liability
for noneconomic damages
There is an important exception to the deep-pocket rule: it applies only to
economic damages; that is, for the plaintiff’s actual financial losses. Noneconomic damages are awarded for physical injuries arising out of the
plaintiff’s pain and suffering.
1.2.1.1.3
COMPARATIVE NEGLIGENCE
The “deep pocket” rule states that when a plaintiff is awarded damages
against multiple defendants, the plaintiff may recover the full amount of his
judgment from any single defendant regardless of that defendant’s degree
of liability.
When the plaintiff shares the blame with the defendant(s) for the damages
he sustained, the award is apportioned according to the doctrine of
“comparative negligence.”
Say, for example, your former client seeks to recover damages from you for
defective construction work performed by a workman you recommended.
You refuse to pay because A) the workman was at fault and B) you believe
it was your client’s responsibility to qualify the workman’s credentials and
approve his work. Unable to resolve the dispute, the buyer takes you and
the workman to arbitration (assuming the workman agreed to have the
matter arbitrated). After hearing the facts, the arbitrator determines you are
10% responsible, the workman 50% responsible, and your former client
40% responsible.
In such matters, California courts (and by extension, arbitration panels)
apportion damages using the “pure comparative fault” rule. This rule states
that the amount of damages is reduced by the degree to which the plaintiff
was at fault. If the amount sought by the plaintiff in the above example was
$100K, then the award to the plaintiff would be $60K. By the “deep pocket
rule,” the plaintiff could seek to recover the full amount from you even
though the arbitrator found you only 10% at fault. After paying the
judgment, you could take legal action against the workman to recover his
portion of the judgment, $50K (.5 times $100K).
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Like it or not, that is how the system works here in California.
1.2.1.2
CAUSES OF ACTION
A cause of action (aka “a claim”) is a recognized common law claim that a
plaintiff “pleads” or “alleges” in a complaint to start a lawsuit. There are two
types: a legal claim based on statute or a claim in equity based on
common law.
A cause of action has two parts: 1) a legal basis for the wrong the plaintiff
claims to have suffered (e.g., fraud), and 2) a remedy which the plaintiff
asks the court to grant (e.g., $250K plus attorney fees).
The facts the plaintiff must prove to justify his cause of action are called the
“elements” of that cause of action. For example, the elements for the
cause of action of negligence are: 1) the existence of a duty, 2) breach of
that duty, 3) reliance on that breach, and 4) damages. If a complaint does
not allege facts sufficient to support every element of a claim, the court,
upon motion by the defendant, may dismiss the complaint.
Next we discuss the causes of action most frequently alleged by clients
when suing their brokers.
1.2.1.2.1
BREACH OF FIDUCIARY DUTY
The claim of breach of fiduciary duty is a necessary part of a negligence
lawsuit. To prove breach of fiduciary duty the plaintiff must show that 1) the
defendant was his agent; 2) that as an agent, he owed him a duty; and 3)
that the duty was breached.
“Acknowledged” in this sense is a
legal term meaning that the
parties agreed by putting the
terms in writing and affirming with
their signatures.
The cleanest way for a plaintiff to show that the defendant was his agent is
to produce an acknowledged Agency Disclosure form (CAR® form AD) stating
that the defendant was the agent of the plaintiff. But even if the form states
otherwise, the plaintiff may prove an agency relationship existed if he can
prove that he did not understand the Agency Disclosure form or was told by
his agent, whom he trusted, to sign the form without reading it. Then, if the
plaintiff could prove any of the following, he could demonstrate that an
agency relationship did in fact exist regardless of what the relationship
indicated on the form:
1.
The defendant performed all the duties expected of an agent
(“implied agency”); or
2.
The plaintiff never objected when the plaintiff introduced him as his
agent (“apparent agency”); or
3.
The defendant acknowledged the plaintiff’s grant of authority to act
on the plaintiff’s behalf (another definition of agency).
If the plaintiff succeeds in demonstrating that the broker was his agent, he
would then have to show that his broker owed him a duty which the agent
breached.
1.2.1.2.2
MISREPRESENTATION
Most real estate attorneys who defend brokers agree that the majority of
the claims against brokers are for misrepresentation.
Page 6
Misrepresentation is a false statement made by a seller or his broker which
induces a client into a contract. When the false statement is made by a
broker about a transaction or a matter of real estate, it is more likely that
courts will hold a statement of opinion by the broker as a statement of fact.
A finding of misrepresentation allows for the remedies of rescission and
damages.
The elements which your client must prove to establish a claim of basic
misrepresentation are: 1) you made a false representation at the time of
the transaction, 2) the representation was material to the transaction, 3)
your client relied on the representation, and 4) your client’s reliance on the
representation was the reason he sustained the damages he claims.
There are three recognized forms of misrepresentation which differ by
intent: 1) fraudulent, 2) negligent, and 3) innocent. Each is discussed
below:
1.2.1.2.2.1
FRAUDULENT MISREPRESENTATION
To establish a claim based on fraudulent misrepresentation, your client
must prove basic misrepresentation and two additional elements:
1.
You made a representation knowing it was false or else with a
reckless disregard as to whether it was true or false (e.g., “This
home is priced at half of it’s market value.”)
2.
Your intent in making the representation was to induce your client to
sell or purchase the property.
The claim of “intentional concealment” (aka, “constructive fraud”) is similar
to fraudulent misrepresentation. It imposes liability for intentionally
concealing known material defects to a buyer especially when the:
defect is latent,
defect poses a health or safety risk,
broker leads the buyer away from discovering the defect, or
broker makes a false statement, believing it to be true but later, after
discovering it to be false, fails to correct it.
Details about DRE’s Recovery
Account can be found here.
If you are found guilty of fraud, regardless of type, in a criminal court, you
will loose your license. If you are found liable for fraud in a civil action and if
your plaintiff initiates an administrative action against you, the DRE will
probably revoke your license. If you are found liable for fraud and fail to pay
a judgment and your client subsequently makes a claim on DRE’s Recovery
Account , the DRE will almost certainly revoke your license.
Since E&O policies insure only for negligent acts, any damages the court
orders you to pay will not be paid by your E&O insurer. (However, some
E&O policies may pay for your defense.)
1.2.1.2.2.2
NEGLIGENT MISREPRESENTATION
Claims alleging “negligent misrepresentation” and “innocent
misrepresentation” represent the majority of claims made by sellers and
Page 7
buyers against their brokers. These are sometimes called, “didn’t know –
didn’t verify” misrepresentations.
To prove negligent misrepresentation, your client must prove basic
misrepresentation plus two additional elements: 1) you had a duty of care
to protect him, and 2) you were negligent in making a representation that
he relied upon.
You may rely on statements made by your seller unless you have observed
facts or conditions which give you reason to believe your seller’s
statements may be false.
To avoid liability for negligent misrepresentation, you should insist upon a
competent home inspection and verify any claims made by the seller which
are of material importance to the buyer.
The Alaska Supreme Court noted that real estate professionals “hold
themselves out to the public as having specialized knowledge of the realty
they sell … [and] …a purchaser who relies on a material misrepresentation,
even though innocently made, has a cause of action against the broker
originating or communicating the misrepresentation.”
1.2.1.2.2.3
INNOCENT MISREPRESENTATION
Should you make material statement of fact which you have good reason to
be true but which is later shown to be false, then you may be liable for
“innocent misrepresentation.” This type of misrepresentation only allows
for a remedy of rescission, the purpose of which is to put the parties back
into a position as if the contract had never taken place. Since the remedy
is rescission (e.g., cancelling the purchase contract), the cause of action is
rarely alleged by buyers once ownership has transferred to the buyer.
1.2.1.2.3
NEGLIGENCE
The elements which your client must prove to win a judgment of negligence
are:
Duty: You owed him a duty of care.
Breach of Duty: You breached that duty.
Causation: As a result of your breach, he suffered damage.
Expectation: You could have reasonably foreseen the damage.
The duties you, as a fiduciary, owe your client are loyalty, honesty, integrity,
and utmost care (CC § 2079.16). The duties you owe third parties are:
competence, fairness, and disclosure.
To prove you owed him a duty which you failed to provide, your client must
show that you failed to exercise the standard of care customary to the
brokerage profession. This can be demonstrated by expert witnesses who
may site sections from the NAR® Code of Ethics, case law, their own
experience, and the legal standard in CC §2079.2 which reads:
…the standard of care owed by a broker under this article is the
degree of care that a reasonably prudent real estate licensee would
exercise and is measured by the degree of knowledge through
education, experience, and examination, required to obtain a
Page 8
license.
Take special note of the above phrase, “… degree of knowledge through
education, experience, and examination, required to obtain a license.” This
means that as a licensee you are expected to know the real estate topics
you studied to pass your real estate exam (e.g., “Practices”, “Principles”,
“Appraisal”, “Law”) and the mandatory subjects of continuing education:
“Ethics,” “Agency,” “Trust Funds,” “Fair Housing,” and “Risk Management.”
1.2.1.2.3.1
NEGLIGENT NONDISCLOSURE
To prevail on a theory alleging negligent nondisclosure, your client must
show you had a duty to disclose a material fact or condition but you
negligently failed to do so.
The disclosure duty may arise out of statute or common law. An example
of a duty arising out of statute is the agency disclosure (CC § 2079.14) and of a
duty arising out of common law is the “duty to learn the material facts that
may affect the principal’s decision” (Field v. Century 21 Klowden-Forness Realty (1998)).
1.2.1.2.3.2
NEGLIGENT ADVICE/REFERRALS
Negligent advice imposes liability for giving false professional advice or
referrals when the broker should have known the advice was wrong or
should have known that the person he referred was not qualified or
competent.
“It doesn’t take a weather man to
know which way the wind blows.”
-- Bob Dylan
Some experts recommend brokers avoid the risk of incurring liability from
the claim of negligent advice by never giving any advice (see Robert Bass’ article,
“The Art of Avoiding Misrepresentation”). But we believe this recommendation is
short sighted, unrealistic, and does a disservice to your clients.
Consider the answer you should give if your client should ask, “How should
we take title?”
TOO CAUTIOUS: I’m sorry, I can’t answer that question since I’m
not a CPA or an attorney and as a real estate licensee I’m forbidden
from practicing law without being a member of the State Bar. I
recommend you find a real estate lawyer and ask him.
TOO CARELESS: Take title as “Community Property with Right of
Survivorship” – that’s how most married couples take title.
JUST RIGHT: California is a community property state. That
means homes purchased and funded with income earned during
marriage are owned jointly. Community property can not be sold or
encumbered without the consent of both husband and wife. So you
have two choices for taking title: 1) as “community property” or 2)
as “community property with right of survivorship.” If you choose the
latter, then should one of you die, the home will become solely
owned by the survivor; if you choose the former, you may bequeath
your half of the property to someone other than your spouse. If you
need guidance, I suggest you google “vesting title in California real
estate.” If you can’t get an answer via Google, I think you should
discuss this matter with an attorney. In any case, if you decide to
change the way in which you hold title, you may do so with an
inexpensive legal procedure called a “quit claim.”
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The “Just Right” answer is what you learned in Principles of Real Estate,
the course you were required to take before sitting for the real estate exam.
This answer does not tell the buyer how to take title it just states facts. Yes
the answer is verbose but if it saves your client hundreds of dollars in
consultation fees and enables your client to make an immediate decision
we think it is worth the very small risk.
In the 1989 Iowa case of Gerard v. Peterson, a real estate agent casually
advised his buyer that it “probably wasn’t necessary” to include a financing
contingency in the purchase agreement. The Court found the broker liable
for negligent advice.
Certainly if you advise your client to take any unusual action you should
state your reasons in writing and make sure your client understands and
agrees. For example, there can be good reasons for advising your client
not to get a home inspection; for example, he might wish to tear down the
house. If you do give unorthodox advice or advice that could be easily
misunderstood, it is prudent to put your advice in writing taking care to list
your assumptions and reasons.
1.2.2
METHODS
“Discourage litigation; persuade your neighbors to compromise whenever you can.
Point out to them how the nominal winner is often the real loser – in fees, expenses
and waste of time.” – Abraham Lincoln
Do all that you can to resolve disputes with your clients face-to-face.
Accommodate, negotiate, intimidate, persuade, apologize, show contrition,
make concessions, and compromise – take whatever measure is required
to avoid litigation. If you can not resolve your dispute through dialogue,
attempt to persuade your client to mediate. If your client refuses to mediate
or if mediation fails, only then should you consider arbitration or civil
litigation.
The methods for resolving disputes using third parties in order of
preference are: 1) mediation, 2) small claims, 3) arbitration, and 4)
litigation. In the sections below, we briefly describe each of these methods.
1.2.2.1
PROVISIONS IN CAR® CONTRACTS
CAR®’s Residential Listing Agreement (Form RLA) requires mediation for
disputes between you and your seller. If both of you initial the form’s
Arbitration of Disputes provision, then any disputes between you and your
seller must be settled by binding arbitration. An exception is made for
disputes settled via Small Claims Court (where the amount in dispute is
less than $7,500).
The CAR® Buyer Broker Representation Agreement (Form BR), oddly enough,
has no dispute resolution provision. Nothing should stop a broker from
adding his own provision to the agreement.
CAR®’s Purchase Agreement (Form RPA-CA) is an agreement between the
buyer and seller; brokers are not party to the agreement. It requires the
buyer and seller to use mediation to resolve their disputes. If mediation
Page 10
fails and if both the buyer and seller have initialed the Arbitration of
Disputes provision in their purchase agreement, they must submit their
dispute to binding arbitration. If they did not initial the provision, they may
still use arbitration to resolve their dispute providing both buyer and seller
agree to do so.
CAR® contracts do not specify an arbitration firm (e.g., American Arbitration
Association). The arbitration provision does require the arbitrator to be a
retired judge or justice or an attorney with at least five years of residential
real estate law experience; however, if the disputants mutually agree they
can use any arbitrator they please. Whoever the parties select as their
arbitrator, the arbitrator must render his decision in accordance with
California law.
1.2.2.2
INFORMAL
1.2.2.2.1
INFORMAL NEGOTIATION
If your client has a complaint and if he trusts you, he should be expected to
initially try and settle his complaint with you in a friendly manner, one-onone. When confronted with a complaint, you should make every effort to be
responsive and reasonable even if your client is not. Make every effort to
keep communication open. Should your discussions deteriorate into verbal
abuse, your client’s next step may be to hire an attorney; that action will
almost certainly ratchet up the cost of the dispute by an order of magnitude.
Even if you can not reach agreement, you should use what ever trust and
goodwill remains to persuade your client to mediate his dispute.
1.2.2.2.2
MEDIATION
Mediation is an informal method of dispute resolution conducted by a
neutral adviser who listens to each side and tries to craft a mutually
agreeable solution. Anyone can serve as a mediator.
CAR®’s Residential Purchase Agreement (Form RLA-CA) requires the buyer and
seller to mediate even if they have not initialed the agreement’s Arbitration
Provision. That provision requires the parties to split the mediation fees. It
also states that should any party not attempt or refuse to mediate a dispute
before initiating arbitration or litigation, then that party will not be entitled to
recover its attorney fees even if it should subsequently prevail.
The best know mediation service
provides are 1) American
Arbitration Association and, 2)
JAMS.
The first hurdle in resolving a dispute via mediation is for the disputants to
find and agree to a mediator. The mediator should be neutral, trusted by
both parties, and be diplomatic in demeanor. If the disputants can not find a
volunteer mediator, they should consider hiring a professional.
Professional mediators are trained in the art of mediation. They know how
to facilitate effective communication between the disputants together or
individually. The professional mediator is skilled in the art of developing
options, considering alternatives, and reaching consensual settlement.
If mediation is successful (and its proponents claim an 80% success rate),
it is the mediator’s responsibility to reduce the agreement to writing.
A mediated dispute generally lasts about a day and the mediator typically
charges about $200/hour. These costs are usually split between the
disputing parties.
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1.2.2.2.3
SMALL CLAIMS COURT
If you have ever watched Judge Judy you know a little something about
Small Claims Court. You know that 1) the justice in Small Claims Court is
far from perfect since so little time is afforded to the litigants to make their
case and 2) it is very fast and very cheap.
Small Claims Court can only be used by individuals seeking monetary
damages of less than $7,500.00 and by legal entities (e.g., corporations,
partnerships, etc.) seeking monetary damages of less than $5,000. Only
the principals of the dispute may appear before the judge; paid
representatives, attorneys in particular, may not represent their clients
before the judge (but an attorney may, of course, be consulted by any party
outside the courtroom).
If a sole proprietorship sues or is sued, the owner must go to court; if a
partnership, a partner must go to court; if a corporation, one its employees,
officers, or directors must go to court. Exceptions are made for plaintiffs in
the armed services and for a business when a claim can be proved by
evidence of a business account in which case a regular employee with
knowledge of that account may represent the business (details).
You can file as many claims as you want for up to $2,500 each but you can
only file two claims in a calendar year that ask for more the $2,500.
Small Claims Court can not be used to obtain equitable relief; that is to
obtain any form of restitution other than a money award. For example, you
can not use the Small Claims Court to enforce a contract or to obtain an
injunction. The only other State court in which plaintiffs can seek relief is
Superior Court which is considerably more complicated than the Small
Claims Court.
The CAR® Purchase Agreement (Form RPA-CA) provides for binding arbitration
for disputes between the buyer and seller (not their brokers) providing both
the buyer and seller have initialed its Arbitration of Disputes provision. The
provision provides an exception for disputes taken to Small Claims Court.
The key advantages of taking your dispute to Small Claims Court are speed
and economy.
Disputants in small claims actions have subpoena power. This power
provides the right to demand documents and compel witnesses to appear
at trial. Monetary judgments awarded by Small Claims Court are no less
valid than monetary judgments awarded by a Superior Court (or by an
arbitrator). As with any monetary judgment, the courts will not help you
collect it. However, as a judgment creditor, you are entitled to use all the
legal powers at the disposal of any attorney or collection agency to compel
collection of your judgment: writs of execution, till taps, bank levies, and so
on.
A further advantage of settling disputes using Small Claims Court is that
once the judge decides the case the matter is effectively closed. If the
plaintiff loses, he can not appeal; defendants may appeal to Superior Court
but if their appeal is found to be frivolous the Court may award the original
plaintiff up to $2,000.00 for attorney’s fees and other related expenses.
Page 12
Nolo Press (Nolo.com) is a godsend for anyone wishing to navigate the
legal system without representation. It offers a wide selection of books to
explain various legal processes to lay readers. Of particular relevance are
How to Collect When You Win a Lawsuit and Everybody's Guide to Small
Claims Court in California. An excellent free document about the Small
Claims Court is available from the Department of Consumer Affairs of the
State of California, The Do’s and Don’ts of Using the Small Claims Court.
1.2.2.3
FORMAL
1.2.2.3.1
ARBITRATION
“The existing judicial system is too costly; too painful, too destructive, too inefficient
for a truly civilized people. … Reliance on the adversarial process as the principal
means of resolving conflicts is a mistake that must be corrected. For some disputes,
trials will be the only means, but for many claims, trial by adversarial contest must in
time go the way of the ancient trial by battle and blood.” – Late Supreme Court Chief
Justice Warren E. Burger
Arbitration is free-market justice; that is, justice you pay for. But because
arbitration is usually much faster, quicker, and less formal than civil
litigation and because decisions obtained through arbitration are almost
always final; arbitration is usually much less expensive than public justice
from a court of law (exception: Small Claims Court).
Unlike public justice, where all documents and proceedings are open to the
public, arbitration is 100% private. No one need know the outcome of a
dispute resolved via arbitration, not your clientele, not homeowners in your
farm, not other licensees in your community, and not the DRE.
In arbitration, the party making a
claim is the “claimant;” the party
responding is the “respondent.”
In arbitration, the disputants select a neutral arbitrator and agree to abide
by the arbitrator’s decision. Arbitration is not only faster, cheaper, and less
burdensome than civil litigation; the arbitrator, unlike a judge in Superior
Court, is ordinarily an expert in real estate law (however, the disputants may
agree to use anyone).
There is one significant disadvantage to arbitration. Arbitration awards are
almost always final. Unless you can prove the arbitrator was corrupt,
incompetent (e.g., drunk), exceeded his authority, refused to hear material
evidence, or failed to recuse himself for good cause; you are stuck with his
decision. Even if your arbitrator allowed hearsay as evidence or made his
decision based on 8th century Islamic Law, you would not be permitted to
appeal his decision.
The arbitration called for in CAR® contracts is contractual and binding.
Evidentiary and procedural rules are relatively informal. Parties are granted
pre-hearing and discovery rights.
The right to subpoena is issued and signed by the arbitrator. The arbitrator
has the power to order discovery and impose the same liabilities, sanctions,
and penalties as a court of law (except an order of contempt which could
result in arrest or imprisonment). The arbitrator decides admissibility,
relevance, and materiality of the evidence offered. The arbitrator must
proceed according to the dictates of due process, treat all parties fairly, and
Page 13
admit all relevant testimony and evidence. Disputants may be represented
by an attorney.
If the parties in a CAR® contract
initial the “Agreement to Arbitrate”
provision, the prevailing party may
not collect attorney fees if he
failed to attempt to settle the
dispute through mediation.
As a general rule, attorney fees are not recoverable unless a contract term
provides for recovery of such fees. The arbitration clause in CAR® contracts
provides for recovery of attorney fees by the prevailing party in any action,
proceeding, or arbitration .
1.2.2.3.2
LITIGATION
Remedies which may be awarded by an arbitrator are specific performance,
compensatory damages, punitive damages, injunctions, and declaratory
relief.
Dispute resolution by civil litigation is just awful.
Civil litigation is extremely expensive, its duration is measured in years, it
employs a jargon from Ancient Rome; it requires highly-paid advocates who
take their due diligence duty all too seriously, and, if a jury is used as the
“finder of fact,” confers its decision to disinterested jurors who know next to
nothing about real estate and are often poorly educated. Nevertheless, we
concede that when the litigated matter is truly important, when the
disputants are irreconcilable, and when the stakes are very high, dispute
resolution via civil litigation is the best and fairest means of justice available.
Here is how civil litigation works…
First, the easy part: The plaintiff files a “complaint” against one or more
defendants.
The complaint, as with all aspects of civil litigation, is highly formalized. It
must cite recognized “causes of action” (e.g., “negligent misrepresentation”,
“fraudulent concealment”), cite supportive allegations, and “pray” for relief
usually in the form of monetary damages. Most complaints are written by
attorneys and their usual practice is to name everyone who might be liable
(in whole or in part) for their client’s injuries taking special care to name
defendants that 1) have pockets deep enough to pay for the award sought,
or 2) might be willing to settle out of court in exchange for having their
names dropped from the complaint.
Online services (example)
provide cookbooks of sample
complaints in Word format where
all one needs to do is plug in the
details.
You need to understand just how easy it is for someone who knows the
local court rules and has a sample book of pleadings in Word format to file
suit . It costs about $320.00 to file the complaint (the fee charged by the
L.A. Superior Court in 2006) and about $100.00 for each named defendant
to pay a process server to deliver the complaint.
Most “pleadings” (the name given to these complaints) usually “pray for
relief” in an extortionate amount. Most pleadings are hyperbolic screeds
alleging every conceivable wrongdoing which the attorney and his client
think they have any chance to attach to the defendants.
The psychological strategy of most complaints is “shock-and-awe.” The
plaintiff’s attorney’s objective is often to frighten the defendants into quickly
settling out of court. The plaintiff’s attorney knows that his client, in most
cases, can not afford to have his dispute fully litigated and so he hopes to
intimidate the defendant into a quick, easy, and profitable settlement.
Page 14
If you are served with a complaint, you need to respond – usually within 30
days – or else the plaintiff can seek a default judgment from the Court in
the full amount of his claim. In most such cases, the Court will grant the
plaintiff his request – a money judgment against the defendant(s) in the full
amount.
If served with a complaint, you may be thrown into a panic (and that is often
its author’s intent). Your first reaction, assuming you do not have E&O
insurance, will be to retain an attorney. Any attorney you approach will
demand a retainer to draft an “answer” or to seek an immediate settlement
with the plaintiff’s attorney. The retainer requested by most attorneys is
likely to be in the range of $5,000 to $10,000 dollars. At a rate of about
$250/hour, this buys you from 25 to 50 hours of your attorney’s time. Your
Query “I’m Billing Time Redux” at attorney will bill you for every minute he spends with you; say “hello” and he
YouTube for a humorous and
will charge you for a quarter hour – his minimum billing unit . When your
musical look at billing from the
retainer fee has been exhausted, your attorney will request another advance
attorney’s perspective.
– and so on until you settle the case or, more likely, run out of money.
Your second reaction, after you consider the costs of defending yourself,
will be to settle out of court. Never mind that you consider the charges
against you groundless. You will be tempted to settle to make the awful
risk go away so you can resume your normal life.
If you regard the allegations against you as total fiction, you might believe
you can fight it with a counterclaim alleging “abusive process” and/or
“malicious prosecution”. You can not! Both of these recognized causes of
action require the action on which it is based to be first decided by a Court
in your favor before you can file a complaint alleging these claims. And
even if you should prevail and file suit alleging “abuse of process” or
“malicious prosecution,” the evidentiary bar needed to prove these claims is
so high that it is highly improbable you will prevail.
Answer: A written pleading by
which the defendant responds to
the plaintiff's complaint.
Assuming you can find an attorney and can afford his retainer, your attorney
has a number of ways he can respond: 1) he can file for an extension, 2) he
can challenge the legality of the complaint (a “demurrer”), 3) he can file
different kinds of motions to attempt to delay or stop (“quash”) the complaint,
4) he can answer the complaint, and 5) he can file an answer with a
cross-complaint (or countersuit) thereby calling and raising the stakes for
both you and your plaintiff.
After you file your answer, next comes the “discovery” period. You and
your attorney and your adversary and his attorney are free to spend as
many years as they may require in “discovering” the evidence needed to
prove their case – with all efforts billed at about $250/hour. This is a war
usually won by attrition.
During the discovery period, your attorney and your client’s attorney have
the right to subpoena evidence, take depositions (for which a stenographer
must be hired), and make motions to the Court. Everything documented
and filed with the Court becomes a matter of public record which anyone
can access (some jurisdictions have placed legal proceedings online where
they can be accessed by anyone in Cyberspace). Furthermore, at any time
the plaintiff may amend his complaint or any of the defendants may amend
their answers.
Page 15
Eventually, if the case is not settled or dropped it will come to trial. If the
claim includes money damages, you and your adversary can elect to have
a “bench trial” or a “jury trial.” If you choose a “bench trial,” the presiding
judge will hear the evidence and decide your case; otherwise, a jury will be
convened to decide the facts of your case.
It comes as a surprise to many people that most attorneys have no trial
experience. Why? Because the time and money required to get to trial is
so burdensome that it is a relatively rare event.
If you have to go to court, you will find it a nasty place. Most litigants are
half mad from years of frustration and endless expense; their frustration
compounded by the mysteries of the legal system. The court personnel,
including judges, are under constant stress; consequently they are often
surly and rarely have any patience or empathy for litigants. The judges
expect to be treated like Gods by everyone in their courtroom (see Judge
Judy ) – for example, should you fail to stand when His Honor swaggers
into his courtroom, he has the legal authority to find you in “contempt of
court” and punish you by sending you straight to jail.
In civil cases the standard of proof is “a preponderance of the evidence.”
What does this mean? It just means that if the jury (or, if it is a bench trial,
the judge) feels the evidence is more likely in the plaintiff’s favor, the
defendant will be found liable.
Judge Judy
The jury usually consists of 12 members but may be fewer if both parties
agree. To be found liable (“guilty” is not used in civil cases), three fourths of
the jury must agree. Juries on civil cases can not hang.
After the judge and jury render their decision, after tens if not hundreds of
thousands of dollars have been expended, it is still not over! Either party
may appeal. Even plaintiffs who prevail may appeal if they consider the
damages awarded to them are too small. (In criminal cases, if the
defendant is found not guilty the prosecution may not appeal.)
An appeal must be based on either a procedural error or an error in the
application of the law providing the error was significant enough to have
affected the outcome. These are called “reversible errors.” Reversible
errors include 1) erroneously instructing the jury on the law, 2) permitting
improper argument by an attorney, and 3) the improper admission or
exclusion of evidence.
An appeal is not a new trial – no new evidence is heard or old evidence
challenged. The facts of the case cited in the appeal must be from the
original court transcript. Usually the issue(s) which serves as the basis for
the appeal must have been challenged by the appellant at the time it
occurred.
The appeal is a written document which cites the court transcript (which
you must pay for) and presents a legal argument for setting aside the
original judgment. If the appellate court which hears the case believes it
has no merit, it “affirms” the lower court’s decision thereby letting the
decision of the lower court stand. Should this occur, the appellant may
appeal to a higher Court of Appeal. The last possible stop for a statelitigated case is the California Supreme Court; the last stop in a federallylitigated case is the U.S. Supreme Court.
Page 16
If the appeals court agrees to hear the case, it listens to oral argument and
renders its decision – often many months later. It is from these decisions
that the common law evolves.
Ultimately one party will prevail and a judgment will be issued by the court.
If the judgment includes a cash award, more legal actions may be required
to collect it.
The homestead exemption in
Florida (OJ’s home state) is
unlimited; that is, if your home is a
20 million dollar mansion, you can
not be forced to sell it to satisfy a
judgment.
Often judgment debtors declare bankruptcy to avoid paying a large award.
Before declaring bankruptcy, impending bankrupts may divest their assets
into safe harbors such as offshore banks, precious metals, and homesteads
in Florida . Bankruptcy is usually a dead end for the creditor.
Says Robert Bass in a column written for RealtyTimes.com:
I can confidently speak for countless litigators who will tell you that
litigation is misery… it is the worst way to resolve disputes. Alas, it
is also the best system that mankind has been able to come up with.
1.2.2.4
DRE’S LICENSE DISCIPLINE
The DRE’s primary responsibility is to protect the general public from
unlawful conduct by its licensees. Such conduct comes to the attention of
DRE’s Enforcement Department in several ways. Principal among these is
a written complaint (see DRE form 519A). The DRE receives from 8K to 10K
complaints a year.
Besides warnings and public rebukes issued by the DRE against licensees,
the only disciplinary actions which can be taken by the DRE are actions
which affect the status of a licensee’s license. At worst the DRE can revoke
a license. If it finds evidence of criminal wrongdoing it can refer the case to
the State Attorney General for criminal prosecution. The DRE can not settle
commission disputes, collect judgments, levy fines, or resolve disputes
between licensees and their clients.
Most if not all of the common law claims described in this course are also
violations of the Real Estate License Law as enforced by the DRE. For
example, BPC §10176 states that the DRE Commissioner
… may, upon his or her own motion, and shall, upon the verified
complaint in writing of any person, investigate the actions of any
[licensee and] … may temporarily suspend or permanently revoke a
real estate license at any time …
In other words, if your disgruntled client is vindictive he may not only sue
you but he may also file a complaint with the DRE which may lead to the
revocation of your license.
The below table shows the license violations that roughly correspond to the
common law claims discussed in this course:
Cause of Action
BPC License Violation (Paraphrased)
Misrepresentation
10176(a)
10176(b)
Substantial misrepresentation.
False promises.
Page 17
10176(c)
Flagrant misrepresentation.
Breach of Fiduciary
Duty
10176(d)
10176(e)
10176(g)
Dual agency.
Commingling funds.
Secret profits.
Fraud
10176(i)
Fraud or dishonest dealing.
A felony conviction for any crime or a finding of liability in a civil case for
misrepresentation may provide sufficient cause for the DRE to revoke your
license.
AB 2454 passed in 2008 raised
the payout limits from $20K to
$50K for any one transaction and
from $100K to $250K for any one
licensee for any application filed
after January 1, 2009.
Another way for you to gain the unwanted attention of DRE’s Enforcement
Department is for your former client and judgment creditor to file a claim
against the DRE’s Recovery Account. Clients with uncollectible judgments
against their brokers may collect up to $50,000 from this fund . It is
funded through your license renewal fees.
For any formal action, possible outcomes are “no action” or issuance of:
1.
a public reproval in which you are censured, rebuked, or
reprimanded by the DRE.
2.
a Desist and Refrain Order. These orders recite the results of a
DRE investigation, state the reasons for the order, and demand that
the named person or entity desist and refrain from specified acts.
3.
an “Accusation” in connection with a matter pertaining to an existing
licensee.
The Accusation describes the particular facts that form the basis for the
disciplinary action sought by the DRE and asks for an administrative
hearing and decision imposing that discipline.
You may avoid the hearing by accepting disciplinary sanctions or you may
negotiate with the DRE. The work product of the negotiation is called a
“Stipulation and Waiver.” If you can not reach an agreement with the DRE
and you wish to retain your license, you had better be prepared to spend
the time and money to defend yourself in a formal administrative hearing.
To notify the DRE that you object to their proposed resolution, you must file
a Notice of Defense. In response to receiving the Notice, the DRE will
schedule a formal hearing.
The administrative hearing process is conducted in accordance with the
California Administrative Procedure Act found in the Government Code
commencing at §11370. This process uses a set of unique rules and
jargon peculiar to this body of law. These rules permit you to 1) be
represented by an attorney, 2) require the DRE to prove their allegations
with “clear and convincing proof to a reasonably certainty” (a stricter burden
of proof than for civil cases), 3) follow formal rules for the admission of
evidence, and 4) require hearings conducted by an administrative law
judge.
After the formal hearing, the judge issues a “Proposed Decision.” This
document contains findings of fact, discusses mitigating and aggravating
Page 18
factors, provides legal conclusions, and may specify recommended
disciplinary actions.
The Commissioner may choose to adopt, reject, or reduce the
recommended disciplinary actions of the Proposed Decision. If the
Commissioner considers changing the recommendations, he must first read
the full transcript of the hearing and the administrative judge’s decision;
then, if the Commissioner still wishes to change the recommendations, he
must do so using a document called the “Decision After Rejection.”
If the Respondent is not satisfied with the Commissioner’s decision, he may
petition the Commissioner to reconsider or he may exercise his right of
appeal to the Superior Court, California Courts of Appeal, or even to the
California Supreme Court.
1.3
DEFENSIVE REAL ESTATE
Here we describe techniques to reduce your risk of developing a serious
dispute with your client or, should such a dispute develop, to eliminate or
mitigate your liability in the dispute.
We have organized these risk reducing practices into four categories:
1.3.1
1.
Risk Avoidance: This is any action taken to avoid a risk.
Examples are 1) declining dual agency, 2) “firing” a troublesome
client, and 3) rejecting a listing from an unethical seller.
2.
Risk Reduction: Any action taken to reduce the severity of a loss
is “risk reduction.” Most of the actions discussed in this course fall
into this category. Examples of risk reduction include 1) providing a
thorough TDS, 2) obtaining a competent home inspection, and 3)
frequent and thorough client communication.
3.
Risk Retention: Is the acceptance of a risk coupled with a
mitigation plan should it occur. Examples of risk retention include
self insurance and incorporation.
4.
Risk Transfer: Any action taken to shift risk to another party is a
“risk transfer.” Examples include 1) the purchase of general liability
insurance, 2) deferral to experts, and 3) client advisories.
RISK AVOIDANCE
Some business is too risky and should be generally avoided. In this subsection, we describe two business situations which are can be very risky:
1) representing both sides of a residential transaction (dual agency); and 2)
representing a client who has a propensity to sue (vexatious client). Of
course exceptions can be made depending on factors such as the expected
gain, the degree of risk, and the opportunities for mitigating the risks.
1.3.1.1
AVOID DUAL AGENCY
“REALTORS® urge exclusive representation of clients…” – Preamble to NAR®’s
Code of Ethics
Page 19
This section assumes dual agency is disclosed. Undisclosed dual agency
is a serious violation of both the common law of agency and real estate law.
CAR®’s Residential Listing Agreement (Form RLA) permits the listing broker to
elect dual agency. While dual agency may have the advantage of
expediting the sale since time need not be spent in finding representation
for the other party, it creates a substantial risk of liability for the dual agent.
“Designated agency” is the name sometimes
given to the relationship in which the selling and
seller’s agent are different licensees employed by
the same broker. Designated agency is dual
agency. The name “designated agency” may give
the buyer the comforting feeling he has his own
advocate but, because the same brokerage controls
both ends of the transaction; the client’s agent is, in
fact, a dual agent.
Experience has shown that if a person believes you to be their agent; either
by statement, action, or documentation; the court will likely side with the
consumer.
The most common situation in which dual agency arises is when a listing
broker finds a buyer and induces the buyer into a dual agency relationship.
Less common is when an exclusive buyer’s agent finds and then represents
a seller. This can occur when the buyer’s agent finds a home for his buyer
which is not already on the market and induces its owner to list his home
with him. It can also occur when a buyer’s agent finds a FiSBO his buyer
wants to purchase and the buyer’s agent induces the seller to first list his
property with him before presenting his buyer’s offer.
For the typical transaction, the risk assumed by a dual agent is more than
the sum of the risks that might be expected for two single agents where one
represents the buyer and the other the seller. The risk is greater because
of the likelihood that an aggrieved party will believe his dual agent showed
favoritism to his opposite party or that the dual agent was more committed
to his own interests than to the interests of either of his clients.
Consider this situation…
A friend asks you to meet her friend Susie about listing her house.
When you meet Susie, you are not surprised to discover that all
three of you have similar backgrounds. You are all female,
Episcopalian, in your mid-30’s, U.C.L.A. alumni, and Republicans.
Not surprisingly, Susie likes you and you like Susie. She agrees to
give you her listing.
One day Fred and Amy Jones walk into your office asking for help in
finding and buying a property in your area. The Jones’ sign a Buyer
Broker Representation Agreement with you. You agree to meet
them the next day to show them homes.
The first home you take the Jones’ to see is Susie’s home. On the
way to Susie’s, you disclose to the Jones’ that you are Susie’s
listing agent.
Page 20
At the end of the day and after having viewed many homes, the
Jones’ ask you to write them an offer on Susie’s home. Before
doing so, you provide them with an Agency Disclosure Form in
which you list yourself as a dual agent and you make the same
disclosure to your friend Susie. Then you explain to the Jones’ that
the law forbids you from sharing confidential information about price
since you are acting as a dual agent (see below sidebar) in the
transaction. They acknowledge your disclosure and then make an
offer anyway. Susie accepts the offer.
Escrow goes smoothly and the Jones’ finally meet Susie at the
walkthrough.
Fred Jones notices you and Susie in animated and friendly
conversation. He notes that both of you communicate as if sisters –
indeed, he thinks you even look like sisters. He notices your similar
dress, similar vocabulary, and similar cars.
During their first six months in their new home, the Jones’ discover
their swimming pool is cracked, their second story bedroom is
shaky, the studs behind their wood paneling have dry rot; and after
some research, they reach the conclusion that they paid 20% over
their home’s true market value. With each new disappointment,
Fred Jones becomes increasingly convinced that you and Susie
colluded against him to conceal the home’s defects and to inflate its
price – this, he fumes to himself, despite your promise you would
treat him and his wife fairly!
Finally after Fred Jones’ compressor in his air conditioning system
breaks, he decides to sue you and your friend Susie for
misrepresentation and fraudulent concealment, and you for breach
of fiduciary duty. After you are served with his complaint, you call
him to ask why he didn’t approach you first so you could settle the
issues through negotiation. He tells you he did not do so because
he had become convinced that you were not “an honest broker”
given your close friendship with Susie.
In California, dual agency is permitted by statute:
A real estate agent, either acting directly or through one or more
associate licensees, can legally be the agent of both the Seller and
the Buyer in a transaction, but only with the knowledge and consent of
both the Seller and the Buyer.
In a dual agency situation, the agent has the following affirmative
obligations to both the Seller and the Buyer: (a) A fiduciary duty of
utmost care, integrity, honesty and loyalty in the dealings with either
the Seller or the Buyer. (b) Other duties to the Seller and the Buyer
as stated above in their respective sections.
In representing both Seller and Buyer, the agent may not, without the
express permission of the respective party, disclose to the other party
that the Seller will accept a price less than the listing price or that the
Buyer will pay a price greater than the price offered (CC 2079.16).
Page 21
Had you been Susie’s single agent and the Jones had been represented by
another agent, if the Jones’ did sue Susie they might not have named you
in the suit. Even if they did your potential liability would be reduced since
their exclusive agent would have had the greater responsibility for
protecting the Jones’ interests.
Of course, one can imagine any number of scenarios in which the decision
to elect dual agency will lead to a happy outcome for you and both the
buyer and seller. Red flags that could portend a risky dual agency are:
a belief that the listed price is significantly over or under the market
price,
a suspicion that the seller is not disclosing all material defects,
an inability to establish rapport with one or both parties, and
an awareness that one or both parties is/are naïve about residential
real estate.
If you do attempt dual agency, be sure you carefully document every step
of the transaction, provide good comps, and make every effort to avoid any
show of favoritism.
1.3.1.2
AVOID VEXATIOUS CLIENTS
Pareto Principle: “80% of the
effects come from 20% of the
causes.” – aka: “The 80/20 Rule.”
The Pareto principle
disputes.
predicts that 20% of all clients create 80% of all
You know or should know how to recognize the clients who comprise this
20% of “troublemakers.” These are the clients who miss appointments, talk
incessantly about their problems, immediately grasp simple solutions to
complex problems, take criticism badly, know more about real estate than
you, are excessively concerned with their status; and live by the motto, “it
never hurts to ask.”
These troublemakers may be nice or disagreeable but they are always
difficult to please – demanding you lower your commission, pay for repairs,
and support their deceptions. Often they show disrespect for both you and
the brokerage profession. You should fire these vexatious clients.
Write ‘CANCELLED’ across their listing and give it back to them. What are
they going to do? What are their damages? You are the one who is out of
pocket for all that time and money expended on their representation.
Refusing to do business with someone is not illegal unless you refuse to do
business for an illegal reason such as racial prejudice. Said Robert Bass,
an Arizona real estate attorney (now deceased), the “last time I looked,
disagreeable SOB’s are not a constitutionally protected class!” (quoted from
“How to Fire a Client” by Blanche Evans)
1.3.2
RISK REDUCTION
Risk reduction techniques reduce the probability or severity of a risk.
Page 22
The most important of the risk reduction tools is the home inspection. It is
of such importance that we give this topic its own section. Several other
risk reduction techniques are discussed below.
1.3.2.1
CONTRACT FAMILIARITY
You should be very familiar three standard contracts: 1) your listing
contract (CAR® Form RLA), 2) your buyer broker representation agreement (CAR®
Form BR); and your purchase agreement (CAR® Form RPA-CA). Of these three, the
purchase agreement is by far the most complicated.
CAR® provides a good
explanation of this document in its
publication, Your Guide to the
California Residential Purchase
Agreement. We highly
recommended it.
The most frequently used purchase agreement is the California Residential
Purchase Agreement and Joint Escrow Instructions (CAR® Form RLA) . It is
eight pages of turgid prose in small type. It cross-references about twenty
other forms.
1.3.2.2
TRANSACTION FILE
Although the purchase agreement is between the buyer and seller and the
brokers are not party to it, it is your duty to make sure your clients
understand the purchase agreement and know its ramifications.
When asked what role agents play in creating conditions for a lawsuit, Bill
Hurlbutt, a senior executive with a major E&O carrier says, “It’s not so much
that agents do the wrong thing; it’s that they can’t prove that they did the
right thing.” (Risk Management, Pg. 244)
To prove you did do the right thing, you need to document your sales
activities. The repository of your documentation is the transaction file (aka,
“sales file”). This file should contain all documents, notes, and pictures
related to a given transaction. As such it should include
a checklist,
copies of all legal documents,
all advertising copy,
all significant written communication (letters, emails,
contemporaneous notes),
telephone call logs,
fax confirmation sheets, and
photographs of the property.
You need not waste time organizing the transaction file. After the
transaction has been completed, the chances that you will ever look at it
again should be very small.
As you drop notes and other documents into your client’s transaction file,
always keep in mind that should you be sued, the file will almost certainly
be subpoenaed. For this reason, you should never place any document
into it that could prove embarrassing if read in open court.
Page 23
When you make your visual inspection, do consider taking photos of your
seller’s home and neighborhood and be sure your digital camera’s timestamp feature is set to ‘ON.’
All transaction files should include a completed checklist showing the date
each required activity was completed. If any of the activities on the list
were omitted, take care to provide an explanation for each so that their
omission can not be construed as negligence.
An excellent step-by-step guide is published by CAR®, The Residential
Real Estate Transaction Guide.
1.3.2.2.1
RETENTION OF RECORDS
According to the DRE’s Broker Compliance Evaluation Manual:
A licensed broker must retain for three years copies of all listings,
deposit receipts, canceled checks, trust account records, and other
documents executed by him or her or obtained by him or her in
connection with any transaction for which a broker's license is
required. The retention period shall run from the date of the closing
of the transaction or from the date of the listing if the transaction is
not consummated. After reasonable notice, the books, accounts
and records shall be made available for audit, examination,
inspection and copying by a Department representative during
regular business hours.
Although DRE regulations require you to maintain your transaction files for
three years, we recommend a longer retention period. Actions may be
brought against you three years after the date your client claims to have
discovered your negligent misrepresentation (or three years after he should
have discovered it).
According to Barbara Nichols, a Los Angeles risk management expert:
… the best advice is to keep all transaction files for at least five
years and major contracts, such as the listing agreement, purchase
contract, and disclosure forms for 10 years.
She offers the following easy test for determining if any transaction file is
complete:
… ask yourself, “If I’m sued and an attorney subpoenas this file,
does it contain everything I need to prove I did everything right?”
1.3.2.3
DOCUMENT REVIEW
Because you have a duty to protect your client, you should review all
important documents for red flags; that is, you should be alert to any
disadvantageous findings or statements not consistent with expectations.
These documents include the preliminary title report, appraisal report, and
home inspection report.
In the Field v. Century 21 Klowden-Forness Realty (1998), the broker was
found liable after the buyer discovered his rural land was rendered useless
by an easement which permitted the local irrigation district to flood his land
at any time. The preliminary title report stated “Easement in favor of local
Page 24
irrigation district, book…” Either the buyer’s broker never saw the prelim, or
read this matter-of-fact statement and failed to appreciate its significance.
1.3.2.4
COMMUNICATION
A common complaint from sellers about their agents is that agents do not
return their emails or phone calls. There is no excuse for not maintaining
regular contact with your clients when you have so many easy ways to
communicate: email, cell phones, text messaging, pagers, faxes, and the
postal service. Agents should not fail to report inactivity since inactivity
conveys meaningful information. Regular contact gives you the opportunity
to find out what is on the mind of your client and to answer his questions
and allay his concerns.
Of all the forms of communication you may use, email offers the most
advantages. It can be sent and replied to at any convenient time, it is time
stamped, it can be easily copied to many recipients, it can be searched and
retrieved, and it provides a permanent record.
Email has disadvantages too. Many people do not like email or have
trouble expressing themselves in writing. It is all too easy to be
misunderstood and give accidental offense using email. Email too often
fails to convey emotions, concerns, and other levels of non-verbal meaning
that can be best conveyed through direct communication. For this reason
we recommend the use of email for routine communications and for
summarizing discussions.
1.3.2.5
RISK MANAGEMENT POLICIES
As a broker, you are libel for the actions taken by your agents and their
subagents when performing real estate transactions under your license.
To minimize your risk, you should have written policies clearly stating the
information you routinely require from your each associate. At a minimum
you should specify
the procedures that must be followed for each type of transaction,
a checklist for the contents of each transaction file,
which activities require your approval,
the proper use of personal assistants,
requirements for E&O insurance,
requirements for attending company-sponsored education to keep
licensees abreast of new laws and regulations,
your duty and right to closely supervise any transaction, and
your probationary policy.
1.3.2.6
CONTRITION
See www.SorryWorks.net for
a site dedicated to the use of
contrition to reduce risk for health
One proven way to prevent or at least mitigate impending legal action is the
simple act of contrition – admitting you made a mistake and giving a sincere
apology. The medical profession – a profession with far greater
Page 25
care professionals.
professional liability than real estate brokerage – embraces this risk
avoidance technique because it has proven so effective.
By admitting your mistakes you motivate your client to reciprocate with
empathy and honesty and, if the fault is not entirely yours, for him to admit
his own complicity. Often, disputing parties must trust one another before
they can work out a mutually agreeable solution.
While contrition may fail to reduce tensions, a show of indifference coupled
with hostility towards your client is almost a sure guarantee to make
matters worse.
1.3.3
RISK TRANSFER
Risk transfer techniques shift all or some portion of your risk to others.
1.3.3.1
DEFERRAL TO EXPERTS
If you are not prepared to accept liability for the advice you give, do not give
it. If your client must resolve a question of material importance and you do
not believe you are qualified to give him advice, refer him to an expert – but
be sure that expert carries professional liability insurance.
Of the many experts to whom you should defer to reduce your risk, none is
more important than the professional home inspector. The very purpose of
employing a home inspector is to use his expertise to discover material
defects. When he performs competently, he reduces your risk; if he does
not, you can always hope your client sues him and not you.
When you see a red flag indicating a possibly major defect, you should not
only warn your buyer to have it evaluated by an expert (e.g., a structural
engineer, a geologist, an attorney) but you should also issue him a written
warning to this effect. Should he fail to heed your advice and subsequently
discover that the red flag you had warned him proved indicative of a serious
material defect, you may rely on your written warning to mitigate your
liability.
Here is a sample advisory:
To: [email protected]
From: [email protected]
Subject: Yesterday’s Walkthrough
Dear Mr. Jones:
… regarding the out-of-plumb deck posts we noticed
yesterday. I believe this condition is caused by the
eucalyptus tree. As I pointed out, its trunk appears
to have pushed the deck aside. The seller informs me
the tree was a sapling when he built the deck 20 years.
But I could be wrong. Ground subsidence could have
caused the posts to move. It is for this reason I
recommend you hire a geologist or a structural engineer
to evaluate the home’s foundation.
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1.3.3.2
IMPORTANCE OF DEEP POCKETS
When working with others to complete a transaction, keep in mind the
deep-pocket rule:
When, in a civil action, several defendants share responsibility for
an injury, the plaintiff most likely will collect his judgment from the
defendant with the highest net worth and/or best insurance without
regard to that defendant’s degree of liability.
Consequently, you should ensure that everyone materially involved in your
transaction has E&O insurance.
Discourage your clients from finding their own inspectors. Should your
client subsequently consider suing the inspector but discover he is
judgment proof it is likely he will sue you instead.
1.3.3.3
ADVISORIES
CAR® recommends you provide its Seller’s Advisory (Form SA) to sellers and
its Buyer’s Inspection Advisory (Form BIA) to buyers. CAR®’s Seller’s Advisory
underscores your seller’s responsibility to disclose every potentially
material defect afflicting the seller’s home. Their Buyer’s Advisory reminds
the Buyer that he has the duty “to investigate the condition and suitability of
all aspects of the property” and to seek the advice of experts concerning
such matters as soil stability, geologic conditions, and structural integrity.
It is important to realize that even when your clients read, understand, and
initial these advisories, their acknowledgement does not exempt you from
your duty to diligently protect your client’s interest using your knowledge
and experience. In representing the buyer, your common law duty to
disclose is clearly stated in Field v Century 21 Klowden-Forness Realty
(1998):
[The buyer’s agent] is hired for his professional knowledge and skill;
he is expected to perform the necessary research and investigation
in order to know those important matters that will affect the
principal’s decision and he has a duty to counsel and advise the
principal regarding the propriety and ramifications of the decision.
1.3.3.4
INSURANCE
Insurance not only benefits you, it is also benefits your client. Your client
knows that should you make a mistake which costs him money, he may
recover his damages from your insurance carrier.
1.3.3.4.1
PROTECTING YOURSELF
You should consider purchasing three types of insurance: 1) E&O, 2)
general liability insurance, and 3) supplemental automobile insurance.
1.3.3.4.1.1
E&O
E&O insurance (aka, “professional liability insurance”) is designed to cover
the legal expenses and damage awards for “goofs;” that is, negligent acts
where the broker (or an associate) has inadvertently neglected to do
something he should have done pursuant to rule or custom.
Page 27
As with most insurance policies, E&O policies are subject to a deductible, a
policy limit, and exclusions. Most policies exclude:
intentional acts (except for innocent participants),
acts performed outside the scope of agency,
personal injury,
suits alleging environmental damage (especially toxic mold),
fair housing violations (except, possibly, for defense),
commission disputes,
transactions for properties owned by the broker, and
issues pertaining to trademarks.
Typical claims covered are those alleging misrepresentation, failure to
disclose, breach of duty, excessive compensation, conflict of interest, and
failure to secure adequate pricing.
With most E&O policies, the named insured is usually the brokerage with
coverage extended to associates and personal assistants. Expenses
covered include defense costs, judgments; and some policies even provide
per diem costs for attending trials and hearings.
In computing premiums, underwriters consider factors such as 1) extent of
coverage, 2) number of associates, 3) experience of associates, 4) past
volume of complaints and lawsuits, 5) years the broker has been in
business, 6) use of written policies and procedures, 7) level of supervision,
and 8) extent of training.
Most policies provide coverage on a “claims-made” basis rather than on an
“occurrence” basis:
A claims-based policy covers claims made during the coverage
period regardless of when the associated act occurred. The
coverage period can often be extended back in time for an
additional premium.
An occurrence-based policy covers acts instigated during the
coverage period. For example, if you held such a policy for just one
year, say 2009, then if in 2011 you were hit with a suit which
occurred in 2009, you would be covered.
According to the National Association of REALTORS®, 80% of its members
maintain E&O insurance. (Many states require licensees to carry E&O –
California is not among them.)
According to Diana Bull, chair of CAR®’s Errors & Omissions Task Force, in
2004 the annual, per-agent premium prices for E&O insurance typically
ranged from $1,500 to $2,000 in Southern California and generally started
at $2,000 in Northern California. The deductible was typically $15,000 but
ranged as high as $50K to $100K for larger firms.
Brokers who carry E&O should make this known to their clientele since it
may be reassuring to clients to know they will have a deep-pocketed
Page 28
defendant to sue (you) in the event you make a professional error which
costs them money.
The obvious drawback to E&O insurance is that it is expensive. A less
obvious drawback is that E&O coverage attracts claims. Attorneys, who
may charge $250 to $400 per hour, know their fees and their client’s claims
will be paid if they can prove their case or intimidate your insurer into
settling. They also know that if the claim amount is small, most insurers will
pay the claim rather than incur the expense of researching the facts or
defending the broker.
To avoid becoming a magnet for claims, some small proprietors choose not
to obtain E&O insurance. Instead, they choose to protect themselves by
exercising extreme care, keeping a reserve from which to pay claims (self
insurance), and limiting their losses by incorporating their brokerages.
1.3.3.4.1.2
GENERAL LIABILITY INSURANCE
General liability insurance is also
known as a “business owner’s
policy.”
Most E&O policies do not cover personal injuries occurring in the work
place; general liability insurance does. It covers the cost of defending
personal injury lawsuits including investigations and settlements, and for any
bonds or judgments required during an appeal procedure.
Most general liability insurance policies have many exclusions. When
choosing among policies, be sure you understand each policy’s exclusions
and policy limits.
Options provided with general liability policies include personal liability
umbrella insurance to increase coverage and special personal property
floaters (endorsements) to provide coverage for individual items of
significant value.
1.3.3.4.1.3
AUTOMOBILE INSURANCE
If you are driving clients on business, be sure to carry auto insurance which
covers passengers who might be injured.
1.3.3.4.2
PROTECTING YOUR CLIENTS
The more comprehensive your client’s insurance coverage, the less likely
he will take action against you should he incur unforeseen expenses
related to a transaction. These events might include: 1) a buyer’s need to
make an expensive repair to a home system which fails soon after his
purchase, 2) a buyer’s discovery of an undisclosed lien on his new home,
or 3) a seller’s responsibility for an injury suffered by a visitor during his
open house.
1.3.3.4.2.1
TITLE INSURANCE
Title insurance: Insurance
against loss from defects in title to
real property and from the
invalidity or unenforceability of
mortgage liens. Examples of
defects include unrecorded
easements, boundary disputes,
and forged deeds.
You should advise buyers paying cash or making large down payments to
purchase a homeowner’s title insurance policy and not a lender’s policy
since the liability limit of a lender’s policy is only the amount of the loan while
the limit on a homeowner’s policy is it’s purchase price.
CAR®’s purchase agreement (Form RPA-CA, paragraph 12) requires that buyers be
provided a current preliminary title report and a CLTA/ALTA Homeowners
Policy of title insurance. This policy offers enhanced coverage for losses
resulting from post-policy forgeries , boundary disputes, transfers to trusts
Page 29
, and permit problems.
Post-policy Forgery: The homeowner is covered when someone forges
the owner’s signature to a deed in an effort to sell or impose a lien or
restriction on the owner’s home.
Transfers to Trusts: Continuance of coverage should the original owner
transfer his title to a trust for which the owner acts as trustee and lifetime
beneficiary.
1.3.3.4.2.2
HOMEOWNERS INSURANCE
If you represent the seller, check to make sure he has homeowners
insurance with personal liability coverage and theft protection before you
agree to hold an open house. Should a visitor be bitten by your seller’s
dog, fall down his stairs, or injure himself by walking into your seller’s
sliding glass door, you will want the visitor to be paid for his injuries from
your seller’s homeowners insurance policy rather than from your own
pocket.
Should a lookyloo at your open house break an antique vase or abscond
with your seller’s baseball card collection, you will want your seller’s
homeowners insurance to cover his loss rather than you.
Mortgage lenders almost always require homeowners insurance to protect
against the loss of the home. A rare exception: when the home’s land
value exceeds the loan amount.
If you represent a buyer who pays cash or makes a large down payment,
recommend he purchase homeowners insurance with a liability limit at least
equal to the purchase price of the home.
There are many forms of homeowners insurance. The most common is
called an “all risk” or an “open perils” policy. An all risk policy covers all
aspects of the insured’s home: its structure and its contents. It covers any
liability that may arise from its daily use and it provides coverage for visitors
who may by injured on the premises.
1.3.4
RISK RETENTION
Not all risks can or should be avoided. This includes any risk having an
expected loss less than the long-term cost of insuring against the risk. This
includes risks where the expected loss is small (loss of your cell phone),
uninsurable risks (double-digit inflation), or any risk having a catastrophic
impact (terrorist attack).
Self insurance for E&O is a good example of risk retention. In self insuring,
the broker accepts the risk of making professional errors and provides a
reserve for mitigating the impact of such errors (e.g., payment to the injured
party out of the broker’s reserve fund).
All risks not avoided or transferred are retained.
1.3.4.1
HIGH DEDUCTIBLES
To save money on E&O and general liability insurance, you should
consider purchasing a policy with as high a deductible as you can
reasonably afford – the higher your deductible, the smaller your premium.
Page 30
1.3.4.2
IGNORING SMALL RISKS
No reasonable person will sue over a minor item so do not worry about a
broken doorbell, a torn window screen, or the presence of raccoons in the
neighborhood. But take no chances: disclose any defect anyone could
reasonably complain about. No one was ever sued for over-disclosing.
1.3.4.3
INCORPORATION
One of the most important reasons for incorporating your brokerage is to
shield your personal assets from liability for work-related risks. If your
brokerage is incorporated and should any of its employees (including you)
injure a client through professional negligence, the injured party may only
recover damages from your corporation’s assets and income and not from
your personal net worth or income. Corporations can have as few as one
employee.
In order to qualify for the liability shield incorporation provides, the broker
must follow burdensome rules in forming and maintaining his corporation.
If a plaintiff can prove these rules were not followed, he can “pierce the
corporate veil” and recover damages from the broker’s personal assets.
The corporate shield only protects for acts performed within the scope of
business and not for intentional wrongdoing by the broker, his agents, or
his employees.
There are several legally-recognized types of corporations including Ccorporations, S-corporations, and limited liability corporations (LLC). Each
type has its own advantages and drawbacks. All forms are expensive to
create and maintain.
One important drawback to incorporation is that defendant corporations
must be represented in Superior Court by a member of the State Bar. For
example, if a client files suit against your corporation then you must retain
an attorney to file your answer – you can not file your answer in your own
name. This restriction can make even the most minor or frivolous suits very
expensive.
1.4
HOME INSPECTION
According to Matt Farmer, associate general council for the Oregon
Association of REALTORS®,
90% of risk problems in real estate stem from a disappointed buyer
discovering defects after closing. When the problem stands to cost
the buyer money, they will either blame the listing agent, saying,
“you didn’t tell me such-and-such.” They will also turn to their own
buyer’s agent and say “You weren’t diligent in protecting me.” (Risk
Management, Robert L. Read, Pg. 145)
First we examine the most common “actionable defects;” that is, defects
serious enough to lead to litigation. Then we take a quick look at the Statemandated disclosures. We follow this with information useful for selecting
Page 31
and working with home inspectors. Finally, we describe several proactive
steps to reduce the risk of negligent non-disclosure.
1.4.1
ACTIONABLE DEFECTS
1.4.1.1
TEN MOST COMMON DEFECTS
Since any material defect discovered by a buyer after obtaining title is likely
to become your problem, you should have a basic understanding of the
common defects that, if undisclosed, often lead to litigation.
The ten defects listed below are commonly reported by home inspectors.
The list includes defects leading to damage (e.g., wood in contact with
damp earth) and unsafe conditions (e.g., pools without fences).
1.
During California’s annual nine month drought (March-November),
sellers often do not know if their roofs have leaks. Even when the
rains come, if the rain is light and infrequent (as it often is Southern
California) leaks may not be noticed. Only during an El Niño year –
which occurs on average every five years – when the rainfall is two
and three times the average may a leaky roof finally be discovered.
When that occurs, the water intrusion from the leaks can cause
extensive damage to the home’s structure and contents. For this
reason, if you represent the buyer you should consider requesting
the home inspector to conduct a “water test” to check for roof leaks.
This test requires the use of a lawn sprinkler on the roof for several
hours followed by a check for leaks. Alternatively, you may wish to
set up an escrow for a lengthy period to cover the cost of any
needed repairs should a roof be found defective during the next
heavy rainfall.
Flashing
French Drain
Page 32
Roofing Defects: Roofs develop leaks from aging and wear,
insufficient flashing , or improper installation. The damage caused
by water seeping into the home through a leak in the roof can be
expensive and for this reason requires immediate repair.
2.
Water Intrusion: Damage created by water intrusion into
basements or crawlspaces due to ground water conditions can be
pervasive and difficult to resolve. Correction can be as simple as regrading the exterior grounds or adding roof gutters with splash
blocks and extensions to direct water away from the structure.
Unfortunately, major drainage improvements are often necessary
and these can require costly ground water systems such as French
drains designed by geotechnical engineers.
3.
Electrical Safety Hazards: Examples are ungrounded outlets, lack
of ground fault interrupters (shock protection devices), and faulty
wiring conditions in electrical panels. Shoddy work can result in fires
and shocks.
4.
Hazardous Conditions Involving Gas and Oil Heaters: An older
heating system or one that has been poorly maintained can be a
serious health and safety hazard. In some cases, gas and oil
heaters contain life-threatening defects that can only be detected by
someone familiar with their operation and design. A cracked heat
exchanger, for example, can result in tragedy. Carbon monoxide
poisoning from faulty heaters causes hundreds of deaths in the U.S.
each year.
5.
Generally poor maintenance: If a house has been poorly
maintained for years, extensive repairs may be necessary to fix
problems such as cracked or peeling paint, crumbling masonry,
broken fixtures, shoddy wiring, or failing plumbing.
6.
Rotten Wood: Rotted wood at building exteriors and at various
plumbing fixtures where wood stays wet for long periods such as
roof eaves, exterior trim, on decks, around tubs and showers, or at
the base of toilets.
7.
Plumbing problems: The most common plumbing defects include
old and incompatible piping materials and faulty fixtures or waste
lines. These may require simple repairs such as replacing a fixture,
or more expensive measures such as replacing the entire plumbing
system.
8.
Poor Insulation: This defect can usually be corrected by repairing
caulking, weather stripping, and other inexpensive repairs around
windows and doors.
9.
Environmental hazards: Environmental problems include the use
of lead-based paint and asbestos, the presence of molds, and the
contamination of ground water. These problems are usually
expensive to fix.
10.
Unsafe Fireplaces: Unsafe conditions can result from lack of
maintenance (e.g., neglecting to hire a chimney sweep) and faulty
installation of fixtures. Most common among these are the lack of
spark arrestors and substandard placement of wood-burning
stoves. Free-standing fireplaces are typically installed by home
owners and handymen without knowledge of fire safety
requirements. The most common violations in these cases involve
insufficient clearance between hot metal surfaces and combustible
materials within the building. Fire hazards of this kind are often
concealed in attics where they remain undiscovered until a roof fire
occurs.
Spark Arrestor atop Chimney
1.4.1.2
RED FLAGS
An excellent way to accumulate knowledge about home inspection is to
accompany inspectors as they carry out an inspection. After attending
many inspections, you should accumulate sufficient knowledge to
recognize an incompetent or careless home inspector.
1.4.1.2.1
VISUAL
Click here for Barbara Nichols’
site.
The following lists of visual, written, and contextual red flags is taken from
an article in Realty Magazine Online by Barbara Nichols. Ms. Nichols is a
risk management expert who serves as an expert witness in real estate
related lawsuits:
Page 33
To spot fire or insect damage, push on the wood to see if it’s spongy
or scrape off some paint to see what is underneath.
Look for water marks or efflorescence on the foundation.
Efflorescence is a white chalky substance left behind by water on the
outside of the cement or brick.
Look to see if the ground slopes toward the house. If it does, it is
likely that water has seeped into the foundation and may have
caused or will cause dry rot and/or accelerate termite destruction.
Efflorescence
Use your sense of smell and touch to probe for water. Where there
is water there may be dry rot, mold, or termites.
Look for curling, damaged, or missing shingles or flashing
find such defects check for water damage underneath.
. If you
Look to see if the floors are level. If they are not, be alert to possible
structural damage.
If you find stains on the ceiling suspect a damaged roof.
Damaged Flashing
If retaining walls are leaning, suspect ground movement.
Be suspicious of any structural irregularities such as changes in
ceiling or floor levels, the presence of exterior wall surfaces inside
the home, or anything else that may indicate unpermitted
construction.
Termite Piles
Look for recent repair work. For example, wide cracks in a patio
deck that may have been filled with cement or recently laid tile.
Look for termite piles
along walls.
If you find red flags, be sure to question the seller about them. If the seller
is evasive or has unconvincing answers, this in itself is a red flag.
Be sure to check with your home inspector after he has completed his
inspection. If he did not spot the same red flags you did, find out why.
1.4.1.2.2
WRITTEN
Take care to be on the lookout for red flags in important documents:
In the preliminary title report, suspicious entries such as: 1)
undisclosed easements, liens, encumbrances, or third parties with
ownership interests; and 2) a legal description citing a lot size
different than advertised.
In the TDS, disclosure of a corrected foundation or structural
problem without corroborating evidence such as a permit or
construction plans.
In the TDS, disclosures citing a room addition without a
corroborating building permit.
In the pest inspection report, areas or structures cited as
“inaccessible” or “unexamined” which should have been inspected.
Page 34
1.4.1.2.3
CONTEXTUAL
Be sensitive to adverse conditions common to a home’s age, subdivision,
or location.
Homes in subdivisions having known construction defects such as
defective fireplaces and cracked foundations.
Homes in areas affected by some common nuisance such as loud
airplane noise or homes built over a waste dump.
Homes in an area affected by an unusually high crime rate.
Homes built before 1978 which may contain asbestos insulation or
homes painted before 1979 that may still bare traces of lead paint.
All natural hazards endemic to the area.
1.4.1.2.4
REMODELS AND REPAIRS
Brokers representing clients selling or buying remodels need to be
especially vigilant for undisclosed material defects.
The objective of the remodeler is usually to turn a quick profit. To better
achieve this objective, remodelers may use cheap materials, skirt the
building code, conceal underlying defects, and fail to take steps to ensure
long-term durability.
Remodels can look fabulous but conceal serious defects. Some of the red
flags associated with poorly rendered remodels and repairs are:
Fresh paint, plaster, tile, paneling, or wallpaper that may cover a
defect such as moisture, wood rot, or cracks caused by structural
problems.
Newly painted homes which may have been spray painted with just
one coat of cheap paint applied without primer and preparation.
Failure to apply chemical preservatives to woods vulnerable to dry
rot or failure to use woods resistant to dry rot and termites.
Uncharacteristically large rooms made possible by the removal of
load bearing walls.
Remodeled kitchens replete with fashionable appliances (stainless
steel freezers, refrigerated wine cabinets, overhead TVs) without the
updated wiring and circuits needed to support the additional
electrical load.
Appliances without warranties.
Google “California license status
check” to check the license status
of any California contractor.
Of course, if you are the buyer’s broker you should ask to see remodeling
permits. If the work was performed by contractors, you should secure the
names and license numbers of the contractors performing the work and
ensure the property has not been encumbered by recent construction liens.
Page 35
1.4.1.3
WATER
As we have already stated, the majority of disputes are initiated by buyers
claiming their brokers failed to disclose material defects discovered after
the close of escrow. Of these defects, most are caused by fungi feeding on
wet wood. For this reason, you need to understand the conditions fungi
need to grow and how to spot the damage caused by these fungi.
Fungi are not plants. Plants make their own food from the sun while fungi
feed on organic material. The fungi we care about eat wood: these are
mildew, mold, and dry rot.
Consider the myriad ways water can wet wood:
1.
Rain water or melting snow may puddle around the home and wet
its foundation.
2.
Water may enter the walls through breaks in flashing.
3.
Water from toilets and bathtubs may overflow and seep into walls
and floors.
4.
Moist air from within the home (e.g., from bathtubs, from boiling over
stoves) may condense into water when contacting cool rafters and
roof sheathing.
5.
Condensation from the home’s air conditioning unit may drip and
accumulate in the crawl space beneath the house.
6.
A pet may repeatedly urinate over a spot on the floor.
7.
Pots and planters may leak water into the walls or floor.
8.
A slow drip in a loose plumbing fixture may wet wood.
9.
Condensation on water pipes may drip when the humidity is high.
All lumber must be air or kiln dried before it is sold. Regardless of how it is
dried, lumber always contains some moisture. The amount of moisture
depends on the average relative humidity of the air to which it is exposed;
consequently, the moisture content of wood is lower in dry areas such as
the Coachella Valley (home to Palm Springs), perhaps, 4-9% for inside
wood, 7-12% for outside wood; and much higher in humid areas such as
San Francisco, 8-13% for inside wood; 9-14% for outside wood (source).
When wood’s moisture content reaches 28%, the minute single-celled
spores of the dry rot fungus resting on the wood’s surface begin to grow.
The spores are ubiquitous in the air – you are breathing them now. If the
wood’s moisture content continues to stay at 30% or higher for a few days
while the temperature remains warm, dry rot will take hold and infect the
wood. If the moisture content of wood drops below 22%, the rot will
become dormant but continue growing once the moisture content rises
above 22% (source).
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1.4.1.4
FUNGI
The life cycle of dry rot is similar to that of the best known fungi – the
mushroom. By gaining a basic understanding of the fungal life cycle, you
will be better able to appreciate just how pernicious dry rot is.
Mold spores seen through an
electron microscope.
Fruiting body of the most feared
of the dry rots, Serpula
lacrymans. (The blooms of most
rots are not so dramatic.)
The mushroom is the “fruiting body” of a much larger mass growing
underground, the “mycelium.” The mycelium is composed of a mass of
minute branching threads called “hyphae.” The hyphae secrete enzymes
onto organic matter to decompose it into digestible nutrients. The hyphae
then absorb these nutrients into its body to sustain its growth.
After the fungus matures, the fungus pushes out onto the surface the fruiting
body we call the mushroom. The mushroom produces spores which it
releases into the air. Each spore is a cell which can reproduce the entire
fungus.
The life cycle of the dry rots is similar to that of the mushroom. The
important differences are that the dry rots feed on wet wood instead of
organic matter in the earth and their blooms, unlike most mushrooms, are
inedible and often repulsive .
You should take note of the following aspects of the fungal lifecycle:
The minute, single-celled fungal spores are everywhere – in the air
and on the surface of everything inside and outside the home. As
many as twenty million mold spores can fit on a postage stamp.
Some spores are toxic to sensitive individuals (the poisonous toxins
are called “mycotoxins”).
The “hyphae” are invisible to the naked eye.
Many fungi only become visible when they “bloom;” that is, when
they send out their fruiting body to the surface of the organic
material in which they grow.
Let us take a closer look at the fungi called “dry rots” and “molds.”
1.4.1.4.1
DRY ROT
Figure 1: Advanced Brown Rot
Figure 2: Advanced White Rot
Despite its name, dry rot requires moist wood. It grows while the wood is
wet and hibernates when it is dry. Subfreezing temperatures do not kill it.
Fungicides applied to wood infested with dry rot will kill it to whatever depth
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the fungicide soaks into the wood. Heat treatments will kill dry rot (and any
other living organism) if the wood it infests is heated to a temperature
above 151°F for at least 75 minutes. Absent heat treatments, the preferred
remedy is to remove all the infected wood within two feet of the infection.
One hideous but, fortunately, relatively uncommon species of brown dry rot
in California (Meruliporia incrassata, aka “house-eating fungus” and “waterconducting fungus”) is capable of transporting water over long distances to
the site of decay through strands called “rhizomorphs.” The strands may
extend for thirty or more feet across brick or concrete. Another species
(Serpula lacrimans, predominant in Northern Europe) has been known to
transport water up three stories.
The ideal conditions for dry rot are wood, warmth, dampness, and poor
ventilation. These conditions are common to cellars, the crawl spaces
under homes, and under stairs.
There are two main classes of dry rot. Wood infected with brown rot (Figure 1,
above) appears brown and has a crumbly appearance. Wood infected with
white rot (Figure 2, above) may appear discolored with a white or yellow tint and,
when the infection is advanced, the wood may appear stringy or spongy.
Sapwood (light)/ Heartwood
(dark)
Common woods considered to be decay resistant include: all cedars, oldgrowth redwood, old-growth bald cypress, white oak, and locust. Only the
heartwoods of these species are rot resistant. (Sapwood is living wood
which conducts water from the roots to the leaves; heartwood is the
deadwood which is decay resistant.) These woods contain natural toxins
that protect the wood from parasitic organisms including dry rot. However,
these woods are expensive.
A good article about the merits of
various woods is “Wood Myths:
Facts and Factions About Wood”
by Paul Fisette (here).
In imitation of Nature, less naturally durable woods can be impregnated with
pesticides like CCA (chromate copper arsenate) to extend their service life
by 30 to 50 years or longer (this is the green-tinted lumber you often see at
construction sites).
An excellent source of images of
various forms and stages of dry
rot can be found here.
Dry rot in its early stages can be difficult to detect even with a microscope.
The weakness of infected wood can be appreciable even in the early stages
of dry rot infestation. As the rot advances, the wood’s luster fades; its
surface becomes lifeless, dull, and discolored. A musty odor is often
evident. The rate at which decay progresses depends on the wood’s
moisture content, its temperature, and the type of fungus which infects it.
The most common areas dry rot is found are the bathroom, under the
kitchen sink, on window sills, in the thresholds near sliding glass doors, and
in the attic.
Most home insurance policies exclude or limit coverage for damage caused
by any form of fungus – dry rots and molds especially. Consequently,
buyers who discover extensive damage from dry rot often seek to recover
their damages from the seller and their brokers.
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1.4.1.4.2
MOLD
Molds are also fungi and like dry rots require the same conditions to get
started and grow: oxygen, moisture, warmth, and organic material. Molds
also propagate using minute, single-celled, air borne spores. Also, like dry
rots, molds once they begin to grow become dormant when their growing
conditions cease and then resume growing once favorable conditions return.
The food source consumed by molds may be wood but molds feed on
virtually anything organic even the dust in the air. Molds are commonly
found behind wallpaper and paneling, ceilings, on drywall, and on carpets.
Molds are even found growing inside air ducts.
Unlike dry rot, which derives the water it needs from the moisture content in
wood; molds derive their water from the humidity in the air. Molds require
humidity levels at or above 55 to 65% in order to grow.
Some molds excrete poisons called mycotoxins or produce mycotoxins in
their spores. The mycotoxins may be found in either gaseous or liquid
forms. Of these molds, some only produce mycotoxins under specific
growing conditions. Mycotoxins may be harmful and some experts claim
they may even be lethal to humans and animals when their concentrations
are high. Exposure to significant quantities of mold spores can cause
toxic/allergic reactions. Health effects of mycotoxin exposure allegedly
include chronic fatigue and irritability, flu-like symptoms, respiratory
problems, headaches, cognitive impairment, and skin problems.
In 2001, a Texas jury awarded the
Ballard Family of Dripping Springs
$32 million dollars (later reduced
to $4 million) for injuries and
damage caused by toxic mold.
Most E&O policies do not provide coverage for mold damage owing to the
high expense often required to remove molds and because of the high
damage awards juries have awarded plaintiffs claiming to have been
injured by toxic mold. Removal of toxic molds may have to be performed
under expensive hazmat conditions requiring workers to wear air-tight suits
equipped with air filtration systems under negative air pressure to avoid
contaminating the outside air with mycotoxins. Just testing for toxic mold
can cost hundreds of dollars.
Considerable information about mold can be found at here including an
excellent brochure here.
There is no confirmed scientific link between mold and related health
effects. The term “toxic mold” is a term coined by the media; it is not used
by scientists who study fungi. Of all the many molds that may be found in
the home, Stachybotrys chartarum, a greenish-black fungus, is the most
notorious of the “toxic molds.” Species of molds from two mold genera are
believed to be allergenic: Penicillium and Aspergillus – the presence of any
of these molds has generated seven-figure settlements. (For an interesting
discussion of toxic-mold litigation, go here.)
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1.4.1.5
TERMITES
Termites swarm once a year usually in late summer. After swarming,
winged termites may alight on a home and if the termite is lucky, find an
unprotected section of damp wood on which to start feeding. If the termite
can also find a mate, they may begin a colony.
The mated pair begins by eating out a chamber in the wood and then
sealing it. Soon afterward, the female begins to lay eggs. Both the king and
queen termite feed the young on predigested food until their young are able
to feed themselves. The king continues to mate with the queen for life.
During their lives, the king and queen raise hoards of children born into
castes such as workers and soldiers.
Termites are generally grouped according to their feeding behavior. Thus
they are categorized into subterranean, soil-feeding, drywood, damp wood,
and grass eating types. Of these, subterranean and dry wood termites are
the two types that eat wooden homes.
Drywood termites have a low moisture requirement and can tolerate dry
conditions for prolonged periods. They remain entirely above ground and
do not connect their nests to the soil.
Subterranean termites require moist environments. To satisfy their need
for water, they usually nest in or near the soil and maintain some connection
with the soil through tunnels in wood or through “shelter tubes” constructed
from soil with bits of wood or even plasterboard (drywall).
Subterranean Termites
Because dry rot and termites both require high moisture contents in wood,
these two pests are often found together.
Once a colony gets started it may take years before it creates significant
damage. During this time, the termites give little notice of their presence.
Eventually, an untrained eye can spot the red flags indicative of termite
infestation: 1) pellets, 2) galleries, and 3) tubes:
Figure 3: Wings
Figure 4: Fecal Pellets
Figure 5: Galleries
Figure 6: Shelter Tubes
Wings: These are discarded by termites after they land following
their swarm. Since ants also swarm, the wings from these two
species are often confused.
Fecal Pellets: These are often found in a pile at the bottom of a
post or wall. The termites create a hole in the wood and push the
pellets out of a gallery where they fall and often accumulate into a
neat, conical pile.
Galleries: These are the most telling and distressing sign of termite
damage since they reduce the strength of the lumber in which they
are found.
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Shelter Tubes: These are made only by subterranean termites.
They are used to move from the wet ground to dry wood.
If you are the listing broker and see any of these red flags, consider
advising your seller to pay for a pest inspection. Even if the home is never
sold, the owner needs to know the extent of the infestation. If the owner
has any sense, he will want to repair the damage and stop the infestation
before it gets any worse. If any offers are accepted, the chances are better
than 99% the home will have to pass a pest inspection as required by the
mortgage lender. CAR®’s Purchase Agreement (Form RPA-CA) requires the
buyer to approve the “Wood Destroying Inspection Report” as a
contingency of the sale. If he does not, he may revise his offer or cancel
his purchase agreement.
If you represent the buyer and spot any of these red flags (pellets, galleries,
tubes) be especially wary. If the seller selects the pest inspection service
you should make sure the pest inspector has an explanation for the red
flags you have noted.
1.4.2
SELLER/AGENT’S HOME INSPECTION
This section describes the disclosure duties of the seller and his agent.
1.4.2.1
AGENT’S VISUAL INSPECTION
The listing broker must conduct a visual inspection of the seller’s home.
The statute which mandates this duty reads:
It is the duty of a real estate broker … to conduct a reasonably
competent and diligent visual inspection of the property offered for
sale and to disclose to that prospective purchaser all facts materially
affecting the value or desirability of the property that an investigation
would reveal… (CC §2079(a)).
If you are the listing broker, we recommend you conduct your visual
inspection before signing your listing agreement. Once you sign the listing
agreement, you are contractually obligated to you use your best efforts to
sell your client’s home even if it contains defects so egregious as to render
it unmarketable.
As you tour the property with the seller, take care to note all the features
you believe may adversely affect the home’s market value and note any red
flags that may indicate serious defects. Ask the seller about roof leaks,
window leaks, drainage, remodeling, repairs, warranties, cracks – there are
so many items to ask about that it is best you conduct your survey using a
check list. If you do not have a check list, consider using the items listed on
your Transfer Disclosure form as a check list.
When noting down possible material defects, take care not to “editorialize,”
that is, to offer or infer an opinion about the materiality of any defect. For
example, note “cracks in garage floor slab” and not “minor cracks in garage
floor due to normal settling.” The later remark expresses an opinion about
the significance of the cracks (that they are of little consequence) and
attributes a cause (suggesting they are caused by “normal settling”).
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To save time, take pictures of everything you see – these may be useful for
posting to the MLS but more importantly they serve to document the
condition of the house at the time of your visual inspection (be sure your
camera’s date/time stamp feature is set to on). The pictures should be
placed into your transaction file.
If you decide to take the listing and the seller accepts your offer of
representation, you need to make clear his disclosure responsibilities. You
should explain the risks to the both of you should he fail to disclose all
material defects about his home and neighborhood. You should also let
your seller know that you have a legal duty to prospective purchasers to
disclose all material defects known to you which your seller either fails to
disclose or considers of negligible importance. A good way to explain to
your seller his disclosure duties is to walk him through CAR®’s Seller’s
Advisory (Form SA).
Your checklist should also include items concerning the seller’s
neighborhood including neighborhood hazards, environmental hazards,
problem neighbors, and noise problems.
1.4.2.2
SELLER’S DISCLOSURES
If the TDS omits any material defects, you risk being sued. The omissions
may not be your fault or your seller’s fault. Perhaps your seller concealed
the omission, perhaps the defect was located in a thoroughly inaccessible
area; perhaps even the inspection professionals failed to find it. It really
does not matter. When the buyer finds the defect and learns how much he
must pay to correct it, he will be inclined to sue you, your seller, and
anyone else he thinks knew or should have known of the defect.
Minimum disclosure standard:
All material defects known to you
or which should have been known
to you or your seller about
accessible areas of the home
(see CC §2079).
With so much risk hinging on this one document, you need to be sure it is
accurate – not accurate to the minimum legal standard but accurate in
fact.
If neither you nor your seller saw the termite pellet piles beneath the living
room’s north wall because it was at the time covered by a 500 pound
armoire, you could be sued for non-disclosure of the home’s termite
infestation. You may have a good chance to successfully defend yourself
by claiming the north wall was inaccessible during the time of sale (pictures
could help you establish this fact) and therefore you had no duty to inspect it
– but then again you might not. And remember, the plaintiff need only prove
you were just 1% liable for him to obtain a court order requiring you to pay
his entire judgment in full (see Joint and Several Liability).
In order to produce a reliable TDS, consider the advantages of obtaining a
home inspection before you fill out the TDS (see Pre-Inspection). While it is
true that you can amend the TDS at any time before close of escrow, an
amended TDS is often perceived by potential buyers as a red flag because
it suggests other defects remain to be discovered.
The seller must complete the TDS (Sections 1 and 2 of this form) and the
listing broker must add his comments to Sections 3 and the selling broker
to Section 4.
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1.4.2.3
NHD
One firm offers to prepare the
NHD disclosures for just $49.00
(as of 2010).
The Natural Hazard Disclosure (CAR® Form NHD) form is used to make the six
natural hazard zone disclosures: (1) Earthquake Fault Zone, (2) Seismic
Hazard Zones, (3) State Fire Responsibility Areas, (4) Very High Fire
Severity Zones, (5) Flood Zone, and (6) Inundation Zones. These
disclosures are required for any residential one-to-four unit property.
1.4.3
PROFESSIONAL PEST INSPECTION
A pest inspection is not a legal requirement however every mortgage lender
requires every home it finances to pass a pest inspection. When
representing a buyer who does not use a mortgage lender (e.g., pays cash
or obtains financing from the seller), it would almost certainly be a breach of
your fiduciary duty to not advise your buyer to make his purchase
contingent to a satisfactory pest inspection. This would be true even for a
buyer purchasing a new home since new homes can be constructed with
rotten wood and because the pest inspector not only looks for active
infestation and past damage but also for conditions likely to lead to
infestation (e.g., a poorly ventilated attic).
How can a new home have dry rot? Almost all lumber is supposed to be
kiln or surface dried before use. If it is not dried sufficiently, it can be
delivered green and wet. If it has been dried, it may be stored for months
before use during which time it can soak up moisture from the air or from its
exposure to the elements. Moreover, if the structure of the home during
construction is exposed to rain or very high humidity over a long period it
may become infested with dry rot.
“Wood destroying organisms”
include termites, dry rot, wood
destroying beetles, and carpenter
ants.
The results of the pest inspection must be documented in a report named
“Wood Destroying Pest and Organisms Inspection Report.” The format of
this report is dictated by statute (BPC §8500 et seq.).
All pest inspectors must be licensed by the Structural Pest Control Board (a
division of the State Department of Consumer Affairs).
After viewing the home, the pest inspector is required to reach one of three
conclusions: 1) “No evidence of wood destroying organisms,” 2) “Evidence
of past damage,” or 3) “Evidence of active infestation.” Conclusion #3 is
the show-stopper. No lender will advance funds to a buyer knowing his
collateral is actively being consumed by insects and/or fungi.
The ramifications of Conclusion #2, “Evidence of past damage,” are
problematic. Some lenders will advance funds providing the inspector finds
no evidence of active infestation; others will want assurances that the
property has been free of pests over the past year; others will simply fund
the loan. You will surely want to understand the nature and extent of the
damage and advise your buyer accordingly.
The findings of the report are organized into two sections:
SECTION A findings are classified as “Active damage and
infestation to wood by wood destroying organisms and pests.” The
“cause” of the damage is also classified as a Section A item.
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SECTION B findings are classified as “Conditions deemed likely to
lead to damage or infestation to wood by wood destroying
organisms and pests if the condition is not corrected.”
The report contains a “Bid Sheet” used by the inspection company to offer
its bid to perform the corrective work listed in Sections A and B. By
custom, the seller selects the inspector, pays for the inspection, and pays
for the corrective work listed in Section A. Also by custom, the buyer pays
for the corrective work listed in Section B. Section A items must be
corrected; Section B items are usually optional for the buyer.
Neither the seller nor the buyer is required to contract with the inspection
company to make the corrective repairs but, owing to time pressures, the
seller often has no other choice. Regardless of whether the original home
inspector or a third party (the owner, a contractor, or another home
inspection company) performs the corrective work, the original home
inspector must issue a “Re-Inspection Report” certifying the Section A
repairs were made.
The pest inspection service is legally accountable to both the seller and the
buyer. Both parties should receive a copy of the pest inspection report. To
protect your client, you should carefully read the report to make sure it
accounts for any red flags you may have discovered independently.
In reviewing the termite inspection report, the listing broker should take
care that all Section A repairs relate to wood damage. Some unscrupulous
pest inspection companies mislabel their findings to fool the seller into
making unneeded corrective work to non-wood components such as tile
and bathroom fixtures. The labeling process is critical to both parties since
the lender will not finance a property unless all Section A repairs have been
made.
As the buyer’s broker, you need to be sensitive to the fact that the pest
control inspector is usually selected by the seller’s broker. It may be in the
short-term interest of the seller’s broker to select a “friendly” inspector
inclined to give a “soft” inspection. For example, a friendly inspector might
label vulnerable areas such as attics, crawl spaces, and roofs as
“inaccessible” to enhance his own profit and to reduce the risk he should
find a problem that might impede the sale thereby jeopardizing his
relationship with the broker who recommended him.
The Structural Pest Control Board
maintains an online database of
reports filed over the past two
years here. If you find that a
report is available for your
property, you may request that a
free copy be sent to you by
regular mail.
Any areas the inspector deems inaccessible should be listed in his report.
As the buyer’s broker, you should take notice of these areas and if you
believe they require inspection you should make arrangements with the
seller and inspector to have them examined. If you believe an inaccessible
area needs inspection, you should consider urging your buyer to pay the
extra cost needed to open the area for inspection. For example, if you were
to smell a musty odor near wood paneling you should urge your buyer to
pay the inspector to remove and then restore the paneling so he can inspect
for damage underneath. Other areas which may justify an intrusive
inspection are the sub-floors beneath carpets, wall interiors, and anywhere
wood may have been or be in contact with a slab foundation or damp earth.
Any buildings not inspected on the property should be listed in the pest
inspection report. Buildings often not inspected include garages, guest
Page 44
houses, and storage sheds. If these buildings are important to your buyer,
you should arrange for their inspection.
A word of caution about licensed pest inspectors: Unlike reputable home
inspectors who do not charge for repairing the defects they find, pest
inspectors make most of their profits from repairing the damage they find.
Many pest inspection companies lose money on inspections for the
opportunity to find and repair the damage found when conducting
inspections. Consequently, pest inspectors are motivated to find damage –
which is good – but some inspectors are undoubtedly overzealous in their
reporting of damage and some charge excessively for repairs knowing that
sellers are not likely to refuse their repair quotes owing to time pressure.
1.4.4
PROFESSIONAL HOME INSPECTION
1.4.4.1
NEED
A study commissioned by The Wall Street Journal concludes that almost
every home, no matter how recently or expertly built, is a money pit.
The study found that the cost of keeping a typical home up to
current standards for 30 years is almost four times the purchase
price. In fact some experts say that it may actually be cheaper to
buy a new or fully remodeled home every 10 years than to deal with
the mounting repair problems that occur as materials fail. (Source)
According to the study, homes with the worst repair record tend to be
between 10 and 20 years old. That is the period when various home
systems begin to fail. These systems include foundations, painting and
waterproofing, heating and air conditioning systems, water heaters,
plumbing, ductwork, and decks. Rather than replacing failing home
systems, homeowners who know they are going to sell often neglect their
home’s maintenance for years and then make shoddy repairs just before
putting their homes up for sale.
Since new owners are often strapped for cash and must struggle to make
each mortgage payment, they are often motivated to sue the seller and his
agent for the funds needed to make urgent and expensive repairs to failed
systems such as the roof or heating system.
A good home inspector will not only find a home’s existing defects and
code violations, he will: 1) report on conditions likely to cause problems in
the future, 2) estimate the life expectancy of home systems, and 3) identify
safety hazards.
1.4.4.2
ASSOCIATIONS:
There are three established associations of home inspectors with members
in California. Each of these three is described below.
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1.4.4.2.1
AMERICAN SOCIETY OF HOME INSPECTORS
The American Society of Home Inspectors (ASHI) is the country's oldest and
largest home inspection organization with 6,000 members (as of June 2005)
in the United States and Canada.
ASHI was founded in 1976. It created the industry’s original standards of
practice. All members must adhere to their association’s strict code of
ethics.
Half of ASHI’s members are fully qualified home inspectors; the rest are in
training. “Full” members must have passed a test provided by the
independent Examination Board of Professional Home Inspectors – an
exam also used by 17 states for licensing – as well as ASHI’s Standards of
Practice and Code of Ethics exams. Additionally, full members are required
to have performed a minimum of 250 paid home inspections and complete
20 hours per year of continuing education. ASHI’s website lists both “fully
credentialed” home inspectors as well as “candidates” who have passed the
required exams but have performed only 50 to 250 paid home inspections.
The two groups are listed separately on their website. In our visit to their
site, we found ASHI had excellent representation throughout California.
Most experts (e.g., Barbara Nichols and Robert Bruss) recommend ASHI
home inspectors.
1.4.4.2.2
NATIONAL ASSOCIATION OF HOME INSPECTORS
The National Association of Home Inspectors (NAHI), the second oldest
home inspection organization in the North America, has more than 1,900
members (as of June 2005). It was founded in 1987 as an offshoot of ASHI
and has a very similar Standards of Practice and Code of Ethics.
NAHI has three levels of membership; the third and highest is the NAHI
Certified Real Estate Inspector (NAHI CRI) designation. To earn the CRI
designation, members must pass a rigorous exam (similar to ASHI’s exam)
and complete a minimum of 250 paid home inspections. In addition, full
members must have passed NAHI’s Standards of Practice and Code of
Ethics exam and members are required to complete 16 hours of continuing
education each year. The two lower levels of membership are for NAHI
home inspectors who have not yet performed 250 home inspections. (Click
here for NAHI’s website.)
1.4.4.2.3
NATIONAL ASSOCIATION OF CERTIFIED HOME INSPECTORS
The National Association of Certified Home Inspectors (NACHI) is the
newest of the three home inspection organizations and has the least
rigorous requirements for membership. Members must pass a free online
exam. If they fail, they can retake the exam until they pass. The same is
true for their Standards of Practice and Code of Ethics exams. NACHI says
it requires full members to have carried out 100 paid inspections but they do
not distinguish which members have met this requirement on their referral
list. (Click here for NACHI’s website.)
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1.4.4.3
USING HOME INSPECTORS
If you take only one action to reduce your risk of liability, let it be to employ
a qualified, competent, and professional home inspector – with E&O
insurance.
Usually it is the buyer who selects the home inspector. This fact poses a
risk to the seller and his broker. Should the buyer select an incompetent
home inspector who misses one or more major defects, the buyer may
blame the seller for failing to disclose the defect(s) and initiate a negligence
claim against him.
Buyer seeing his new home
through rose-colored glasses.
For a number of reasons, the buyer often makes a poor choice of home
inspector: 1) since he is under time pressure to meet closing deadlines he
often chooses the first home inspector he finds; 2) if he has stretched his
resources to make his down payment, he may cut corners by selecting the
least expensive home inspector he can find; 3) since the buyer is
inexperienced, he does not know what questions to ask to make a proper
selection of a home inspector, and 4) the buyer has tendency to view the
inspector’s report through rose-colored glasses ; in other words, to
minimize unfavorable findings which do not support his decision.
But probably the most common reason that unprofessional home
inspectors are selected by the buyer is that the buyer accepts the
recommendation of his short-sighted agent (or someone he regards as his
agent but who in fact is a cooperating broker representing the seller). The
proper motivation of the agent should be to protect his client’s interest by
selecting the most thorough and professional home inspector he can find.
Unfortunately, some agents will select home inspectors they know are likely
to give positive assessments. And some home inspectors are motivated to
give rosy reports to stay on good terms with the agents they rely upon for
continued business.
With so much riding on the competency and professionalism of the home
inspector and with so many reasons to doubt that the buyer will choose
wisely, we recommend the seller and his broker either: 1) pay for a preinspection (see “Pre-Inspection”), or 2) make it a condition of the sale, that
if the home inspector is selected by the buyer that his choice must be
ratified by the seller. As to the latter recommendation, you might wish to
set the following requirements for the home inspector:
He is full member of ASHI or NAHI.
He has not inspected a home sold by either the selling or the seller’s
broker over the past six months.
Both the selling and the seller’s agent agree not to recommend the
selected home inspector for at least six months and that the
inspector must be informed of this restriction.
He inspects all areas and structures of the home except those
described in an attached addendum.
He is willing to give a two hour, onsite briefing session to all
interested parties immediately following his inspection.
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He provides a report similar in detail to that found in Exhibit A (an
exhibit which you would prepare).
1.4.4.3.1
LEGAL ISSUES
Home inspectors are licensed and regulated in 23 states but California is
not one of them. BPC §§7195-7199 describe the legal status of home
inspectors in California. §7195 defines the scope of work performed by
home inspectors and §7196 defines the standard of care for home
inspectors as follows:
It is the duty of a home inspector who is not licensed as a general
contractor, structural pest control operator, or architect, or registered
as a professional engineer to conduct a home inspection with the
degree of care that a reasonably prudent home inspector would
exercise.
§7198 states that contracts used by home inspectors which purport to
waive the inspector’s duty to conduct a professional home inspection (per
§7196) or limit the home inspector’s liability to the inspection fee are invalid
since these limitations are contrary to public policy. In other words, home
inspectors are legally liable for negligence.
§7199 states that the statute of limitations for a breach of duty action
against a home inspector shall not exceed four years after the date of
inspection. Home inspectors may sign contracts with their clients limiting
claims to shorter periods (less than four years) providing the period is
“reasonable.”
In the California case, Moreno v. Sanchez (2003), the appeals court ruled if
a limitation on the discovery period is placed into the contract, that limitation
must be: 1) of reasonable duration for the homeowner to discover a
breach, and 2) the discovery period must accrue not from the date of
inspection but from the date the breach is discovered or should have been
discovered by the homeowner .
When the discovery period begins when a breach is discovered or should
have been discovered, it is called the “delayed discovery rule.” For
example, if in March the home inspector declares the roof of a home in
sound condition but it’s new owner discovers a large hole in the roof the
following January (ten months later) upon the first significant rain, then
according to the delayed discovery rule, the discovery period begins not in
March but in January.
Pre-Inspection: A home
inspection conducted immediately
before the seller puts his home up
for sale.
There are many advantages to a pre-inspection for the seller. If your
seller conducts a pre-inspection, be sure the inspector’s contract does not
restrict his liability to the seller but also extends it to the buyer.
1.4.4.3.2
SCOPE
CC §7195 defines “home inspection” as:
… a noninvasive, physical examination … [of a home’s] mechanical,
electrical, or plumbing systems or the structural and essential
components of a residential dwelling … designed to identify material
defects in those systems, structures, and components.
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Note the word “noninvasive.” If when doing your visual inspection you
discover a lump in a spongy floor or hear dripping behind walls when the
upstairs bath is run, you may have a good reason to suspect a serious
problem that can only be discovered by an invasive inspection.
If you have a suspicion that there may be a serious problem beneath the
carpet or behind a wall, you owe it to your client to hire an inspector willing
to perform an invasive inspection. Of course if your inspector performs an
invasive inspection you will need to secure the owner’s approval by
assuring him you will repair any damage that may be necessary to conduct
it (e.g., repair and repaint a section of dry wall that may have to be removed
to check the studs behind it). The cost of conducting an invasive inspection
may be worth it to allay your buyer’s concerns and avoid a major repair
down the road. If your buyer declines to pay for an invasive inspection or
should the seller refuse to permit it, you should issue the parties a written
advisory and place a copy in your transaction file.
Another question to ask the home inspector after reading his contract is
what he means by “accessible areas.” You will want him to be specific. Is
the roof accessible? Is the crawl space under the house accessible? Is the
attic accessible?
Be sure the seller is available when the home inspector conducts his
inspection. The seller may be needed to unlock rooms and gates for
inspection. He may also be needed to warn the inspector of unsafe
conditions such as the presence of a vicious dog or a loose railing on the
terrace.
Some inspectors limit their inspection to the home and do not inspect other
stand-alone structures such as garages, guest houses, cabañas, or cabins.
If these structures are materially important to your buyer, be sure they are
included in the inspection.
Often home inspectors will exclude the following items from inspection:
recreational facilities – spas, saunas, steam baths, swimming pools,
tennis courts, playground equipment; and other exercise,
entertainment, or athletic facilities,
septic systems,
underground storage tanks,
home appliances such as washers, dryers, and dishwashers;
wells,
roads and driveways, and
landscaping – the condition of overhanging trees, ungrounded steel
tubing, sprinkler systems, etc.
Be sure you know which items are to be inspected. If items important to
your buyer are not inspected either find an inspector willing to include them
or arrange for other experts to inspect the excluded items.
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Inspection for pest, dry rot, or mold may or may not be included in the
home inspection since inspections for wood destroying organisms are also
performed by licensed pest inspection companies. Owing to the fact that
damage caused by pests can be extremely expensive to repair, we
recommend home inspectors also report any damage from dry rot and
termites they may find. (The contracts used by most inspectors provides
an exemption for any failure to find damage from pest infestations.)
1.4.4.3.3
QUALIFYING HOME INSPECTORS
The choice of home inspector is of such importance in reducing your risk
that it should not be left entirely to the buyer, the buyer’s broker, or your
principal.
Consider this scenario: Three months after the close of escrow while your
buyer is on vacation, a PB (Polybutylene) pipe in his second story
bathroom bursts flooding the floor below. His repair cost is enormous and
he must incur further expense to replace all his PB plumbing with copper
plumping to avoid a reoccurrence.
Your buyer might not remember he selected the least expensive home
inspector he could find, that he was too busy to attend the inspection, that
his inspector marked his plumbing as “serviceable,” and the inspector took
only one hour to examine the house.
Polybutylene Pipe
Rather than delegating the choice of home inspector to your buyer, we
recommend you compile a recommendation list of a dozen home inspectors
you have pre-qualified as professional and reliable.
Below is a list of questions we recommend asking prospective home
inspectors:
An exemplar home inspection
report can be found here.
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1.
With which home inspector association are you affiliated?: The
preferred answers are 1) the American Society of Home Inspectors,
or 2) the National Association of Home Inspectors with a
designation of Certified Real Estate Inspector (CRI). Full members
of these two organizations have performed 250 paid home
inspections and subscribe to similar codes of ethics.
2.
If your inspection finds defects, can you perform repairs or
recommend someone who can? The answers should be “no” and
“no.” You want a professional home inspector who makes his living
only from home inspection and not from making repairs.
3.
Can you provide me a sample of your home inspection report?
The answer should be “yes.” When you receive the sample home
inspection report you will want to make sure it includes these seven
sections: 1) a description of areas not examined with corresponding
explanations for why they were excluded, 2) guidelines for estimating
the cost of repairs, 3) recommendations for consulting other
professionals such as arborists or structural engineers, 4) a
prioritization of repairs with justifications, 5) estimates for the
remaining life expectancy of critical home systems such as the roof,
6) a list of potential safety issues, and 7) a list of recommendations
for improving the energy efficiency of the home.
4.
Do you have E&O insurance, general liability insurance, and
worker’s compensation? The answer should be ‘yes’ for all three
types of insurance.
5.
Can all parties and their agents accompany you on your
inspection? The answer should be ‘yes’; however, you should
expect he will place limits on the time he will spend answering
questions or that he may charge an hourly fee for the extra time he
spends with you or the other principals.
6.
What do you not inspect? All inspectors set limitations on what
they will inspect based on accessibility, safety, or because they lack
the required expertise. If the limitations the inspector sets exclude
the inspection of features important to your client, ask the inspector
if he would, for an additional fee, agree to inspect those areas.
7.
Are you willing to perform a water test on the roof? The answer
should be “yes” or “maybe.” If it has not rained for many months
and if the roof does not appear to be in good condition, you should
ask the home inspector if he thinks a water test on the roof is
warranted. If he does, he will probably charge extra. Given that the
integrity of the roof is critical to avoid massive water damage, the
additional cost should be worth it.
8.
Are you willing to be present at the final walk-through? The
answer should be “yes.” There is no better person to verify that the
recommended repairs were made than the home inspector who
found the defects.
9.
Can you send me a copy of your home inspection contract?
The answer, of course, should be “yes.” You will want to read it
carefully for any clauses which limit the inspector’s liability or
inspection duties.
One final question you should ask yourself before placing a home inspector
on your “approved list:” “If I am sued and this home inspector is asked to
testify, would this inspector appear qualified when giving testimony in
court?”
Once you develop a roster of cracker-jack inspectors, you can make
referrals with confidence.
Home inspectors have a cynical view of real estate agents. One inspector,
Tome Corbett, describes his cynicism in this YouTube video. Specifically,
his recommendation is for buyers to compile a list of unacceptable home
inspectors from inspectors recommended by local real estate agents ☺.
1.4.4.4
PRE-INSPECTION
If you represent the seller, we recommend you advise him to get a home
inspection before he lists his property – what home inspectors call a “preinspection.” As already stated, it is best to conduct the pre-inspection
before you sign the listing agreement so you may better set the price of the
home and to avoid making a legally binding commitment to market a home
which is unlikely sell due to egregious defects.
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There are many advantages to pre-inspections which should be impressed
upon your seller:
1.
Avoid Cancellations of Purchase Agreements: In nearly every
purchase contract, the buyer has the option to cancel should his
home inspection reveal a material defect not reported on the seller’s
TDS. If the home inspection identifies a material defect, and most
do, the buyer will either cancel the purchase agreement or, more
likely, negotiate a price reduction from the seller.
Some agents have reported that buyers, owing to their superior
negotiating position in this situation, ask and get price reductions
two and three times greater than the cost of the repairs.
Consequently, the money the seller is likely to lose for overpaying
for repairs will probably be a small fraction of the cost of a preinspection.
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2.
Reduce risk of liability: There is simply no better way to
demonstrate compliance with your fiduciary duty of honesty and fair
dealing to the buyer than to conduct a home inspection before
completing the TDS.
3.
Reduce repair costs: If the pre-inspection reveals defects you
deem necessary or desirable to correct before putting the seller’s
home on the market, the more time the seller has to make repairs
the more money he should save. The more time, the better he can
plan, the more bids he can consider, and the lower the price he will
need to pay for materials. If your seller does not have the ready
cash to make the repairs, he may have time to get a home equity
loan or a swing loan to fund the repairs. If he chooses not to make
the repairs, he can always disclose the defects on his TDS thereby
avoiding risk should the undiscovered material defects be
discovered by the buyer after the sale.
4.
Increase the confidence of the post inspection report: If you as
the seller’s agent elect to also represent the buyer, you can save the
buyer time and money by not getting another inspection. To
assuage any concerns the buyer might have about the condition of
the property, you can ask the home inspector who conducted the
pre-inspection to walk the property with your buyer and explain his
findings. If the buyer is represented by a broker, then in all
likelihood his broker will recommend another home inspection using
an inspector he trusts. This second inspection should increase
everyone’s confidence in the adequacy of your disclosures and
serve as a check on the competency of the inspector who
conducted the pre-inspection.
5.
Qualify the Seller: A seller who is willing to pay for the preinspection is almost certainly going to be more motivated to sell his
home than a seller who is not willing to pay for this relatively modest
expense.
1.4.4.5
POST-INSPECTION
It is a good idea to invite – maybe even insist – that everyone attend the
home inspection. If not the entire inspection, which may take six to eight
hours, then at least a wrap-up session where the home inspector
summarizes his findings, describes the most serious defects, and answers
questions from the principals. With everyone present, any issues requiring
repairs or price accommodations can be expeditiously resolved since all
parties will be present and in possession of the same facts; and,
furthermore, the home inspector will be available to clarify his findings and
conclusions and his recommend remedies.
If you represent the buyer and the inspector recommends the use of
experts, you should encourage your buyer to hire the recommended
professionals. If your buyer should balk at the delay and expense, your
buyer can challenge the home inspector’s claim that other experts need to
be consulted.
Many of the defects reported by the home inspector may sound serious but
actually be trivial. For example consider this defect:
Repair: The wiring at the kitchen waste disposal is incomplete. The
cable clamp is missing at the disposal location. Installation is
recommended.
Cable clamps cost about 50 cents and takes an instant to snap into place.
A buyer with cold feet might obsess about this defect and even use it as an
excuse to cancel his purchase agreement.
On the other hand, a serious defect might be dismissed by the buyer due to
his ignorance or his bias for only favorable information in support of his
purchasing decision.
Cable Clamps
As the inspector follows his routine, checking sockets, flushing toilets, and
opening and shutting windows; the attending buyer should be learning a
myriad of important details about the home from the seller: the color codes
used for the interior paints, instructions on how to scare away the raccoons
that visit every night, how to operate the spa heater, the repair history of the
roof, and the fact that his neighbor, Ned – a mean-looking hombre, is
actually sweeter than a kitten.
One further advantage to having all the players in attendance is to ensure
that as much of the structure gets inspected as possible. For example, if
the outside water heater compartment is locked shut, the seller can find the
keys so it can be inspected. If the bedroom wall is damp, the seller may
give his permission to have the wall opened for an invasive inspection.
1.4.5
PROACTIVE STEPS
This section lists miscellaneous proactive steps to reduce your liability in
real estate transactions. They are listed in no particular order.
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1.4.5.1
PAST TDS REPORTS
Ask your seller for copies of any previous TDS’ he might have. You may
find these useful in preparing a new TDS and you will want to verify that
defects listed on the old TDS were corrected.
1.4.5.2
EXPERTS
The home inspector may recommend the buyer consult several
professionals to inspect special aspects of the property: a geologist to
report on soil stability, a structural engineer to determine the adequacy of
shear wall reinforcement, a licensed electrician to evaluate the condition of
the circuit panel, an arborist to ascertain the condition of an old oak tree, a
certified environmental expert to check for mold, radon, and asbestos; and,
of course, a pest control service to look for evidence of termite or dry rot
infestation.
If the buyer contracts all the professionals recommended to him, it may cost
him thousands and delay the sale for weeks, months, or stop it altogether.
If you believe the use of any given expert is not worthwhile, let your client
know your reasons but be sure the decision to employ any given
professional is your client’s decision.
Say as little as possible about the need for professionals you think
unnecessary and to encourage your client to contract the professionals you
think really are needed. The safe-or-sorry approach of inviting half a dozen
highly-paid, highly-skilled professionals to evaluate every feasible danger
no matter how remote is certainly the safest approach but it is also
impractical and can be a deal killer.
1.4.5.3
WALKTHROUGHS
Your standard purchase agreement probably permits a walkthrough
inspection by the buyer (see “Final Verification of Condition” in CAR®’s purchase agreement, Form
RPA-CA) a few days prior to the close of escrow. Whether you represent the
buyer or seller you should attend the walkthrough to verify that all promised
repairs have been made to the satisfaction of the buyer.
If the repairs have not been made to the buyer’s satisfaction, you will want
to be on hand to help your client negotiate an immediate resolution with the
other party. If all is satisfactory, then the selling broker should prepare a
release such as CAR®’s Verification of Property Condition (Form VPC). You
should have the buyer sign the release and have the seller countersign it.
When thoroughly prepared and signed by your buyer, it constitutes a waiver
by your buyer of any claim on the seller for repairs to unlisted items.
The walkthrough is not a contingency of the purchase agreement. It should
not be used as a tool to restart negotiations. It merely serves to verify that
the property is in the same condition as it was at the time the contract was
made and as a check to ensure that promised repairs have been made.
Recommendations: 1) make sure you have plenty of time for the
walkthrough, 2) photograph the condition of the house, 3) be accompanied
by your home inspector, and 4) know what the contract says.
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1.4.5.4
BUILDER WARRANTIES
State law allows buyers of new homes to sue builders for “general” defects
(i.e., obvious defects) for up to four years after the home is constructed and
for ten years for latent defects on major components. But the window of
ten years is a long time. During the ten year window the builder could quit
the business or become insolvent.
To protect your buyer, you should insist the builder provide a warranty from
a third-party insurer. Under such programs, builders buy coverage and
include its cost in the home’s price. For any covered defect, the builder
must repair. If the builder does not or cannot make repairs, the warranty
company performs the repair work.
Third-party plans typically last ten years. In the first year there is coverage
for workmanship and materials, in the first two years basic systems such as
plumbing and electrical work are covered, and for the full ten years
structural items are covered.
In addition to the builder’s warranty on the home the builder may transfer to
the buyer the manufacturer’s warranties for major systems (such as the
furnace and air conditioning systems) and appliances.
CC §895 et seq. allows new home buyers to sue builders for general
defects for up to four years after the home is constructed. The defects for
which builders are liable are defined in CC §896. The number of years
from the close of escrow during which a homeowner may file an action
varies from two years for defects such as wood decay to ten years for latent
defects on major components.
1.4.5.5
NEIGHBORHOOD EVALUATIONS
Legally you are under no obligation to conduct a neighborhood evaluation;
that is, to make an effort to learn about the conditions of safety,
environment, noise, school, neighbor relations, and other factors materially
affecting an owner’s enjoyment of his prospective home. As a matter of
practicality though, it is a good idea for you to do so; or, at least to
encourage your buyer to do so. Neighborhood conditions that could be
material to your buyer are:
1.
Noise: Constant dog barking, boisterous children, trains, planes, a
bar that blasts music late into the night, playgrounds.
2.
Neighbors: Troublesome neighbors, boundary disputes, Harley
riders, dog kennels, anti-social teens, drummers, chronic leaf blower
users.
3.
Safety: Retired landfills, landslides, rattlesnakes, bears, falling
trees, unfenced bodies of water.
4.
Crime: High incidence of burglaries, gang problems, vagrants.
5.
Municipal Services: Trash pickup, repair, tree trimming, street
repair.
6.
Schools: Quality of the school system (e.g., information about local
schools is available from a number of services such as
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www.SchoolMatch.com).
If as a broker you advertise yourself as a neighborhood specialist and fail to
disclose a significant problem known to exist in the seller’s neighborhood,
you risk being sued by your buyer for fraudulent concealment.
1.4.5.6
STIGMATIZED PROPERTIES
Feng shui is an ancient Chinese
system of aesthetics believed to
utilize the Laws of both heaven
and Earth to help one improve life
by receiving positive Qi (“energy
flow”).
A stigmatized property is any home with a notorious history. The home
might have been the scene of a murder/suicide; its previous owners may all
have died from the same fatal disease, the neighbors may believe it is
haunted, it might exude bad feng shui ; or it might have a history of
expensive repairs.
What ever the stigma, be it rational or irrational, you should disclose it even
if the law does not require you to do so.
The California law concerning stigmatized properties states in CC §1710.2:
No cause of action arises against an owner of real property or his or
her agent … for the failure to disclose to the transferee the
occurrence of an occupant’s death … or the manner of death where
the death has occurred more than three years prior to the date the
transferee offers to purchase … the real property.
If a death occurred on a property within three years of the date of transfer
and the circumstances of that death are material (i.e., it stained the
property’s reputation), it must be disclosed. If the same death occurred
before the statutory limitation of three years, we recommend it be
disclosed.
The same statute absolves you from liability for nondisclosure of AIDS
related deaths regardless of how recently the death may have
occurred.
Yes, the science of medicine has proven that AIDS cannot be transmitted in
any manner other than by the transfer of bodily fluids, but why take the
chance that your buyer knows and believes this? In our opinion, you should
disclose it. For that matter, you should also disclose any alien abductions
that may have taken place on or near the property.
Disclose all alien abductions.
1.4.5.7
Even if you choose to not take our advice and to take refuge in this statute’s
safe harbor (CC §1710.2), if asked directly about any event you must be truthful
otherwise you may be held liable for misrepresentation or concealment.
CLUE REPORTS
When homeowners file a claim on their homeowners insurance policy for a
wind-damaged roof, for injuries from a dog bite, for damage from a tree
falling onto the roof; most insurers post a record of the claim to a
cooperative database called CLUE (Comprehensive Loss Underwriting
Exchange).
When an insurer is asked to write a homeowners insurance policy, the
insurer checks the home’s claims history on CLUE. If the insurer finds an
Page 56
unacceptable claims history the insurer may refuse to write the policy or he
may charge an exorbitant premium. In particular, insurers are reluctant to
provide homeowners insurance for homes having had any claim for
significant water damage.
Should your buyer be unable to obtain homeowners insurance he may not
be able to secure financing.
If you represent the buyer you should consider writing into the purchase
agreement a contingency stating that the seller’s CLUE report must be
acceptable to your buyer.
There are at least two benefits in obtaining the home’s CLUE report:
First, the report serves as a check on the veracity of the seller. If,
for example, the report shows a claim for fire damage not disclosed
on the seller’s TDS, then you would have reason to suspect
concealment. You could also use this knowledge to direct your
home inspector to verify that all reported damage has been
corrected.
Second, if the report shows an extensive claims history or any claim
for damage caused by water, you should expect that homeowners
insurance will either be unavailable or very expensive. In this
situation you may want to advise your buyer to negotiate a price
reduction.
Under the Fair Credit Report Act, each homeowner is entitled to a copy of
his CLUE report. The report is available through the mail for free. To
receive it, you must fill out a form available from LexisNexis Personal
Reports together with photocopies proving your identity and send it to their
processing center.
1.4.5.8
SERVICE CONTRACTS
If you represent the buyer, you should make it a contingency that the seller
assigns to the buyer all warranties, insurance policies, and service
agreements (subject to prorations) on major fixtures and household
components such as heating and cooling systems, fountains, pool/spa
systems, and built-in kitchen appliances.
Unless the written warranty states otherwise, roof warranties are
enforceable throughout their guaranteed term by subsequent purchasers.
1.4.5.9
HOME WARRANTIES
Sellers often purchase a home warranty for their buyer’s protection.
According to the Home Warranty Association of California, 90% of
purchase agreements for re-sales include home warranty service contracts
paid by the seller.
Most home warranties are one-year contracts that provide coverage for the
repair of a home’s mechanical systems; including plumbing, heating,
electrical, water heater, and most built-in appliances should they fail due to
normal wear-and-tear.
Page 57
Home warranty companies are notorious for denying claims for items they
contend were broken when the policy was purchased (i.e., “pre-existing
conditions”) or because the insurer contends the homeowner failed to
adequately maintain the system. If the homeowner’s claim is denied by his
insurer, he may consider filing suit against the seller and his broker to
recover his damages. Therefore, when recommending home warranty
insurers, be aware of the reputation of the insurers you recommend and be
sure to explain to your clients the limitations and liability limits of their home
warranty policy.
If you recommend a home warranty to your buyer, you should, as with all
recommendations, provide a list of reliable vendors. For each home
warranty company on your list you should verify: 1) the policy provides
coverage for the items your buyer is likely to consider important, 2) the fee
for a service call is reasonable, 3) the liability limits of the coverage are
reasonable, 4) the company is licensed by the California Department of
Insurance, 5) the service assures quick response, 6) the service provides
insured contractors for all repairs, 7) the turnaround time for service calls is
reasonable, and, finally, 8) the policy can be renewed at the buyer’s option.
Page 58
2
CONSUMER PROTECTION ARTICLES
The following originate from the last four years (08/2006-09/2010) of
articles taken from two sources:
1.
DRE’s quarterly Real Estate Bulletin for which the DRE maintains
an online archive. As a government publication, its articles are in
the public domain. The articles are well written and thoroughly
researched by DRE staff. They discuss topics the DRE considers
important for licensees to know.
2.
The online magazine, RealtyTimes.com. RealtyTimes.com holds
the copyright to its articles which we use here with their permission.
Their terms for our use are (1) they be unaltered, (2) we
acknowledge their copyright in each article, (3) we provide the
biographical information for each article’s author as it appeared with
the original articles, and (4) we purchase an annual license which
permits us to reprint their articles. All biographies are listed
alphabetically by last name in Appendix A.
The articles we selected are intended to update licensee’s knowledge of
the residential real estate brokerage industry for the purpose of protecting
their client’s interests. Thus we have few, if any, articles pertaining to
marketing, selling, management, and business development.
From the thousands of articles we reviewed from our two major sources, we
selected only articles which fit the following two criteria:
Alerts the licensee to a law enacted or a trend which has emerged
during the past four years.
Describes a matter of topical interest in an especially succinct, clear,
or entertaining manner.
Al Capp’s “shmoo” was perfectly
altruistic. Look at a shmoo with
hunger in your eyes and it would
happily drop dead so you could
roast it for your next meal – it
tasted like really good chicken.
We have selected articles for an imaginary “ideal residential real estate
agent.” This ideal agent cares only for his client’s interests. He regards
himself as a home consultant with expertise in everything relating to home
ownership; not just brokerage and real estate transfers but also home
protection, security, and enjoyment. We fully realize real estate agents
need to make a living and must therefore spend considerable time
marketing, selling, and managing their businesses but our imaginary ideal
real estate agent is not unlike Al Capp’s shmoo ; a creature who never
gives a moment’s attention to his own needs caring only for the needs and
happiness of others.
Articles are arranged in chronological order within sections.
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2.1
LAW
2.1.1
ANNUAL SUMMARIES OF NEW LEGISLATION
These annual summaries of new State legislation are intended to alert you
to noteworthy changes to the law. Copies of the bills can be obtained here.
Please note that “SB” refers to a Senate bill and “AB” to an Assembly bill
and the Chapter number refers to the sequence that the bill was filed with
the Secretary of State. The name appearing after the bill number is the
name of the author. All statutes are effective January 1st unless otherwise
noted.
2.1.1.1
FEDERAL LEGISLATION
by Chuck Milbourne, Editor
Much of the recent tumult in the residential real estate brokerage industry is
attributable to Federal legislation enacted in response to the 2008 Financial
Crises. Congress has enacted sweeping new laws in their attempt to
stimulate the economy, prevent another mortgage crises, rescue the GSEs,
and to provide relief to struggling homeowners.
2.1.1.1.1
MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007
This act provides relief to homeowners who would formerly owe taxes on
forgiven mortgage debt following foreclosure. The act originally extended
relief through calendar years 2007-2009 but was extended through 2012 by
the Emergency Economic Stabilization Act of 2008.
The relief applies only to debt incurred for purchase money loans or for that
portion of home equity debt incurred for home improvement.
Normally when a lender forgives all or a portion of a borrower’s debt (as in
a short sell), the forgiven amount is taxable income to the borrower.
2.1.1.1.2
HOUSING AND ENCONOMIC RECOVERY ACT OF 2008
The Housing and Economic Recovery Act of 2008 (HERA) was enacted
July 30, 2008. This act was designed primarily to address the subprime
mortgage crisis. It was signed by President Bush on July 30, 2008. It
authorizes the FHA to guarantee up to $300 billion in new 30-year fixed
rate mortgages for subprime borrowers if lenders write-down principal loan
balances to 90 percent of current appraisal value. It’s intended to restore
confidence in Fannie Mae and Freddie Mac by strengthening regulations
and injecting capital into the two large U.S. suppliers of mortgage funding.
It authorizes states to refinance subprime loans using mortgage revenue
bonds. It also establishes the Federal Housing Finance Agency out of the
Federal Housing Finance Board and Office of Federal Housing Enterprise
Oversight.
Some provisions of the law were modified by the American Recovery and
Reinvestment Act of 2009, which was signed into law by President Obama
on February 17, 2009.
HERA is 694 pages long and consists of five separate acts:
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2.1.1.1.2.1
HOUSING ASSISTANCE TAX ACT OF 2008
The most important provision of this act was a first-time home buyer
refundable tax credit for purchases on or after April 9, 2008 to July 1, 2009
but later extended to July 1, 2010. The tax credit was equal to 10% of the
purchase price of a principal residence, up to $7,500. The program
successfully stimulated home sales but the month after its cancellation
(July 2010) home sales plummeted to a fifteen-year low of -27% from the
same month a year earlier.
2.1.1.1.2.2
FHA MODERNIZATION ACT OF 2008
The FHA does not lend money; it
guarantees a percentage of home
loans from private lenders who
participate in FHA loan programs.
Increases the FHA loan limit from 95% to 110% of area median home
price up to 150% of the GSE conforming loan limit, or $625,000. Among its
provisions:
FHA’s loan limit for a single-family
home in Los Angeles as of August
2010 is 729,750. Click here to
search other counties.
Requires a down payment of at least 3.5% for any FHA loan.
Places a 12-month moratorium on HUD implementation of riskbased premiums.
Prohibits seller-financed down payments.
Allows down payment assistance from family members.
Due to the collapse of the subprime market and as a consequence of this
act’s near doubling of FHA’s loan limits, FHA’s share of the mortgage
insurance market has grown from 2% in 2006 to 30% as of August 2010
(source).
Until recently (August 2010) due to the State’s budget shortfalls, the
California Housing Finance Authority offered 100% financing (details) for
FHA loans. Thus, the same no downpayment loans that helped precipitate
the Mortgage Crises when home values fell and the unemployment rate
increased are still being made.
2.1.1.1.2.3
FEDERAL HOUSING FINANCE REGULATORY REFORM ACT OF 2008:
This act replaces several regulatory bodies with the independent Federal
Housing Finance Agency (FHFA). The FHFA is designed to provide much
stricter oversight of the GSEs. In particular, this act enabled the FHFA to
place both Fannie and Freddie into conservatorship and to bailout these
two failed GSEs with taxpayer money.
2.1.1.1.2.4
HOPE FOR HOMEOWNERS ACT OF 2008
The Hope for Homeowners program is designed to help homeowners in
danger of default and foreclosure refinance into a more affordable loan.
This act authorizes the FHA to insure up to $300 billion of 30-year fixed rate
refinance loans up to 90% of appraised value for distressed borrowers. It
covers mortgage commitments made before January 1, 2008. The
participation of lenders is voluntary. Participating lenders are required to
accept the proceeds of the insured loan as payment in full for all preexisting indebtedness.
As of March 2010 (source), only a fraction of the planned 400,000
homeowners have been helped. Reasons cited for its failure are lender’s
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reluctance to take write-downs, lender’s difficulty with the required
paperwork, and poor economic conditions.
2.1.1.1.2.5
MORTGAGE DISCLOSURE IMPROVEMENT ACT OF 2008
The Federal Reserve Board
implements the Truth in Lending
Act through it’s “Regulation Z.”
In 2009 the Federal Reserve Board issued a final rule implementing
changes to the Truth in Lending Act (TILA) made by the Mortgage
Disclosure Improvement Act of 2008 (MDIA). MDIA applies to any
consumer mortgage transaction subject to the Real Estate Settlement
Procedures Act (RESPA); that is, any loan secured by the borrower’s home.
Previous to MDIA, TILA disclosure requirements applied only to purchasemoney loans and not to refinances and home equity lines.
The Act is designed to protect borrowers from being low balled on their
Good Faith Estimates (GFE). Here are some of its details:
The borrower must receive his initial GFE and TIL statements
showing his final APR seven days prior to closing.
If the final APR is off by more than .125% from the APR cited in the
borrower’s initial GFE, the lender must re-disclose and wait yet
another three business days before closing.
Lenders can only collect from the borrower a credit report fee prior
to their delivery of the final TIL.
The following must appear on both initial and final TIL: “You are not
required to complete this agreement merely because you have
received these disclosures or signed a loan application.”
The borrower may expedite the process for a personal emergency.
2.1.1.1.3
SECURE AND FAIR ENFORCEMENT FOR MORTGAGE LICENSING ACT OF
2008 (SAFE)
SAFE requires each state to register its “loan originators” using the
Nationwide Mortgage Licensing System (NMLS), a registry operated jointly
by the Conference of State Bank Supervisors and the American
Association of Residential Mortgage Regulators. The SAFE Act is intended
to provide uniform licensing standards nationwide. It is also designed to
create a comprehensive licensing database so that all loan originators will
be known and presumably, bad actors can be kept out of the industry. It
requires all residential loan originators to pass an exam to obtain an
“endorsement” (i.e., a license) to legally originate home loans and to me
annual continuing education requirements to maintain the endorsement.
(We provide several detailed articles about the SAFE act.)
2.1.1.1.4
HOME AFFORDABLE MODIFICATION PROGRAM (HAMP)
HAMP helps eligible home owners with loan modifications on their home
mortgage debt. It was created by the Financial Stability Act of 2009.
The objective of the program is to help seven to eight million homeowners
at risk of foreclosure by working with their lenders to lower monthly
mortgage payments. The Program is part of the Making Home Affordable
Program which was created by the Financial Stability Act of 2009. The
program was built in collaboration with banks, services, credit unions, the
FHA, the VA, the USDA and the Federal Housing Finance Agency, to
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create standard loan modification guidelines for lenders to take into
consideration when evaluating a borrower for a potential loan modification.
As of July 2010 and after 18 months after the inception of the program,
434,717 borrowers have received permanent loan modifications (source).
2.1.1.2
STATE LEGISLATION
2.1.1.2.1
2006 LEGISLATION
Real Estate Bulletin, Winter 2006
September 30, 2006 marked the end of the two-year legislative session
during which 1,871 bills wound their way through the process and landed on
the Governor’s desk. Of these bills, 1,378 were signed into law and 493
were vetoed.
SB 983 (Lowenthal) Subdivisons; Conversions (Chapter 636)
The Subdivision Map Act requires a subdivider, prior to the filing of a
tentative map to convert apartments to condominiums, to give a 60-day
notice to each tenant of the subject property and to each person applying
after the date for rental of a unit of the subject property. The act also
requires a subdivider who fails to give the required notice to pay each
prospective tenant his or her actual moving expenses and the first month’s
rent in an amount not to exceed $500 for each expense. SB 983 increased
the expense amount to $1,100.
SB 1560 (Battin) Homeowners Associations: Elections (Chapter 310)
Last year, SB 61 (Battin) established new election procedures for CIDs. A
complementary bill, AB 1098 (Jones) established a specified list of
documents that an HOA must make available to an association member.
SB 1560 is a non-controversial clean-up measure to clarify last year’s
measures.
This bill and the two 2005 bills; AB 1098 and SB 61, are best understood as
one bill designed to improve the transparency of HOA financial reporting
and the fairness of HOA elections.
SB 1609 (Simitian) Reverse Mortgages: Annuities (Chapter 202)
Annuity: A contract sold by an
This bill requires applicants for reverse mortgages to obtain financial
insurance company designed to counseling and receive certification of such prior to making an application.
provide periodic payments to the
SB 1609 also prohibits a lender from requiring the purchase of an annuity
holder usually after retirement.
as a condition of obtaining a reverse mortgage loan. With respect to
annuities, this bill prohibits a reverse mortgage lender or a broker arranging
a reverse mortgage loan from offering an annuity to the borrower or referring
the borrower to anyone for the purchase of an annuity prior to the closing of
the loan or before the expiration of the borrower’s right to rescind. In
addition, the bill requires a reverse mortgage contract be translated into the
appropriate language when negotiations for the reverse mortgage contract
were conducted in that language. The bill was suggested by the Community
Legal Services in East Palo Alto and the Elder Financial Protection Network.
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AB 790 (Yee) Real Estate Licenses: Discipline (Chapter 199)
Existing law allows the DRE to suspend or revoke a real estate license or
deny issuance of a real estate license to a real estate license applicant who
has knowingly authorized, directed, connived at, or aided in the publication,
advertisement, distribution, or circulation of any material false statement or
representation concerning his or her business or concerning any business
opportunity or any land or subdivision offered for sale.
AB 790 amends existing law to allow the DRE to also suspend or revoke a
real estate license or deny issuance of a real estate license to a real estate
license applicant who has knowingly authorized or distributed any material
false statement or representation concerning his or her designation or
certification of special education, credential, or trade organization
membership. The California Association of Mortgage Brokers sponsored
AB 790.
AB 2100 (Laird) Homeowner Associations: Reserves (Chapter 188)
Existing law requires an HOA to annually prepare an operating budget and
every three years to perform a reserve study to assess the adequacy of
reserves earmarked to fund the repair or replacement of major common
interest components within the development such as the roof(s) or replastering of a pool. AB 2100 requires that the board of directors of an
HOA adopt a reserve-funding plan based on the reserve study. This bill
also establishes new requirements for the review of contracts.
AB 2429 (Negrette McLeod) Conditional Salesperson License; Repeal
(Chapter 278)
Existing law authorizes DRE to issue, under specified conditions, an 18month conditional real estate salesperson’s license to persons who have
successfully completed a college level course in real estate principles and
passed the real estate salesperson’s license examination.
Effective October 1, 2007, AB 2429 repeals the DRE’s authority to issue a
conditional license, thus effectively mandating that all real estate
salesperson license applicants complete three college-level real estate
courses, as specified, prior to taking the real estate salesperson’s license
examination. The CAR® sponsored AB 2429.
This is one of four recent changes to continuing education (CE)
requirements sponsored by CAR®: 1) the 2006 change requiring all
licensees take a three-hour course in risk management (AB 223 (McLeod)),
2) the 2005 change limiting the rate at which licensees could complete their
CE to not more than 15 hours per day, and 3) the impending change
scheduled to take place January 1st 2011 which will require more rigorous
final exams for continuing education courses (including mandatory multiple
choice exams with no retakes permitted). It is my opinion that CAR® is
intentionally making it more difficult to obtain and renew licenses.
AB 2602 (Leiu) Interest Bearing Trust Accounts (Chapter 107)
Existing law allows a real estate broker to place trust funds in an interest
bearing trust account in specified circumstances. AB 2602 expands these
circumstances to allow real estate brokers who service commercial loans to
place trust funds (loan payments) into an interest bearing trust account with
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the permission of the investor (note owner). The California Mortgage
Bankers Association sponsored AB 2602.
AB 2624 (Houston) HOA; Foreclosure (Chapter 575)
Non-Judicial Foreclosure: Aka, Last year SB 137 (Ducheny) established, among other things, a 90-day
“trustee’s sale.” Nearly all
redemption right on property that was foreclosed on by an HOA for
foreclosures in California are nondelinquent assessments. AB 2624 establishes procedures governing the
judicial; that is the foreclosure
in a CID. The
takes place via a private sale and 90-day redemption period in a non-judicial foreclosure
not through a civil proceeding.
United Trustee’s Association sponsored AB 2624.
AB 2800 (Laird) Housing Discrimination: Real Estate Licensee
Discipline (Chapter 578)
AB 2800 enacts the Omnibus Housing Nondiscrimination Act by which
various non-discrimination provisions in existing law related to housing
would be made consistent with the protections against discrimination
afforded by {California’s} Fair Employment and Housing Act (FEHA).
Panic Selling: The illegal practice
of igniting fear among property
owners in a particular
neighborhood or area by inducing
an abnormally high turnover or
panic.
With respect to the real estate law, AB 2800 expands the provisions for
which a real estate licensee can be disciplined. Specifically, existing law
states it is unlawful for a licensee to induce “panic selling” due to the
present or prospective entry into a neighborhood of a person of another
race, color, religion, ancestry, or national origin. This bill expands the class
of protected characteristics to include sex, sexual orientation, marital status,
familial status, source of income, or disability.
The author sponsored AB 2800.
AB 3020 (Montanez) Real Estate: Time-Share Developments (Chapter
429)
The Vacation Ownership and Time-Share Act of 2004 (VOTA) was enacted
on July 1, 2005. VOTA effectively changed how time-share offerings are
regulated in California. AB 3020 made several clarifying changes to VOTA.
The American Resort Development Association sponsored AB 3020.
2.1.1.2.2
2007 LEGISLATION
October 14, 2007 marked the end of year one of the current two-year
legislative session. A total of 964 bills wound their way through the process
and landed on the Governor’s desk . Of these bills, 750 were signed into
law and 214 were vetoed.
AB 432 (Garcia) Time-share Public Reports (Chapter 53)
The Vacation Ownership and Time-Share Act of 2004 (VOTA), which
became effective 07/01/2005, effectively changed how time-share offerings
are regulated in California. The act requires a timeshare plan developer,
prior to selling timeshare interests, to obtain a public report from the DRE.
The public report application requires the developer to fully and accurately
disclose certain facts concerning the time-share developer and time-share
plan.
AB 432 will allow a developer to submit a public report application that
combines, in a manner prescribed by the Commissioner, the information
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required to be disclosed by the California law and the information required
to be disclosed in a public report issued by a regulatory agency in one or
more states. This will allow a developer to create a single disclosure
document that is potentially valid in the states where the time-shares are
marketed.
The DRE sponsored AB 432.
AB 691 (Silva) Homeowner Association Managers; Certification
(Chapter 236)
While existing law does not require managers of HOAs to be licensed, the
law does prescribe requirements for the certification of HOA managers.
Specifically, existing law requires the completion of specified educational
requirements in order for an HOA manager to be considered certified,
although there is no requirement that an individual be certified in order to
manage an HOA. The provisions in existing law that set forth the
requirements for HOA manager certification will sunset on 01/01/2008.
CACM offers a credential program
for managers, with a designation
called the CCAM (Certified
Community Association Manager)
designation.
AB 691 extends the sunset date to 01/01/2012 and modifies the
requirements for HOA manager certification.
AB 691 was sponsored by the California Association of Community
Managers .
California’s Davis-Stirling Act (CC §§1350-1377) regulates CIDs. It was designed
to protect owners, requires that boards carry appropriate liability insurance
to indemnify the association from any wrong-doing. The large budgets and
expertise required to run such groups are a part of the arguments behind
mandating manager certification (through the Community Association
Institute, state real estate boards, or other agencies).
AB 763 (Saldana) Subdivision; Conversions; Notice (Chapter 612)
The Subdivision Map Act (Map Act) generally requires an apartment owner
to give tenants notice that the property in which they live will be converted
from rental units to condominium units that will be offered for sale. AB 763
deletes the current notification procedure and creates new tenant
notification requirements that must be fulfilled prior to the approval of a final
subdivision map for the conversion of residential rental property into
condominiums.
CC §1632(a)(3) designates these
five foreign languages as the five
most common foreign languages
and notes that 83% of foreign
language speakers are fluent in
one of these five languages.
This bill also requires that if a rental agreement was negotiated in Spanish,
Chinese, Tagalog, Vietnamese, or Korean, all required written notices
regarding the conversion of residential real property into a condominium
project, a community apartment project, or a stock cooperative project shall
be issued in the tenant’s primary language.
AB 839 (Emmerson) Real Estate License Renewals; Military Extension
(Chapter 194)
Existing law allows a licensee who is called to active military service to
extend the amount of time he or she has to renew a real estate license.
Military service includes active duty in the United States Army, the United
States Navy, the United States Air Force, the Marine Corps, and the
Merchant Marine in time of war, the Coast Guard, and all officers of the
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Public Health Service detailed by proper authority for duty either with the
Army or the Navy.
AB 839 extends the definition of military service to include those in the
National Guard. The DRE sponsored AB 839.
Moral turpitude refers to “conduct
that is considered contrary to
community standards of justice,
honesty, or good morals.”
AB 840 (Emmerson) Real Estate Licenses: Discipline (Chapter 140)
Existing law allows the DRE to deny a real estate license applicant or to
discipline a real estate licensee for (a) a felony conviction or (b) a
misdemeanor conviction where the crime involved “moral turpitude” and
the crime bore a substantial relationship to the duties of a real estate
licensee.
AB 840 amends existing law to strike the moral turpitude standard. The
DRE sponsored AB 840.
AB 980 (Calderon) Real Estate Transfer Fees: Residential Property.
(Chapter 689)
Builders use these fees to win
Some home builders have instituted the use of private transfer fees to
support from organizations that
fund the maintenance of amenities, improvements, or open space. The
otherwise would stand in the way
funds generated by the transfer fee are typically paid to a third party entity,
of their development. Builders
not associated with the developer or homeowner association. These fees
agree to add a covenant to the
deed of each new home that
are generally imposed upon initial sale of a newly constructed home and
requires future buyers of the
upon the ‘transfer’ or subsequent sales of the home. Existing law does not
property to pay a percentage of
impose any limits on the amount, duration, or use of the transfer fees.
the selling price to a designated
land trust or charity. Every new
buyer must pay the fee, usually
about 1% of the home's price.
AB 980 requires the disclosure of the existence of a transfer fee for
properties that are subject to such a fee. Disclosure will generally be in the
form of a recorded notice and a requirement that a seller provide a buyer
with a statement indicating, among other things, the amount of the transfer
fee based on the asking price and how the fee is calculated.
CAR® sponsored AB 980.
SB 223 (Machado) Real Estate Appraisals (Chapter 291)
Existing law precludes a licensed appraiser from doing an appraisal if the
appraiser’s compensation is affected by the sales commission generated
by the transaction for which the appraisal was made.
SB 223 prohibits a person with an interest in a real estate transaction
involving an appraisal to improperly influence or attempt to improperly
influence, through coercion, extortion, or bribery, the development,
reporting, result, or review of a real estate appraisal sought in connection
with a mortgage loan. A person who violates the provision of this bill and is
licensed under any state licensing law will be in violation of the licensing
law under which the person is licensed.
Why wasn’t this law from the
dawn of time?
SB 223 was an urgency bill and was effective the day it was chaptered on
October 5, 2007.
SB 385 (Machado) State Agencies: Accounts: Reports. (Chapter 301)
Existing law allows a real estate broker to, among other things, arrange
loans secured by real property, including nontraditional mortgage products,
as defined.
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Recently {Winter 2007}, federal financial institution regulatory agencies and
the Conference of State Bank Supervisors (CSBS), together with the
American Association of Residential Mortgage Regulators (AARMR),
published guidance on nontraditional mortgage product risks and a
statement on subprime mortgage lending. The guidance and statement set
forth suggested best practices for underwriting and marketing nontraditional
and subprime loans.
SB 385 requires the DRE, Financial Institutions (DFI), and Corporations
(DOC) to apply the guidance on nontraditional mortgage products and the
statement on subprime mortgage lending published by CSBS and AARMR
to their respective licensees. This bill also allows the departments to adopt
clarifying emergency and final regulations with respect to the guidance and
subprime statement. In this regard, the DRE has issued regulations
providing for added disclosures for nontraditional loans. Licensees should
familiarize themselves with these as well as future regulation proposals as
they become available on the DRE Web site.
As to the Guidance and Statement published by CSBS and AARMR, they
can be found at the following Web sites:
Conference of State Bank Supervisors: American Association of
Residential Mortgage Regulators; Guidance on Non-Traditional
Mortgage Product Risks.
Conference of State Bank Supervisors; American Assocation of
Residential Mortgage Regulators; National Assocation of Consumer
Credit Administrators: Statement on Subprime Mortgage Lending
SB 385 also extends the authority of the DRE to the principal lending
activities of real estate brokers who make more than eight loans a year.
SB 528 (Aanestad) Common Interest Developments: Open Meetings
(Chapter 250)
Existing law does not require HOA boards to solely adhere to the matters
set-forth on the agenda. SB 528 requires all issues to be discussed at a
board meeting to be on the agenda so that homeowners have advance
notice of what issues the HOA board will be acting on. This bill also
requires that meeting notices include the agenda for the meeting.
2.1.1.2.3
2008 LEGISLATION
The following legislative summaries, from the legislative session that ended
on August 31, 2008, contain pertinent information for real estate licensees
and subdividers.
AB 180 (Bass) Foreclosure Consultants (Chapter 278)
Foreclosure consultants are in the business of helping homeowners who
are in default stop, delay, or resolve a foreclosure action. Existing law sets
forth to various consumer protections including, but not limited to, making it
illegal for consultants to engage in certain deceitful practices, allowing
consumers to rescind contracts entered into with a consultant up to three
days after signing, and requiring representatives of a consultant to be
bonded. AB 180 enhances consumer protections by, among other things,
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requiring foreclosure consultants to register with the Department of Justice
and increase the bonding requirement for foreclosure consultants to
$100,000.
AB 2180 (Lieu) Solar Energy Systems in Common Interest
Developments (Chapter 539)
AB 2180 requires a HOA in a CID to respond to a request from a member
to install a solar energy system in his/her separate interest within 60 days.
If an HOA fails to respond within 60 days, the application is deemed
approved. Associations violating this law face a civil penalty of up to
$1000.
AB 2454 (Emmerson) Recovery Account Payout Limits Increased
(Chapter 279)
Under the real estate law, the DRE administers a recovery account from
which the DRE can pay the victims of fraud their actual and direct losses, if
the fraud was committed by a real estate licensee while performing acts for
which a license is required. The payout from the fund is generally limited
by statute to $20,000 for any one transaction and $100,000 for any one
licensee.
Your renewal fee funds the
Account.
As of August 2010, this limit is
$7,500.
Yet another legally-required
disclosure…
AB 2454 increased the payout limits to $50,000 for any one transaction and
$250,000 per licensee for applications received after January 1, 2009. The
DRE sponsored AB 2454.
AB 2846 (Feuer) HOA; Disputed Assessments (Chapter 502)
AB 2846 provides that if a dispute arises between a homeowner and his or
her HOA regarding any charge or sum and the amount does not exceed the
jurisdictional limit for Small Claims Court , the homeowner may, in
addition to pursuing dispute resolution, pay the disputed amount under
protest and commence an action in Small Claims Court.
AB 2881 (Wolk) Disclosure of Farming Operations (Chapter 686)
AB 2881 requires developers and sellers of residential property to disclose
to potential buyers if the property is within a mile of a farming operation, as
set forth in the most current “Important Farmland Map” issued by the
California Department of Conservation, Division of Land Resource
Protection.
SB 1007 (Machado) 1031 Exchange Facilitators/Accommodators
(Chapter 708)
In a 1031 exchange, an exchange Third-parties facilitators of tax deferred exchanges of real property
are
facilitator acquires from a
generally unregulated. SB 1007 requires facilitators to meet certain bonding
taxpayer title to his property, the
or cash reserve minimums. The bill also sets forth acceptable and
contractual right to sell his
property, or the right to act as his prohibited behavior by persons who facilitate tax deferred exchanges. The
trustee or escrow holder.
provisions of SB 1007 will remain in effect until January 1, 2014, after which
they are repealed.
State senator Mike Machado, the author of this new law, said “this bill
corrects a loophole to make (rules governing exchange facilitators)
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consistent with the same type of fiduciary responsibility that you would
place on any other agent providing financial services.”
Subsequently coded to CC §§
2923.5 and 2923.6.
SB 1137 (Perata) Foreclosure Procedures (Chapter 69)
SB 1137 , until January 1, 2013, changes the foreclosure requirements on
loans that were originated on and between January 1, 2003 and December
31, 2007. Specifically, this bill requires lenders, prior to filing a notice of
default, to contact or make a good faith attempts to contact borrowers to
discuss their options. The bill also requires specific notices be given to the
occupant of the property that the property is in foreclosure. And the bill
would require the legal owner of a foreclosed, vacant property to maintain
the property or be subject to fines. SB 1137 went into effect on 09/07/2008.
This helps reduce the impact on tenants who rent apartments in foreclosed
properties. Tenants must be warned in six common languages they have
60 days to vacate (previously it was 30 days). Owners of vacant properties
must keep up the appearance of the vacated home or face fines from
municipal authorities of up to $1,000/day. (See it’s author explain his bill in
this YouTube video.)
On June 4, 2010, the California Court of Appeal issued its first important
decision on the scope of the Perata Mortgage Relief Act. Though the Court
held plaintiffs have a private right of action under the PMRA, it also held
that the PMRA does not require lenders to modify loans but only to contact
(or attempt to contact) borrowers about possible options to potentially avoid
foreclosure. The Court also held the act could not be used to forestall
foreclosure using class action suits.
The State’s Real Estate Fraud
Prosecution Trust Fund should
not be confused with the DRE’s
Recovery Account.
Unlicensed real estate broker.
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SB 1396 (Cox) Real Estate Fraud Prosecution Trust Fund (Chapter
405)
Existing law allows counties to impose an additional $2 recording fee on real
estate documents and put the money into a county Real Estate Fraud
Prosecution Trust Fund . County officials must use the Fund to deter,
investigate, and prosecute real estate fraud crimes. SB 1396 increased the
number of documents on which the additional recording fee can be charged
and it increased the additional recording fee to from $2 to $3.
SB 1448 (Scott) Fines for Unlicensed Activity (Chapter 156)
Existing law provides that any person acting as a real estate broker or real
estate salesperson without a license is guilty of a public offense, punishable
by a fine of up to $10,000, imprisonment in the county jail for up to six
months, or by both a fine and imprisonment. In addition, the law provides
that if the unlicensed entity violating the law is a corporation, a fine of up to
$50,000 may be imposed. SB 1448 increases the fines for unlicensed
activity to $20,000 or by imprisonment in the county jail for a term not to
exceed six months or by both fine and imprisonment; or if a corporation, be
punished by a fine not exceeding $60,000. This bill also requires any fines
collected from a person in excess of $10,000 and any fines collected from a
corporation in excess of $50,000, to be deposited into the county’s Real
Estate Fraud Prosecution Trust Fund, if such a trust fund exists in the
county in which the person or corporation was prosecuted.
Illegal business card (no license
number).
SB 1461 (Negrete McLeod) Disclosure of License Identification
Number (Chapter 284)
Effective 07/01/2009, this bill requires a real estate licensee to place his or
her license identification number on all first point of contact marketing
materials and on home purchase agreements which they negotiate. First
point of contact materials includes business cards, stationery, advertising
fliers, and other materials designed to solicit the creation of a professional
relationship between the licensee and a consumer. The DRE sponsored
SB 1461 {this rule is discussed in greater detail later in this book}.
While this new law is a small step toward consumer protection, it and the
database it is relying upon leave much to be desired. Only tech savvy
prospects are going to know how to navigate the web to find a licensee’s
DRE record in DRE’s online database and, assuming the prospect finds it,
the discipline history it may show lists meaningless codes which may
unnecessarily alarm prospects. For example:
06/14/06 - H-26660 LA
08/20/07 – REVOKED
What was action ‘H-26660 LA’? Did the broker fail to report a dismissal to
the DRE or did he deliberately swindle his client?
SB 1511 (Ducheny) Foreclosure Sales in Common Interest
Developments (CID) (Chapter 527)
This bill allows an HOA to record a notice against each of the units in its
CID requiring a trustee to notify the HOA when a unit is foreclosed upon
and to whom the property was sold.
SB 1737 (Machado) Bar Orders, Short Sales, and Dual Agency
Disclosures (Chapter 286)
SB 1737 makes three distinct changes to the Real Estate Law. First, the bill
expands the DRE’s regulatory authority to issue an order barring any
This is another reason to arbitrate individual from real estate related activity who has been found guilty of any
a customer dispute rather than to offense involving fraud, dishonesty, or deceit . Barred persons would also
litigate it in the civil courts –
be prohibited from participating in any real estate activity of a finance lender,
arbitration judgments are private;
residential mortgage lender, bank, credit union, escrow company, or title
court decisions are public.
company. Secondly, the bill expands the DRE’s authority to discipline a
licensee who generates an inaccurate opinion of value, requested in
connection with a short sale, in order to acquire a financial or business
advantage. Finally, the bill requires a licensee who represents a buyer or
seller in a purchase/sale transaction and intends to arrange the financing in
connection with the purchase of the property, to provide a written disclosure
of his or her role as a mortgage broker to all parties to the sale of the
property .
This law was codified into BPC §10087. It allows the Commissioner upon
notice and after an appeal to bar any dishonest person, licensee or nonlicensee, from engaging in any real estate brokerage activity for a period of
up to 36 months. A “dishonest person” is defined as anyone convicted or
found liable for fraud, misrepresentation leading to material damage, or any
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civil or administrative finding that a person was liable for dishonesty, fraud,
or deceit.
2.1.1.2.4
2009 LEGISLATION
October 11, 2009 marked the end of the year of the 2009/2010 legislative
session. Last year, 948 bills made it to the Governor’s desk of which 694
were signed and 254 were vetoed.
ABX2 7 (Lieu) and SBX2 7 (Corbett) California Foreclosure Prevention
Act (Chapter 5, Chapter 4)
These identical bills prohibit lenders and servicers from foreclosing for an
additional 90 days on specified residential loans unless they have an
approved comprehensive loan modification program. The provisions of
California Foreclosure Prevention Act went into effect in June 2009. The
provisions of the Act will sunset on January 1, 2011 unless otherwise
extended by legislation.
AB 260 (Lieu) Mortgage Loans (Chapter 629)
This bill places restrictions on higher cost mortgages including limiting the
use of, among other things, prepayment penalties, yield spread premiums
and negative amortization. The bill also codifies that mortgage brokers are
fiduciaries of the borrower and prohibits a broker from steering a borrower
into a loan that is more beneficial to the broker than the borrower.
The DRE must approve the
CC&Rs for all new HOA
developments. It derives this
authority from the Davis Stirling
Common Interest Development
Act (enacted in 1985, see CC
§1350 et. al).
AB 313 (Fletcher) Assessments for Common Interest Developments
(Chapter 431)
This bill prohibits a HOA in a CID from basing HOA dues on the assessed
value of the homeowner’s property unless the governing documents of the
HOA allowed for this practice on or before December 31, 2009.
AB 329 (Feuer) Reverse Mortgages (Chapter 236)
This bill enacts the Reverse Mortgage Elder Protection Act of 2009.
Specifically, this bill restricts cross-selling of some financial products to an
applicant in connection with a reverse mortgage and requires lenders and
counseling agencies to provide applicants with information on the risks and
suitability of reverse mortgages prior to the applicant making application for
a reverse mortgage. The bill also increases the number of choices of HUD
certified housing counselors a lender can refer an applicant to for
counseling from five to at least ten.
AB 899 (Torres) CIDs; Disclosures (Chapter 848)
This bill requires an HOA in a CID to distribute annually to its members a
Disclosure Documents Index that cross references a homeowner’s right to
receive various reports with the specific code section that requires an HOA
to provide the report. This bill also allows for electronic distribution of these
disclosures. Additionally, this bill provides that the required Assessment
and Reserve Funding Disclosure Summary include a specified statement
regarding the assumed interest rate earned on reserve funds and the
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assumed inflation rate applied to major component repair and replacement
costs.
AB 957 (Galgiani) Buyers Choice Act; Escrow and Title Insurance
(Chapter 264)
AB 957 prohibits any seller who acquired the property as the result of a
foreclosure sale (REOs) from requiring a buyer of the property, as a
condition of the sale, to use the seller’s choice of title insurer or escrow
company if the buyer is paying for these services. As an urgency measure,
it became effective upon the Governor’s signature on October 11, 2009.
AB 1061 (Lieu) CIDs; Landscaping (Chapter 503)
This bill makes void and unenforceable any provisions of governing
documents of a CID that prohibit or include conditions that have the effect
of prohibiting or restricting compliance with a local water-efficient landscape
ordinance or water conservation measure.
AB 1094 (Conway) Confidential Destruction of Records (Chapter 134)
This bill requires all licensed businesses, including real estate firms, to take
all reasonable steps to confidentially dispose of records containing personal
information. Records containing, but not limited to, a name, social security
number, signature, address, telephone number, and account numbers are
generally considered records containing personal information. This bill
allows customers to recover civil penalties for violations of the law. Check
the Office of Privacy Protection web site for more information.
AB 1160 (Fong) Translation of Loan Terms (Chapter 274)
This bill requires lenders to provide a summary of the loan terms in
Spanish, Chinese, Tagalog, Vietnamese, or Korean if the loan was
negotiated primarily in one of those languages.
SB 36 (Calderon) Enacts the Federal SAFE Act (Chapter 160) in CA
This measure resulted from the passage of federal legislation; see Title V of
HR 3221. SB 36 requires residential mortgage loan originators to pass an
exam and register in a national database. It also requires residential
mortgage loan originators licensed by DRE to obtain an endorsement on
his or her license in order to originate residential loans. Finally, the bill
requires real estate brokers that originate residential mortgage loans to
submit business activity reports. Residential mortgage loan originators
licensed by the DRE will need an endorsement on his or her license by
January 1, 2011.
SB 94 (Calderon) Bans Advance Fees for Loan Modification Services
(Chapter 630)
This urgency legislation prohibits any person, including real estate
licensees and lawyers, from demanding or collecting an advance fee from a
consumer for loan modification or mortgage loan forbearance services
affecting 1-4 unit residential dwellings. As an urgency measure, it became
effective upon the Governor’s signature on October 11, 2009. Most of the
provisions of SB 94 will sunset on 1/1/2013 unless otherwise extended by
new legislation.
Appraisal Management
SB 237 (Calderon) Appraisal Management Companies (Chapter 173)
The Real Estate Appraisers’ Licensing and Certification Law provides for
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Companies serve as an
intermediary between lenders and
appraisers. They manage panels
of fee appraisers and perform the
administrative elements needed
to process and fulfill individual
appraisal assignments for
lenders.
the licensure and regulation of real estate appraisers and vests the duty of
enforcing and administering that law with the Office of Real Estate
Appraisers (OREA). Current law does not regulate “appraisal management
companies” (AMCs). This bill creates a registration program for AMCs
within the OREA and would require AMCs to meet similar existing licensing
program requirements for independent appraisers. This bill also specifies
and clarifies prohibited acts by AMCs as well as others who have an interest
in a real estate transaction.
SB 239 (Pavley) Mortgage Fraud (Chapter 174)
This bill makes it a crime to commit mortgage fraud. The bill broadly
defines fraud as providing false information to any party in a mortgage loan
transaction that is relied upon by any party to the mortgage transaction.
Prior to SB 239, a person, other than the loan applicant, who made false
financial statements in connection with a mortgage was guilty of a
misdemeanor, punishable by a fine not exceeding $10,000, by
imprisonment in a county jail not exceeding one year, or by both the fine
Borrower imprisoned for making a and imprisonment; and by restitution to the victim, as specified. SB 239
makes “mortgage fraud” a criminal offense punishable by imprisonment in
“liar loan.” ☺
the state prison for 16 months, or two- or three-years, or in a county jail for
not more than one year. Mortgage fraud may only be prosecuted when the
Grand Theft: Theft of property
valued in excess of $400.
value of the fraud meets the threshold for grand theft , as specified.
SB 407 (Padilla) Property Transfers: Plumbing Fixtures Replacement
(Chapter 587)
This bill requires the replacement of all non-water conserving plumbing
fixtures, as defined, in commercial and residential properties built prior to
1994 with water-conserving fixtures by either 2017 or 2019, depending on
the type of property.
Single family residences, by January 1, 2014, when making certain building
alterations, owners must replace noncompliant plumbing fixtures with waterconserving fixtures. By January 1, 2017, all noncompliant plumbing fixtures
must be replaced with water-conserving plumbing fixtures. A seller must
disclose to his buyer whether his home’s plumbing complies to water
This toilet flushes with greywater conservation requirements.
from attached washing machine.
2.1.2
DRE REGULATIONS
2.1.2.1
BROKER’S MAINTENANCE OF RECORDS
Real Estate Bulletin, Fall 2008
Real estate brokers are required to maintain books and records (“records”)
that were prepared in connection with all transactions for which a real
estate license is required. The failure to do so constitutes a basis for
disciplinary action against the broker’s license pursuant to BPC §10148.
BPC §10148 requires a licensed real estate broker to retain copies of all
listings, deposit receipts, canceled checks, trust records, and other
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documents executed by the broker, or obtained by the broker, in connection
with any transactions for which a real estate broker license is required.
Brokers must retain these records for a period of three years from the close
of the transaction or from the date of the listing if the transaction was not
consummated.
Storage of Records on Electronic Media
In complying with BP §10148, some real estate brokers experience storage
issues such as limited onsite storage space or costs, security, and
accessibility issues related to use of off-site locations.
CR §2729 provides an alternative. A real estate broker can avoid storage
costs related to bulky transaction files and other real estate documentation
by use of electronic image storage media. Electronic image storage media
may be used to retain and store copies of all documents executed or
obtained by the broker in connection with any transaction for which a real
estate broker license is required.
Copies of real estate documents such as listings, deposit receipts,
canceled checks, trust records and any other type of real estate related
documents can be stored on an electronic image storage media if the
following requirements of CR § 2729(a)(1 through 6) are satisfied:
They are referring to the
ubiquitous CD-R and DVD-R
storage media; the same
technology used to burn music to
disks.
1.
The electronic image storage shall be non-erasable “write once, read
many” (“WORM”) , that does not allow changes to the stored
document or record.
2.
The stored document or record is made or preserved as part of and
in the regular course of business.
3.
The original record from which the stored document or record was
copied was made or prepared by the broker or the broker’s
employees at or near the time of the act, condition, or event
reflected in the record.
4.
The custodian of the record is able to identify the stored document
or record, the mode of its preparation, and the mode of storing it on
the electronic image storage.
5.
The electronic image storage media contains a reliable indexing
system that provides ready access to a desired document or record,
appropriate quality control of the storage process to ensure the
quality of imaged documents or records, and date ordered
arrangement of stored documents or records to assure a consistent
and logical flow of paperwork to preclude unnecessary search time.
6.
Records copied and stored under this section shall be retained for
three years pursuant to BPC §10148.
Additionally, CR §2729 does require the broker to maintain at the broker’s
office a means of viewing copies of documents or records stored pursuant
to this regulation. Also, the broker shall provide, at the broker’s expense, a
paper copy of any document or record requested by the DRE.
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CR §2729 thus allows a real estate broker to utilize current technology
while at the same time complying with BPC §10148. Done properly, a real
estate broker can maintain real estate documentation as required while
saving valuable office space or reducing the concerns about the high
storage costs and adequate protection of his or her real estate files at an
offsite facility.
Production of Records
The DRE has the right to examine, inspect, and copy a real estate broker’s
records upon reasonable notice. Although the law on this subject is clear,
there are brokers who refuse to produce records when requested to do so.
The failure to do so also constitutes a basis for disciplinary action against
the broker’s license pursuant to BPC §10148.
When a representative from the DRE requests records in connection with a
specific transaction, audit, or office survey, the best course of action is to
comply. Further, the records produced must be full, complete, and
unaltered. To do less could establish a basis for disciplinary action.
Safeguarding and Non-Abandonment of Records
Since the downturn in the California real estate market, some brokerages
have closed their operations and simply abandoned records. In certain
cases brought to the attention of the DRE, hundreds of files were left
behind and/or scattered about in vacated offices. Many of those files
contained private, personal, sensitive, and confidential information and
documents. Such abandonment of records demonstrates a flagrant and
inexcusable disregard for the privacy rights of the principals and other
individuals to whom the records are related.
Despite the closing of an office, a real estate broker is still required to retain
and maintain records for the period required by law. It is clearly
unacceptable for, and a dereliction of duty by, a broker, when ceasing the
broker’s business operations, to simply leave behind records containing
personal information. The failure by a broker to adequately address privacy
and security issues with respect to the treatment of records of personal
information can have very harmful consequences for the individuals to
whom this information relates.
The abandonment of records can raise a whole host of problems for the
real estate broker, including forming the basis for disciplinary action by the
DRE and possible civil liability under federal and state law.
CC §1798.81.5 requires businesses that collect specified personal
information (name plus social security number, driver’s license or state
identification number, financial account number, or medical information) on
California residents to use reasonable and appropriate safeguards to
protect it from unauthorized access, destruction, use, modification, or
disclosure. A good source of information about personal information
security and privacy protection is the California Office of Information
Security and Privacy Protection. It offers guidance and advice on best
practices for businesses, security breach notification, privacy laws, and the
like.
The point that must be underscored here is that brokers have a duty to
ensure that records of personal information are retained, safeguarded,
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returned/transferred, and ultimately disposed of in a secure and confidential
manner.
2.1.2.2
CLARIFYING THE LICENSE ID NUMBER DISCLOSURE
REQUIREMENT
The Department has received many inquiries from licensees requesting
clarification of the requirements of BPC §10140.6, which took effect on July
1, 2009. Among other things, that section requires licensees who are acting
as agents in transactions to disclose their license numbers on all solicitation
materials intended to be the first point of contact with consumers, and on
real property purchase agreements when acting as agents in those
transactions.
The new law was created in part as a reaction to the increasing use of
“nicknames” by licensees (names which are not the licensee’s legal name
as it appears on the license or the Department’s database). The timing of
this issue coincided with the unprecedented entry of unlicensed individuals
into the home loan modification arena and resulting mortgage fraud
schemes. The public has good reason to seek assurance that the person
soliciting them to provide services in real estate related transactions is
properly licensed.
With the enactment of BPC §10140.6, the Legislature, the Governor, the
Department, and industry leaders agree that it is time for licensees to make
clear their licensed status from the moment an initial contact with a
consumer is made. This practice has already been adopted by other
licensed professions, such as contractors, and similar disclosures are made
by attorneys. Experienced attorneys, in particular, display their relatively
low license number with pride; the same scenario can be applicable to the
real estate license number.
To clarify the new law, the Commissioner prepared and adopted CR §2773,
which requires that the name and eight digit license number of a broker or
salesperson, when engaging in acts for which a license is required, be
disclosed on materials intended to be the “first point of contact” with
consumers. If those materials also include the name of a corporate broker
or an employing broker of a licensed employee or broker associate whose
solicitation it is, the license number of the corporate broker or individual
employing broker need not also be included on that licensed employee or
broker associate’s solicitation materials.
BPC §10140.6(b)(2) states that the term “solicitation materials intended to
be the first point of contact with consumers” includes business cards,
stationery, advertising fliers, and other materials designed to solicit the
creation of a professional relationship between the licensee and the
consumer.
The new Commissioner’s Regulation clarifies the materials which require
disclosure of the license number. In addition to business cards and
stationery, the regulation also requires the license number to be included
on (i) websites owned, controlled, and/or maintained by the soliciting real
estate licensee, and (ii) promotional and advertising fliers, brochures, email
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and regular mail, leaflets, and any marketing or promotional materials
designed to solicit the creation of a professional relationship between the
licensee and a consumer, or which is intended to incentivize, induce, or
entice a consumer to contact the licensee about any service for which a
license is required.
Some promotional materials, such as giant pencils and refrigerator
magnets, would likely not qualify as solicitation materials “designed to
solicit the creation of a professional relationship”… and thus, would not
require the license number.
The new law also excludes certain materials from the license number
requirement. Namely, advertisements in print or electronic media, “For
Sale” signs, and classified rental advertisements that provide the telephone
number at the premises of properties offered for rent or the address of the
property offered for rent. “Advertisements in electronic media” includes
radio, cinema and television ads, and the opening section of streaming
video and audio. Also excluded is print advertising in any newspaper or
periodical, as well as “For Sale” signs placed on or around a property
intended to alert the public the property is available for lease, purchase or
trade.
Recapitulation:
Where a licensee’s name appears in a solicitation, as defined by the
statute, the eight digit number of that licensee should also appear.
Where more than one licensee’s name appears (as with a “team”
concept), each licensee’s name should be accompanied by their
license number. This does not apply to employing brokers or to
corporate brokers whose name or logo appears on a solicitation by
their employed salespersons or affiliated brokers, so long as the
name and number of the employed salesperson or affiliated broker
does appear on that solicitation.
Finally, there are no exceptions or qualifications within the code
section or new regulation excluding particular real estate market
types or segments, such as “commercial” or “industrial” real estate
brokerage. “Consumer” as used in the statute includes all potential
clients/customers of all real estate licensees.
2.1.2.3
BROKER SUPERVISION: THE BUCK STOPS HERE
Real Estate Bulletin, Summer 2010; by Martha Rosett, Real Estate Counsel
All too often, the disciplinary cases the DRE investigates and prosecutes
stem from complaints about real estate transactions in which the
designated broker-officer responsible for supervising the sales force was an
absentee or pro forma “rent-a-broker.” A “rent-a-broker” refers to a broker
who is the broker of record on the Department’s records but who abdicates
all actual responsibility to another individual, usually the true owner of the
company, who may or may not be licensed or qualified to manage a real
estate business. While there are legitimate ways to delegate some legal
responsibility for supervision to other licensees, California’s Real Estate
Law requires that the designated broker-officer of a real estate corporation
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and the employing broker of salespersons in a sole proprietorship,
supervise the sales force.
Under the Real Estate Law, broker supervision is key to achieving
maximum protection for the public who engage in real estate transactions.
In hiring and managing the sales force, reviewing and disseminating
advertisements, protecting and accounting for trust funds, and handling
escrows, brokers ensure that strict standards are adhered to, and that only
trustworthy, competent individuals will be privy to the sensitive financial
information and matters involved in buying, selling, leasing and mortgaging
of real property. The Real Estate Law is set forth primarily in BPC§ 10000
et seq. and in the related rules set forth in the CR Title 10, Chapter 6 of the
California Code of Regulations (Regulations). The following is a discussion
of some sections of the BPC and Regulations relating to the supervision
requirement.
Broker’s Obligation to Supervise
A licensed real estate broker must supervise the real estate salespeople
who are employed under the broker. This is true for corporate brokers and
for “sole proprietor” brokers alike. There are no exceptions to this law.
Moreover, it is never acceptable for an unlicensed individual to supervise a
licensed real estate salesperson or to conduct licensed acts.
Specifically, BPC §10159.2 sets forth the primary broker supervision
requirement in which the designated licensed broker is responsible for
exercising sufficient supervision and control over his or her employees
necessary to achieve full compliance with the Real Estate Law. Where
there are other corporate officers who hold broker licenses and wish to act
in a supervisory capacity, they may do so providing that the corporation
enacts a corresponding corporate resolution and the resolution is promptly
filed with the DRE.
CR §2743 provides the very limited and specific criteria that must be
followed for the delegation of supervisory responsibility to other brokerofficers of a corporation. The corporate resolution assigning supervisory
responsibility over salespersons licensed to a corporate broker must make
reference to a specified business address or addresses of the corporate
broker, rather than by the listing of the names of salespersons subject to
the supervision. In this way, a broker may use the services of brokers and
salespersons to assist in supervising salespersons so long as the broker
does not relinquish overall responsibility for supervision of the acts of
salespersons licensed to the broker. Ultimately, it remains the designated
broker’s responsibility to ensure that only qualified personnel are allowed to
supervise the sales force and to ensure that the brokerage operates in
compliance with the Real Estate law. What happens, for example, if a real
estate salesperson who is being supervised by an officer other than the
designated officer does something wrong which is within the scope of his or
her employment? Depending on the facts and circumstances and the
nature of the violation, the designated broker-officer may still be
responsible along with the officer to whom supervision was delegated.
The supervision requirement in BPC §10159.2 is supported by BPC
§10177(h). Enacted in 1955, this subsection authorizes two causes for
disciplinary action:
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(1)
for any broker who fails to exercise “reasonable supervision” over
the salespersons practicing under his or her license, and
(2)
for any designated corporate broker licensee who fails to exercise
reasonable supervision and control of the activities of the
corporation for which a real estate license is required.
Hence, a broker’s failure to provide adequate supervision can lead to
disastrous consequences not only for the affected consumers but also for
the broker’s future as a real estate licensee.
In exercising reasonable supervision over the activities of their
salespersons, CR §2725 requires that brokers establish policies, rules,
procedures, and systems to review, oversee, inspect and manage:
(a)
Transactions requiring a real estate license.
(b)
Documents which may have a material effect upon the rights or
obligations of a party to the transaction.
(c)
Filing, storage and maintenance of such documents.
(d)
Handling of trust funds.
(e)
Advertising of any service for which a license is required.
(f)
Familiarizing salesperson with the requirements of federal and state
laws relating to the prohibitions against discrimination.
(g)
Regular and consistent reports of licensed activities of
salespersons.
The form and extent of such policies, rules, procedures and systems must
take into consideration the number of salespersons employed and the
number and location of branch offices. In other words, a designated broker
should keep track of who is working for the company, what the license
status is of employees, and out of which office they are working. A broker
also must have a system in place to monitor the overall policies, rules,
procedures and systems. Brokers may use the services of other brokers
and salespersons to assist in administering these supervisory policies and
procedures, so long as the broker does not relinquish overall responsibility
for supervision of the acts of salespersons licensed to the broker.
Ensuring License Requirements are Met
Any person, individual or corporation, who engages in the business of, or
advertises as, a real estate broker or a real estate salesperson must first
obtain a real estate license from the Department. It is therefore incumbent
upon brokers to hire licensed agents and ensure that only employees who
are licensed perform activities requiring a real estate license. It is the
employing brokers and/or the designated broker officers of corporations
who are responsible for ensuring that agents are properly licensed and that
unlicensed employees do not perform activities requiring a real estate
license. In this way, supervising brokers ensure that the sales force is
licensed and has the basic requisite knowledge, skills, experience and
character to represent members of the public in real estate transactions.
Page 80
Because corporations are “persons” under the Real Estate Law,
corporations may obtain real estate broker licenses. However, a licensed
corporate broker may act only through a designated corporate officer who
is a licensed broker. BPC §10211 requires that the corporation designate a
supervising broker in its application for a real estate license. If there is no
licensed officer designated as the supervising broker for the corporation,
the corporation cannot perform licensed activities. A designated brokerofficer of a corporation is, while so employed, licensed only to act for and
on behalf of the corporation as an officer. However, a designated brokerofficer may also hold a separate license through which he or she may act
as an individual broker. A corporate licensee engaging in the real estate
business when there is no designated broker-officer is acting in an
unlicensed capacity. This may subject the corporation to discipline by the
Department as well as to criminal penalties.
In addition, in order to be licensed by the DRE and to do business as a
corporate real estate broker, the corporation must be in good standing with
other agencies of the State. If a corporation, for example, has its corporate
status suspended or revoked, it is no longer a corporation in good standing.
The designated broker officer of a corporation is responsible for ensuring
compliance with this provision of the Real Estate Law.
Among the express administrative duties of supervision are the requirements that the broker physically possess the licenses of the salespeople he
or she employs. The salesperson license must reflect the current
employing broker. In addition, brokers must notify the DRE when hiring or
terminating a salesperson. Brokers must maintain written agreements
between the broker and each salesperson. The agreements must address
the broker’s supervision of licensed activities. Brokers must have and
maintain a definite place of business in California where licenses are
displayed and where consultations with clients take place. Fictitious
business names and the location of branch offices must also be on record
with the Department to be lawful. In addition, alternative business names
(doing business with a fictitious business name, or “dba”) and the location
of branch offices must be on record with the Department to be lawful. In
the case of a corporate broker, it is the duty of the designated broker to
ensure compliance with these rules. These latter examples of
administrative duties are part of the more general duties of supervision of
an individual broker’s employees or the designated supervising broker’s
duty to supervise the acts of a licensed corporation and its employees and
agents.
The supervising broker is also responsible for properly handling trust funds
and for maintaining trust account records, transaction records, and records
of payments, on behalf of the corporation.
Ensuring that all employees act with the utmost honesty and integrity and
adhere to their duties as fiduciaries is an inherent part of the supervising
broker’s responsibility. The decision to serve as a supervising broker,
either of a sole proprietorship or of a corporate brokerage, should not be
taken lightly. If any violations occur in the name of the corporation, the
designated broker may suffer the consequences. The buck stops with that
individual.
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2.1.3
LICENSE
2.1.3.1
THE ADMINISTRATIVE DISCIPLINARY PROCESS
One of the most important functions of the DRE is to protect the public and
the real estate profession from licensees who fail to adhere to their
professional and legal responsibilities from persons and entities that
engage in licensed activities without being licensed and from applicants for
licensure or renewal of a license who do not have the requisite honesty,
truthfulness, and integrity.
DRE investigates applicants for licensure and for renewal of licensure,
complaints and inquiries from the public, licensees, regulatory agencies
and others regarding unlicensed activities and unethical, deceptive,
unprofessional, and unlawful conduct by licensees. Sometimes DRE learns
that a license applicant or licensee has had another license issued by the
State or federal government suspended or revoked, discovers one or more
criminal convictions, or ascertains misconduct through its own audits and
compliance reviews of licensees. Or DRE might learn of a potential
disciplinary violation through the media.
The Legal section of DRE, which has attorneys in Sacramento and Los
Angeles, is responsible for, among other duties, the statewide prosecution
of disciplinary actions. In the last fiscal year, the Legal section filed about
1,900 formal actions.
California law authorizes the Commissioner and/or DRE to revoke or
suspend a person’s or entity’s real estate license, restrict the use of a
license, or refuse to renew or grant a license. A summary list of the types
of disciplinary actions and the germane laws and regulations is set forth in
the “Disciplinary Action” portion of the Real Estate Bulletin. The least
severe license discipline is known as a “public reproval,” which is a
censure, rebuke or reprimand issued by DRE that is a matter of public
record. The level of discipline sanction is dependent upon the violations by
the individual or entity penalized.
The Subdivided Lands Act is a
consumer protection law that
regulates the sale of subdivisions
and ensures public disclosures.
In the case of individuals and entities engaged in the practice of real estate
without being licensed or who violate the provisions of the Subdivided Lands
Act or other laws and regulations under the jurisdiction of the
Commissioner or DRE, DRE issues Desist and Refrain Orders. Such
administrative orders recite the results of DRE’s investigation, state the
reasons for the order, and command that the named person and/or entity
desist and refrain from certain specified acts. Failure to obey a Desist and
Refrain Order issued for the violation of certain offenses may be punishable
by a fine, imprisonment, or both fine and imprisonment. (See BPC §11023.)
Because DRE's disciplinary actions are conducted to protect the public and
are not penal in nature, DRE may, when appropriate, refer matters to law
enforcement authorities or to a criminal prosecution agency such as the
Department of Justice.
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Administrative Disciplinary Proceedings
What follows is a basic primer intended to give the reader a basic
understanding of, and to answer some common questions regarding, the
administrative disciplinary process and proceedings brought by DRE.
The Legal section initiates formal disciplinary proceedings by filing a
pleading called a “Statement of Issues” in connection with an application for
license matter or a pleading known as an “Accusation” in connection with a
matter pertaining to an existing licensee. In either case, the pleading sets
forth and describes the particular facts that form the basis for the
disciplinary action sought and asks for a hearing and a decision imposing
discipline.
As of the date of publication of this article, the majority of formal
administrative actions brought by DRE arise because an applicant for
licensure or a licensee is convicted of one or more crimes that meet certain
threshold tests. Yet there are many Accusation cases brought against
licensees based on some malfeasance in real estate transactions, improper
record keeping, and/or some other breach of duty or violation of the law.
Not all cases where formal disciplinary proceedings have been brought will
result in formal hearings. In some cases, both DRE and the Respondent
(as the individual or entity named in the pleadings and against whom
discipline is sought is known) agree to certain disciplinary sanctions by
entering into a negotiated agreement and signing a Stipulation and Waiver
in license application cases or a Stipulation and Agreement in cases
regarding an existing license.
If a Respondent fails to file a Notice of Defense, which essentially notifies
DRE that the Respondent objects to the pleading filed by the department
and wishes to proceed to a hearing on the merits, a default decision against
the Respondent will usually result. The Commissioner will thereafter enter
an Order imposing disciplinary action.
Those cases that proceed to formal hearings are decided by an
Administrative Law Judge under the auspices of the California Office of
Administrative Hearings. The administrative hearing process is conducted
in accordance with the California Administrative Procedure Act. See
§11370 and those sections that follow the California Government Code.
Burden and Standard of Proof
In a proceeding involving the issuance of a license, the burden of proof is
on the applicant to show that he or she is qualified to hold the license. The
standard of proof is a preponderance of the evidence which means that the
applicant must have stronger evidence of fitness for licensure, however
slight the edge in evidence might be. This is the standard of proof in civil
trials.
DRE has the burden of proof if the case involves disciplinary action against
a real estate licensee. The standard of proof is also greater in a case such
as this because a licensee is considered to have a property right in the
license. Here DRE must have “clear and convincing proof to a reasonable
certainty.” In order to prevail, DRE must have evidence indicating that the
matters to be proved are reasonably certain.
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The Hearing Process
An administrative hearing is a quasi-judicial, contested proceeding where
evidence is introduced and argument is made, and the hearing rooms
generally look like courtrooms. Some Respondents mistakenly believe that
administrative hearings are informal. They are evidentiary trials with only a
slight relaxation of evidentiary rules. A Respondent is entitled to be
represented by an attorney at all stages of the disciplinary process,
including the hearing and any appeals.
Respondents should be fully prepared to litigate and pursue their side of
the case by presenting evidence and facts favorable to them and/or by
challenging DRE’s charges and claims. In the case where criminal
convictions form the basis for DRE’s request for disciplinary action,
Respondents are permitted to introduce evidence of extenuating
circumstances by way of mitigation or explanation, as well as any evidence
of rehabilitation. CR §§ 2911 and 2912 provide criteria for determining
rehabilitation.
After the Formal Hearing
Factors in Aggravation: aka
After the formal hearing is conducted, the Administrative Law Judge issues
“aggravating factors”; Any fact or what is known as a “Proposed Decision,” which contains findings of fact,
circumstance that increases the
severity or culpability of an illegal factors in aggravation , mitigation, justification and rehabilitation,
conclusions of law, and recommended disciplinary action, if any.
act.
The Commissioner examines each case and may adopt or reject (which is
sometimes stated as “non adopt”) the Proposed Decision or he or she may
reduce the recommended disciplinary penalty.
If the Commissioner rejects the Proposed Decision, he or she may not
increase or enhance the penalty unless he or she reviews the record
including the transcript of the hearing and decides the matter himself or
herself by issuing a Decision After Rejection or unless another hearing is
held.
If dissatisfied with the Commissioner’s decision, the Respondent has a right
to petition the Commissioner for reconsideration, the right of appeal, by
what is known as a writ of mandate, to the Superior Court, and, if
necessary, to the appropriate California Court of Appeal, or to the California
Supreme Court.
The administrative hearing process is lengthy but it is designed to ensure
due process and to protect the rights of the individuals and entities
involved.
Applicants for a real estate license who are denied a plenary (or
unrestricted) license but granted a restricted license and licensees who
have their licenses suspended, revoked, or revoked with the right to a
restricted license, can petition the Commissioner for reinstatement of that
license or for removal of restrictions pertaining to any restricted license,
after a period of time has elapsed from the effective date of the decision.
The procedure and process of petitioning for reinstatement or removal of
restrictions will be described in a future article in the Real Estate Bulletin
{as of August 2010 we’re still waiting}.
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2.1.3.2
MORAL TURPITUDE NO LONGER A REQUIREMENT FOR LICENSE
REVOCATION
by Bob Hunt for Realty Times, October 15, 2007
Copyright© 2011 Realty Times®. All Rights Reserved. Used With Permission.
The peak was reached in 2008
with 548,000 active licensees – or
one in 52 adults in California has
a real estate license. As of April
2010, then number had dropped
to 490,000 with only about half
actively practicing (source).
As a result of recent legislation it is now somewhat easier for the
Commissioner to revoke or deny a real estate license than it was a year
ago. This may be a good thing. Currently there are somewhat more than
537,000 real estate licensees in the Golden State. That's a 20% increase
from just two years ago. Really, it looks like we have enough.
The legislation referred to was Assembly Bill 840 (Emmerson), which was
signed into law by the Governor on July 27. It undoes an unusual provision
of previous law that came to light last fall in the case of Petropoulos v.
Department of Real Estate.
In that case, the Commissioner had sought to revoke the license of an
agent who had pleaded guilty to misdemeanor battery against his thengirlfriend and had pleaded nolo contendere (no contest) to misdemeanor
battery against his former wife. At that time, BPC §10177(b), which applies
to real estate licensees only, provided that the Commissioner could
suspend, revoke, or deny the license of a person who had “… entered a
plea of guilty or nolo contendere to, or has been found guilty of, or been
convicted of, a felony or a crime involving moral turpitude … .”
In the Petropoulos case, a lower court ruled that the assaults, which were
misdemeanor offenses, had not involved moral turpitude. The
Commissioner did not contend this. Subsequently, California’s First
Appellate District Court of Appeal ruled that the DRE could not “take
disciplinary action against a licensee convicted of a misdemeanor unless
the offense involves moral turpitude.”
Findings of moral turpitude, as once were findings of “bad character,” are
liable to be subjective, to say the least. Requiring such findings in
misdemeanor cases, even if the misdemeanor is clearly related to the
functions and duties of a licensee, seemed an unwarranted restriction on
the disciplinary powers of the Commissioner.
Hence, Assembly Bill 840, which was sponsored by the DRE and
supported by both the CAR ® and the California Association of Mortgage
Brokers. It passed without opposition.
It is unlikely, of course, that the Commissioner’s newly-expanded
disciplinary powers will result in much of a dent being made in the state’s
current enormous real estate licensee population. Market forces will
probably take care of that {and so they did}. Applications to take the
salesperson’s examination were down 40% in the second quarter of this
year compared to the same quarter last year.
2.1.3.3
MORTGAGE BROKERING IN CALIFORNIA
by Truyly Sughrue, Real Estate Counsel, Real Estate Bulletin, Spring 2008
Mortgage brokers act as conduits and the principal points of contact
between mortgage consumers and those who loan mortgage monies. Is a
DRE license required in order to broker residential mortgage loans in
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California? The answer is maybe. There are two common licensing
options available to those wishing to operate as a mortgage broker: 1) a
real estate broker license under the jurisdiction of DRE, or 2) a California
Finance Lender (CFL) license under the jurisdiction of the Department of
Corporations (DOC), with limitations.
California Residential Mortgage
Lending Act authorizes mortgage
banks to originate and/or service
residential loans. A mortgage
bank (aka, “mortgage company”)
is a mortgage lender that sells all
the loans it originates in the
secondary market.
The purpose of this article is to provide an overview of the licensing
differences between DRE’s real estate broker licenses and CFL licenses
relative to mortgage brokering and some special considerations for persons
choosing to operate under a real estate broker and CFL license
simultaneously. It is important to note there are other alternatives for a
person to broker mortgage loans in California. For example, a licensed
California Residential Mortgage Lending Act lender is authorized to
provide brokerage services to a borrower by attempting to obtain a
mortgage loan on behalf of the borrower from another lender.
BPC §10131(d) permits any real estate broker licensee to operate as a
mortgage loan broker and sets forth a wide range of mortgage loan
brokerage functions that may be performed:
solicitation of borrowers or lenders,
negotiation of loans, and
collection of payments or performance of services for borrowers or
lenders in connection with loans secured directly or collaterally by
liens on real property or on a business opportunity.
BPC §10131.3 defines a specific statutory exemption from the real estate
licensing requirement for any person licensed as a CFL when acting under
the authority of the CFL license.
The CFL law is codified under Division 9 (commencing with §22000) of the
California Financial Code. CFL licensees are regulated by the DOC.
A number of factors differentiate real estate brokers from CFL licensees.
Some examples of these differences are discussed below.
1.
Real estate brokers, including when they are acting as mortgage
loan brokers, are fiduciaries of their clients. A fiduciary relationship
is a relationship involving a high degree of trust, fidelity, integrity and
confidence, and the exercise of professional expertise or special
knowledge. Being a fiduciary imposes the highest standard of care
on the broker and imposes duties including, but not limited to: the
obligation to exercise diligence and skill in representing a client, to
fully and truthfully disclose to a client all material facts, and to
exercise the utmost honesty, candor, and unselfishness toward the
client. A real estate broker must work in the best interests of his or
her principal.
A CFL licensee’s duties in connection with the making of loans are
specified by statute and administrative regulations. Unlike the case
with real estate licensed mortgage brokers, no court has held CFL
brokers have a fiduciary duty to the borrower.
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As a fiduciary, a mortgage broker should, in principle, be as vulnerable to
lawsuits alleging “breach of fiduciary duty” as are real estate agents but this
does not seem to be the case. As a fiduciary, a mortgage broker is legally
required to put his client’s interest before his own. As a fiduciary, the
mortgage broker should never encourage his client to falsify his income or
net worth, assist his client in purchasing a home he can not afford, collude
with appraisers and/or licensees to tweak estimated home values, or push
his clients into subprime loans for higher commissions.
Even if a fiduciary’s client is complicit, a fiduciary may never assist him in
breaking the law.
2.
A real estate broker has the ability to arrange mortgage loans for
consumers through a wide variety of lenders. The lenders can be
real estate brokers, banks, credit unions, licensed residential
mortgage lenders, private individuals, and other sources of
mortgage loans. CFL licenses are issued to both brokers and
lenders. A CFL broker engages in the business of negotiating or
performing actions in connection with loans made by finance
lenders. CFL brokers are limited to arranging loans through CFL
licensed lenders.
3.
The CFL license is an umbrella license. This means an employee
of a CFL licensee is not required to be licensed when working in the
scope of the person’s employment. CFL licensees can hire
employees to work under their CFL license and the employees do
not need to hold a license. However, a CFL licensee cannot allow
an independent contractor or other non-employee to use or operate
under the CFL license. This is considered a transfer or assignment
of the CFL license which is not permitted under the law. Therefore,
an employee arranging loans under a CFL license must be a W-2
employee.
A real estate broker may employ licensed salespersons to work
under the broker’s license. While a salesperson is considered an
employee for licensing purposes, the person may work as an
independent contractor, and compensation may be based entirely
on commissions. A salesperson properly licensed to a broker may
solicit and negotiate mortgage loans under the broker’s supervision.
A real estate broker may also employ unlicensed individuals. The
Real Estate Law allows employees of a broker to assist the broker
as long as the employee does not participate in negotiation and is
supervised. CR §2841 details activities which are not considered to
be a negotiation. The term employee refers to a W-2 employee.
4.
All persons engaged in the business of a finance lender must obtain
a license from the Commissioner of Corporations. In order to obtain
a CFL license an individual or organization shall:
submit an application and appropriate fee to the
Commissioner of Corporations,
include with the application financial statements indicating a
net worth of at least $25,000,
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maintain a surety bond payable to the Commissioner in the
amount of $25,000; and
furnish a full set of fingerprints for the purpose of the
Commissioner to conduct a criminal history record check.
Upon an opportunity to be heard, the Commissioner may
deny the application if the applicant has been convicted of a
crime or committed an act involving dishonesty.
The SAFE Act will require CFL
licensees (and all residential
lenders) to have 12 hours of CE
annually beginning in 2011;
however, this CE is not related to
the 45 hours of CE required to
renew a real estate license every
four years.
Unlike real estate brokers, no experience, examination, or particular
education is necessary for a CFL license ; there are no continuing
education requirements , and a CFL licensee does not need to maintain a
physical office in California. Senate Bill 998, effective January 1, 2008,
expands the DOC authority to bar persons from working with CFL licensees,
including employees from a company, if they have been subject to
disciplinary action by the DRE.
Operating as a CFL and a Real Estate Broker
Some real estate brokers obtain a CFL license and simultaneously broker
loans under both licenses. There is nothing in the law prohibiting this
practice and there may be reasons for a person to organize their business
this way. However, when a broker opts to arrange loans through both
licenses, it is important the broker ensure the brokerage is operating in
compliance with both regulatory schemes. Failure of a real estate broker to
ensure compliance may result in disciplinary action against one or both of
the licenses.
As noted above, with respect to mortgage loan activity, the Real Estate Law
provides an exemption from the real estate licensing requirement for any
person licensed as a CFL when acting under the authority of the CFL
license. Because the CFL license is an umbrella license, any employee of
the CFL licensee arranging mortgage loans under the CFL license would
be covered by this exemption. However, it is the responsibility of the broker
to establish [if] a loan was arranged under the authority of the CFL license
and falls under the exemption.
DRE has filed disciplinary actions against real estate brokers alleging
violation(s) of BPC §10137, “Unlawful Employment or Payment of
Compensation,” when the broker has been unable to establish the loan was
arranged under the authority of the CFL license. To establish a violation of
§10137, the DRE must show: (1) the person was not licensed as a real
estate broker or salesperson licensed to the broker, (2) the person engaged
in activity requiring a real estate license, and (3) the broker compensated
the unlicensed person.
The typical facts are a broker has hired and/or compensated one or more
independent contractors to solicit, negotiate, and arrange mortgage loans
on behalf of the broker. The independent contractor is not licensed by DRE
as either a real estate broker or salesperson. Upon an investigation by
DRE, the broker claims the loans were arranged under the CFL license.
However, because the person is an independent contractor the person is
not, and cannot be, working under the authority of the broker’s CFL license.
The broker’s activities do not fall under an exemption provided under BPC
§10133.1(a)(6). The broker is liable for a violation of BPC §10137 for each
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loan arranged in this fashion. Discipline of the real estate broker’s license
can range from a suspension to outright revocation.
In addition to discipline against a real estate broker’s license, a CFL
licensee operating in this fashion may be disciplined by the DOC. CFL
licensees are prohibited from sharing the commission with someone not
covered by the CFL license or an exemption. The payment of
compensation to independent contractors may constitute a violation of the
Finance Lender Law.
Finally, DRE may file and issue a Desist and Refrain (D&R) Order against
the unlicensed person for violation of the Real Estate Law. This D&R may
prohibit the person from being able to obtain a real estate license upon their
application. As of January 1, 2008, the DOC may also prohibit a person
from working as an employee of a CFL licensee if they have been subject
to a D&R by the DRE.
A real estate broker arranging loans under both licenses should consider
the separation of licensing functions. This may include an actual physical
separation. When a customer walks into a broker’s office it should be
determined if the loan will be arranged under the broker’s real estate or
CFL license. A broker might consider using separate business offices as
well as business names for each license.
In addition, brokers should have separate employment agreements for
persons working under each license. DRE has discovered, during
investigating complaints, brokers using the same employment agreement
for an individual working under either a real estate license or a CFL license.
This is often the first sign there may be additional violations in the broker’s
day-to-day operations. Employment agreements should specifically set
forth what license the individual is being hired to work under, how they will
be employed, and how they will be compensated.
Please note this article is intended to provide only a general overview of the
CFL law. For more detailed information you should contact the DOC,
and/or visit their Web site at www.corp.ca.gov.
2.1.3.4
REAL ESTATE AUCTIONS
In today’s housing market, auctions are increasingly being used to sell real
property. An indication of their popularity is the number of radio, television,
newspaper, and Internet advertisements promoting real estate auctions.
However, the use of auctions as a marketing and sales strategy is not new.
Auctions have certain advantages such as bringing together multiple parties
to compete for the property or properties and the ability to set the terms and
a date certain for the sale of the property or properties. But they do raise
some issues related to the laws and regulations enforced by the DRE.
License Requirements
A real estate broker license is not required for the people who simply “cry”
or “call” an auction, unless they do more in connection with the sale and/or
financing of the properties solicited for sale and then sold by auction.
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Yet a California real estate license is required to solicit sellers and buyers
of real property. In addition, a real estate license is required to negotiate
the price that is established through the auction, the actual contract for the
sale of the property, and other documents relating to the purchase of the
real property after the bidding has been concluded. Consequently, a real
estate licensee must be on site during the auction calling process.
Properties offered for sale at auctions are often made available for
inspection by prospective buyers prior to the auction. Use of unlicensed
assistants to sit at the properties during the inspections is allowed so long
as they do not engage in any activity that would be considered soliciting or
negotiating. For example, unlicensed assistants would be allowed to hand
out pre-printed materials but not discuss the price or any features of the
house.
To the extent that the property to be auctioned is promoted prior to the
auction, a responsible real estate licensee is required to ensure compliance
with the DRE’s prohibition against false and misleading advertising.
Furthermore, any dissemination of print, radio, Internet and/or television
advertisements, or even “cold-calling” on the telephone, that is designed to
cause someone to buy or sell a home through an auction constitutes
solicitation and requires a real estate license.
For a fuller understanding of the activities which require a real estate
license, see BPC §10131.
Internet Auctions
Real estate agents who participate in activities requiring a license in the
context of an Internet auction are subject to the same licensing and other
rules as “brick and mortar” brokerages. For instance, all brokers licensed by
the DRE are required to have a definite place of business within the State of
California (BPC §10162). So brokers who conduct business over the
Internet are required to have and maintain a definite place of business
where the license is displayed and where consultations with clients are or
can be held.
In California, Internet auctions of properties “being foreclosed” (under the
power of sale in a deed of trust or mortgage) are not permitted. Sales of
foreclosures via the auction process can only be consummated when
bidders are present and bid in person in the county or counties where the
properties are located. See CC §2924(g). Once the foreclosure is
consummated the property can subsequently be sold via the Internet
auction.
§2770 of the Real Estate Commissioner’s Regulations provides information
regarding advertising and the dissemination of information on the Internet.
Licensees from Other States
A real estate license issued by another State is not sufficient to conduct
licensed real estate auction activity in California since California does not
have reciprocity with any other state.
Property Disclosures
Exception: Civil Code §1710.2
As with other real estate sales, all known defects affecting the value or
absolves anyone from liability for desirability of the property to be auctioned must be disclosed. This includes
nondisclosure of AIDS related
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deaths, regardless of how
recently the death may have
occurred.
disclosure of extrinsic facts not related to the physical condition of the
property. For example, a death must be disclosed if it occurred on the
property within three years of the date of the offer to purchase .
Subdivisions
If a CID, the subdivision’s CC&Rs A seller who sells real property located in a subdivision (as defined in BPC
and other material disclosures
§§11000, 11000.1, and 11004.5) through an auction is required to comply
concerning the subdivision.
with the Subdivided Lands Law. That means a Public Report must be
obtained and provided to prospective purchasers [BPC §11018.1 (a)j] .
Auction Parameters and Rules
In addition to all of the above, a seller using the auction process must
clearly disclose to all potential buyers, among other things, the type of
auction, bidding rules and methods, and qualifications, restrictions, and
disclaimers being used for the sale.
2.1.3.5
SAFE MORTGAGE LICENSING ACT
The following article is entitled “Update on SAFE Mortgage Licensing Act”.
It updates an earlier article about the act. We follow this article with
excerpts from two subsequent articles which provide further updates.
In the Spring 2009 issue of the Mortgage Loan Bulletin and the Summer
2009 issue of the Real Estate Bulletin we discussed the Secure and Fair
Enforcement Mortgage Licensing Act (SAFE Act) of the Housing and
Economic Recovery Act of 2008. The bill was signed into law on July 30,
2008 to enhance consumer protection and reduce fraud in mortgage loan
transactions. SAFE requires all 50 states and five territories to put into
place a licensing system for mortgage loan originators that meets the
minimum requirements of the SAFE Act. We reported that the Conference
of State Bank Supervisors (CSBS) and the American Association of
Residential Mortgage Regulators (AARMR) created, and will maintain, the
Nationwide Mortgage Licensing System and Registry (NMLS&R) to
streamline the licensing process with oversight by HUD. The NMLS&R will
contain a single license record for each mortgage loan lender, broker,
branch and mortgage loan originator which can be used to apply for,
amend, and renew a license in any state.
Although all licensees who broker
loans must register with the DRE,
only licensees who broker
residential loans need the MLO
endorsement.
To search the NMLS database
click here.
The SAFE Act mandates that each person who meets the definition of a
mortgage loan originator must meet certain minimum pre-licensing and
continuing education requirements in order to be licensed in any state.
Each person must also take and pass a test consisting of a national
component and a state component. Those tests are currently being
developed and will be required in addition to the real estate salesperson or
broker examination. Each mortgage loan originator will be required to
provide fingerprints to the NMLS&R to obtain criminal background histories
through the FBI and must authorize NMLS&R to obtain an independent
credit report from a consumer reporting agency. The SAFE Act also
mandates mortgage call reports, reporting of enforcement actions, and
certain public access .
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When registering with the NMLS&R, each person will be issued a unique
identifier. This unique identifier will not replace the real estate license
identification number but will allow information to be shared among states
in the event of complaints and/or disciplinary actions. It is anticipated that
the DRE will issue an endorsement as part of the real estate licensee’s
broker or salesperson license for those persons engaging in mortgage loan
activities. Each {residential} mortgage loan originator would hold a
California real estate license plus the endorsement. The endorsement will
be renewed annually while the real estate license will remain on a four-year
renewal cycle.
Two bills, Senate Bill 36 (Calderon) and Assembly Bill 34 (Nava), were
introduced this year in the state legislature to implement the SAFE Act in
California. SB 36 passed both houses, is enrolled and on its way to the
Governor’s desk for signature, while AB 34 failed passage in the Senate.
Information on these bills can be found at www.leginfo.ca.gov. If the
Governor Schwarzenegger signed
Governor signs SB 36 into law , the DRE will begin transitioning to the
SB 36 in October 2009.
NMLS&R on March 1, 2010 with endorsements being issued after that date.
The Department of Corporations is also working to implement a SAFEcompliant licensing system for all mortgage loan originators under the
California Finance Lenders Licensing Law (CFL) and California Mortgage
Loan Act (Mortgage Bankers).
This article appeared as “Another Update on the Safe Mortgage Licensing
Act” and has been abridged.
Real estate licensees who meet the definition of a residential mortgage
loan originator (MLO) must meet the requirements outlined in the SAFE Act
by December 31, 2010. After all of the requirements are met, DRE will
issue a mortgage loan originator (MLO) license endorsement as authorized
under a separate real estate license. This endorsement will need to be
renewed every year. This endorsement will carry a nationwide
identification number known as a “unique identifier” which will be assigned
by the NMLS&R when a MLO applicant registers on the system. The DRE
license identification number will continue to be used for the “base” real
estate license and the term of the real estate license will not change. Real
estate licensees will continue to be responsible for filing the necessary
renewal and change requirements to maintain their four year real estate
license.
Real Estate Bulletin, Summer 2010
Abridged from an article entitled, “One More Update on the SAFE Act!”
Licensees needing an MLO
endorsement should consult the
DRE home page for the latest
details.
Page 92
As of March 1, 2010, the NMLS&R began allowing real estate licensees to
register and start the process to obtain a MLO License Endorsement.
Applicants for the MLO License Endorsement should complete the following
items through the NMLS&R by September 15, 2010 to allow the Department
sufficient time to review and approve the endorsement. The following
information provides an overview of the requirements to obtain a Mortgage
Loan Originator License Endorsement. DRE anticipates issuing the
endorsements before this Fall.
1.
Online Application – To be completed and accessed through the
NMLS&R
MU1 form for companies.
MU2 form for officers.
MU3 form for branches.
MU4 form for individuals – This form will be completed by
each mortgage loan originator who will take a mortgage loan
application, or who will negotiate or offer to negotiate a
residential property mortgage loan. This includes brokers,
salespersons, and independent or contract loan processors
or loan underwriters. If a MLO License Endorsement
application is filed for a corporation, the corporation licensed
broker officer must also file this form.
2.
Qualifying Tests – Two tests are given by the NMLS&R. One is a
national component and one is a state component. If a passing
score is not obtained, the test can be retaken after 30 days. If a
passing score is not obtained after the first 3 attempts, then the test
can be retaken again after 180 days.
3.
Prelicensing Education – Existing DRE licensees can either take
20 hours of education through NMLS course providers OR have the
pre-licensing education waived by meeting the following
requirements:
1.
Register on NMLS and file a MU4 form by August 31, 2010.
2.
Pay a $15 fee when requested by email.
3.
Maintain an active DRE license through July 1, 2010 (or
through August 1st, 2010 if applying after July 1st).
4.
Criminal Background – New fingerprints are required. Review of
criminal background information will result in denial of the mortgage
loan originator license endorsement when there has been a felony
conviction in the last seven years or if there has been any conviction
for a felony involving an act of fraud, dishonesty, breach of trust, or
money laundering.
5.
Credit Report Authorization – Credit scores will not be the key to
the state evaluation of financial responsibility. However, an
applicant may be precluded from obtaining a mortgage loan
originator license endorsement where his or her personal history
includes any liens or judgments for fraud, misrepresentation,
dishonest dealing, and/or mishandling of trust funds, or other liens,
judgments, or financial or professional conditions that indicate a
pattern of dishonesty on the part of the applicant. The credit report
will be used to validate MU Application disclosures.
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6.
Disclosures – The application forms will include disclosure
questions about the applicant’s background and will require him or
her to forward copies of these disclosures to the Department’s
licensing section with attached copies of any evidence, explanation,
or clarification that may be appropriate.
7.
Fees – Pay the required fees through the NMLS registry system. All
fees are non-refundable.
Loan Processors and Underwriters
The SAFE Act requires that independent or contract loan processors and
underwriters must also register with the NMLS&R as Mortgage Loan
Originators. The MLO License Endorsement will be added to the DRE
Broker License as an MLO Endorsement. Processors or underwriters who
do not already have a DRE Broker License will have to obtain one by
December 31, 2010 or before doing any activities as an independent or
contract loan processor or underwriter after December 31, 2010.
Arranging Seller Carry-Back Transactions
Licensees who enter into a listing agreement to sell property and help the
seller arrange carry-back terms for the sale but are not compensated by a
lender for originating the loan will not be required to obtain an MLO License
Endorsement.
Department of Corporations Applicants
Applicants for an MLO License Endorsement who will be working for a
Department of Corporations (DOC) licensee may be able to request
certification of the 20 hours of pre-licensing education if they currently hold
a DRE license. Contact the DOC for instructions.
For frequently asked questions and the most current information, please
visit the DRE’s Web site at www.dre.ca.gov.
2.1.3.6
REAL ESTATE LICENSE CAN BE EASILY LOST
by Bob Hunt for Realty Times, January 19, 2010
“Bad facts make bad law,” they say, and the recent case of Robbins v.
Davi, heard by California’s Second Appellate District Court of Appeal drives
that point home for real estate licensees.
The Court affirmed the trial court’s
decision; that is, it agreed with the
Commissioner’s decision to
revoke Mr. Robbins’ license.
Did I say the facts were bad? Try this: Real estate broker and attorney,
Lance Robbins, both owned and managed numerous “slumlord” apartments
in the city of Los Angeles . This, as acknowledged by Robbins’s attorney,
was an extremely lucrative business. The record suggests, though, that
Robbins took less than adequate care of the apartments under his control.
Between 1985 and 1995, Robbins had been convicted of some 50
municipal building code violations. He was twice disciplined (1991 and
1994) by the State Bar for “facts and circumstances surrounding habitability
violations in properties” that he owned.
These violations were: 1)
unlawful obstruction of buildings,
2) failing to test a fire signal
system, 3) and failing to inspect
In January of 2001, Robbins pleaded nolo contendere and was convicted of
three misdemeanor violations of the fire protection and prevention
provisions of the Los Angeles Municipal Code . He was fined $100 and
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fire extinguishers.
placed on summary probation for 18 months. In March of 2003 the DRE
filed an accusation alleging that Robbins’s convictions constituted cause for
the suspension or revocation of his license as a broker.
The original charges involved issues of moral turpitude, but subsequent
rulings have effectively removed that as a cause of action. Nonetheless,
charges remained based on the claim that Robbins’s crimes were
“substantially related to the qualifications, functions or duties of a real
estate licensee.”
According to California law, if a crime is so related to a licensee’s
qualifications, functions, or duties, the license may be revoked. But,
“licensing authorities do not have unfettered discretion to determine
whether a given conviction is substantially related to the relevant
professional qualifications.” The authorities are required to develop criteria
to aid them in making that determination.
The DRE has developed such criteria in a manner that many think is
distressingly broad. Namely, a crime shall be considered substantially
related “…if it involves…doing of any unlawful act with the intent of
conferring a financial or economic benefit upon the perpetrator…”.
Presumably, then, for example, an attempt to fix a horse race or a high
school basketball game might be considered “a crime substantially related
to the qualifications, functions, or duties of a real estate licensee.”
Because Robbins’s violations were related to a profit motive, the court
agreed that they fit the criteria for license revocation. This is a result that
many concerned licensees think is too broad. Any illegal act aimed at
making a profit will fit the definition. It need not have anything to do with
the profession in question. Presumably, failing to pay a traffic fine might
result in a license revocation. That seems excessive.
While many concerned real estate professionals were inclined to protest
the court’s decision, those sentiments were overcome by the
egregiousness of Robbins’s actions. Who would want to appear to be on
his side? Regrettably, this is the way that bad law sometimes gets made.
I agree with Mr. Hunt’s disapproval of the Court’s denial of Mr. Robbins’
petition. If Mr. Robbins had run a luxury condominium instead of lowincome housing and had been cited for the same misdemeanors, I doubt
the Bar would have disciplined him or the Commissioner would have
revoked his license.
2.1.4
FAIR HOUSING
2.1.4.1
FEDERAL COURT RULES ON INTERNET HOUSING DISCRIMINATION
CASE
by Bob Hunt for Realty Times, April 24, 2009
Discrimination is illegal only if
based on one of the 13 protected
classes: race, color, religion, sex,
national origin, familial status,
disability, sexual orientation,
We know it is against the law to discriminate in housing . You can’t run
newspaper ads stating preferences or indicating rejection on the basis of
race, religion, gender, age, etc. You can say “no smokers,” but you can’t
say “no Presbyterians.”
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marital status, ancestry, source of
income, and age.
At least you can’t run discriminatory ads in the physical world of newsprint
and magazines. But what about cyberspace? Can housing discrimination
be practiced on websites? It’s not quite as clear. A recent decision by the
United States Court of Appeals for the Ninth Circuit (Fair Housing Council of
San Fernando Valley and The Fair Housing Council of San Diego v.
Roommates.com) purports to make the rules more clear, but whether it did
so remains to be seen.
When we say “you can’t run discriminatory ads” what we mean is that the
publisher of the ad will have liability. So, naturally, publishers seek to avoid
such ads. Many real estate agents have had experience with this. Indeed,
as publishers have worked together with various fair housing groups, some
pretty astounding measures have resulted. Lists of acceptable and
unacceptable words and phrases have been developed. Don’t call a unit a
“bachelor pad” or describe a home as perfect for “empty nesters.” The ad
will be rejected; the publisher doesn’t want to get into trouble.
But different rules have evolved for ads on websites. And with good
reason. When an agent or a landlord sends an ad to a newspaper or
magazine, someone sees it before it is set for type. There is an opportunity
to screen the content. It’s not the same on the Web. Everyday on a myriad
of websites hundreds of thousands of people are posting ads, messages,
claims, and accusations.
A person sits down at a keyboard, types in whatever they like, and the next
thing you know there it is for viewing. (I acknowledge, some sites can and
do filter for certain types of language, words, and expressions; but on the
whole, it’s pretty hard to block all the objectionable things that can be
phrased in so many ways.)
In 1996 Congress enacted the Communications Decency Act (CDA). A
part of that act, specifically §230, was intended to provide safe harbor for
website operators who were simply passing through information or content
created by others. An important application of §230 occurred in the March,
2008, decision from the Seventh Circuit Court of Appeals (Chicago Lawyers’
Committee for Civil Rights Under Law, Inc. v. Craigslist, Inc.) Craigslist, a huge Internet
classified ads directory, had been sued for fair housing violations because
of discriminatory ads that had been posted by users of Craigslist.
Some argued that, because Craigslist did do some screening (it solicits
notification from readers) and did remove some ads, that it should be held
accountable for the content of ads appearing on its site. The court noted,
though, that §230 does provide protection for ‘good Samaritan’ blocking
and screening of offensive material. As long as the website operator has
not been the creator or developer of offensive content it will not be held
liable for failing to find all the offensive material that had been submitted to
it.
The Roommates.com case posed a slightly different scenario with a
somewhat different result. According to the court record, “Roommate [the
website operator name is singular] requires each subscriber to disclose his
sex, sexual orientation, and whether he would bring children to a
household. Each subscriber must also describe his preferences in
roommates with respect to the same three criteria … .” Also, the site
“encourages subscribers to provide ‘Additional Comments’ describing
themselves and their desired roommate … .”
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As of August 2010, we couldn’t
find anything about the resolution
of the case.
The Fair Housing Councils sued Roommate in federal court alleging
violation of the Fair Housing Act but the district court dismissed the suit on
the grounds that Roommate was immune under §230 of the CDA.
However, the Ninth Circuit court reversed the dismissal and sent the case
back for trial.
The appellate court noted that Roommate “created the questions and
choices of answers [by dropdown menus] and designed its registration
process around them.” By doing so and by incorporating the answers into
the operation of its search system the court reasoned that Roommate
became a developer of content, not simply a pass-through. (Interestingly, it
said that Roommate would not itself be considered a developer of content
simply by providing the “Additional Contents” section.) And it noted that the
content developed by Roommate, as well as the mere act of asking the
questions, could be violations of the FHA. Hence, it sent the case back for
trial on those issues.
The court made it quite clear that it would be completely legal to ask
questions about age, race, religion, and a variety of other things if one were
operating an Internet dating registry. That’s because there is no Fair
Dating Act that prohibits such things. Whether similar questioning and
sorting can be done when landlords and tenants are being matched is
another issue.
2.1.4.2
REALTY VIEWPOINT: FAIR HOUSING GROUPS NEED TO BE
REGULATED
by Blanche Evans for Realty Times, April 10, 2008
Discrimination is an ugly thing but so is unlimited power. When you think
about it, prejudice is one of the manifestations of power.
And that’s why it’s wrong for the federal and state governments to give
special powers to fair housing groups.
In trying to right the wrongs of housing discrimination, fair housing groups
have been given seed money to target real estate professionals and
landlords for violations. If they see one, they can shake the company or
landlord down for cash and threaten litigation if they don’t get a check
fast.
Imagine Dog the Bounty Hunter negotiating a cash settlement with felons for
their release and you’ve got a pretty good idea of what happens.
If the targeted companies or individuals don’t pay whatever fines the fair
housing group demands, the case moves forward at the state and/or
federal level in a lawsuit. Damages are awarded to the fair housing group,
not the person or persons who were actually harmed.
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And the demands for settlements can be ridiculously steep – millions for
steering violations levied against Coldwell Banker Residential’s Chicago
Gold Coast, an NRT company, and $4,000 against a California man named
Dan Bader renting part of his house. He advertised in Craigslist that his
480-square foot unit was “perfect for 1 or 2 professionals,” which the Fair
Housing Council of Orange County felt discriminated against families with
children.
Dan Bader -- He tells his own
story at his site.
What’s wrong with this picture is that the fair housing groups have unique
powers to enforce fair housing laws. They can act as prosecutor, court, and
collection agency but because they are funded by settlements, they have no
incentive to issue warnings and accept apologies. They want settlements.
What that means is that other forms of arbitration or punishment won’t be
used.
In Bader’s case, a few minutes of counseling could have easily solved the
matter. In NRT’s case, the offending real estate agents could have been
required to attend fair housing classes or had their licenses to practice
suspended or revoked.
Except that NRT was never told who the offending agents were nor was the
company supplied with any proof that the fair housing violations actually
occurred.
And folks, there’s something wrong with that. Fair housing groups are
either part of the government or they aren’t. If they are vigilantes, they
should not be given powers of prosecution or collection. If they are part of
the government, they should be regulated.
Dan Bader wrote this on his site, www.StateGoneCrazy.com, on October
28, 2008:
On Friday, October 24, 2008, the State {California} staff attorney who filed
the discrimination lawsuit against me in November, 2007, Ralph Tsong,
esq., filed a request for dismissal without prejudice.
After turning my life upside down for over two years and costing me many
thousands of dollars in attorneys fees in a failed and frivolous attempt to
extort money from me, State of California Department of Fair Employment
& Housing Staff Attorney, Mr. Tsong, esq, Mr. Paul Ramsey, esq, (former
DFEH, chief counsel) and the Fair Housing Council of Orange County
apparently changed their minds and finally concluded (after two years) that
the State did not have a meritorious lawsuit after-all and none of them were
willing to present such a clearly malicious and frivolous lawsuit to a jury.
On March 13, 2009, the judge will decide whether or not I am entitled to my
many thousands of dollars in attorney’s fees or whether the State and Fair
Housing Corporation will simply walk away with no penalties for the costs
that I incurred defending myself against this truly nefarious lawsuit.
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On March 28, 2009, I contacted Mr. Bader by email about the judge’s
determination whether he was entitled to attorney fees. He wrote back
saying that a statute limits the liability of the State to $7,500 dollars and that
the judge was at that moment undecided as whether to award that figure or
less to Mr. Bader. Summing up his ordeal, Mr. Bader wrote: “I have
attorney’s fees in the $30K range, two years of grief, and about $30K in
attorney’s fees awarded against me. This is a system that is completely out
of control and a target victim has no legal recourse other than to pay
whatever they demand.”
On June 28, 2010 Mr. Bader filed suit against the Fair Housing Council of
Orange County alleging “slander and trade libel” and asking for relief in the
amount of $300,000 compensatory damages and also punitive damages.
On July 21, 2010, I again contacted Mr. Bader concerning his case and he
wrote me back as follows: “Even though I won the lawsuit – because the
State dropped the case on the eve of trial – I lost at every attempt I made to
recover my fees and costs. I appealed the lower court’s decision not to
award me one penny, but the court of appeals upheld the lower court’s
decision but, instead, awarded the Council’s attorney’s fees against me. ¶ I
am currently facing foreclosure on my home as this preposterous lawsuit
cost me three years of my life, my job as a business broker and pretty
much my life’s savings. ¶ It’s a no win game for anyone accused of
discrimination.”
2.1.4.3
HOUSING GROUP TARGETS STEERING VIA SCHOOLS
by Blanche Evans for Realty Times, December 6, 2006
It’s a form of steering that one housing group claims to stop.
According to the National Fair Housing Alliance (NFHA,) real estate agents
tend to use schools as “a proxy for the racial composition of a
neighborhood,” steering customers from seeing homes in interracial
neighborhoods on the claim that “the schools are bad.”
In a friend of the court brief filed regarding Parents Involved in Community Schools v.
Seattle School District No. 1, et al, (Seattle) and Crystal D. Meredith V Jefferson County Board of
Education, et al, (Louisville) the NFHA, along with housing scholars,
researchers, and other advocacy organizations, claims that “today’s
housing patterns are not simply products of private, free choice.
Segregated residential patterns result from an array of policies and actions
by public and private actors.”
The pair of cases, now before the Supreme Court {see note at bottom},
involve the use of race to determine which public school a child will attend,
according to voluntary integration programs under examination in Seattle
and Louisville. According to an Associate Press story, “The court is
considering whether the programs in those cities are acceptable moves
toward student diversity – or if they are instead illegal racial quotas.”
The school districts say they are attempting to “advance the goals of the
Equal Protection Clause of the Fourteenth Amendment.”
“Concerned about how these trends were affecting their own children and
community, locally-elected school boards in Louisville and Seattle adopted
student assignment measures to foster integrated, diverse schools. In
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doing so, they joined hundreds of other communities around the country
that have also taken steps to see that children from different backgrounds
learn to live, play, and solve problems together,” says the NAACP synopsis
of the plans.
“When the Court rules on these cases this term, it has an opportunity either
to give these communities the ability to preserve some measure of racial
integration in public schools, or to end the era of Brown (1954's Brown V
Board of Education)” says the NAACP, which also says that schools
haven’t been so segregated since 1970, the era that introduced busing as a
solution to geographic boundaries that fostered segregation.
NRT, Inc. is a huge real estate
brokerage owning a large family
of companies throughout the
United States. In California, NRT,
Inc. owns a large number of
Coldwell Banker and Sotheby’s
franchises (web site).
The NFHA has been vocal about racial steering practices and is currently
bringing actions against NRT, Inc. , and other firms whose agents the
advocacy group says have been guilty of steering customers or providing
lesser service to minority “testers.”
In tests the NFHA says it has performed, under a grant provided by HUD,
testers found racial steering by real estate agents to be the norm – 87
percent. Whites were limited to viewing homes in predominantly white
neighborhoods and discouraged from visiting homes in interracial
neighborhoods. And “African-American and Latinos lost their right to see
homes of their choosing across a wide spectrum of white communities.”
The Alliance says there is a growing tendency by real estate agents to use
schools as an excuse to avoid certain neighborhoods when what they are
really doing is steering. “White homeseekers are consistently deterred from
seeing homes in interracial neighborhoods on the claim that ‘the schools
are bad.’” Yet, says the Alliance, these are the very schools recommended
and neighborhoods marketing to African American and Latino
homeseekers.
“To achieve integrated schools, America must support the use of race as a
factor in school decisions until we achieve promotion and enforcement of
the spirit and intent of the federal Fair Housing Act: to eliminate housing
discrimination and ensure the creation of truly integrated neighborhoods,"
says Shanna L. Smith, president and CEO of the NFHA.
What’s scary about this latest allegation against real estate agents is that
it’s probably true, even though the Alliance hasn’t released its quantification
or proof that it’s so. An email to the organization was not answered before
publication.
If you were to ask a real estate agent what the number one consideration is
in choosing a home, most would probably say, “schools.” Schools are the
reason to choose or to avoid a neighborhood and its homes. Why?
Because half of homebuyers have children under the age of 18. Higherperforming schools are coveted by homebuyers and lower performing
schools are shunned if the homebuyer has a choice between the two.
Where real estate agents must be careful is denigrating one area because
of its schools to one client while ignoring or lauding the area or its schools
to another client because of the color of their skin or ethnic background.
Further, agents might not even know the true performance of the schools,
what programs they offer, or how they are coping with overcrowding,
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language barriers, No Child Left Behind, underpaid and underappreciated
teachers, and a myriad of other issues.
Agents should remember that all sellers, especially those with homes in
less desirable neighborhoods, are looking to REALTORS® to help them sell
their homes, not to encourage buyers to avoid their homes. In that respect,
it could be REALTORS® themselves who are responsible for repressing
home values as much as the “bad” schools.
Fair housing training should be available to all real estate agents, as it
appears that Ms. Smith and her associates are going to be watching how
agents handle the question of schools as an insight into housing
discrimination from now on.
On June 28, 2007, the U.S. Supreme Court decided Parents Involved in
Community Schools v. Seattle School District No. 1 and Meredith v.
Jefferson County Board of Education. They found that the practice of
assigning students to public schools solely for the purpose of achieving
racial integration was illegal. They declined to recognize racial balancing
as a compelling state interest (source).
2.1.5
TRUST FUND HANDLING
2.1.5.1
ARE YOU COLLECTING AN ADVANCE FEE?…MORE TO KNOW
In this difficult economic climate, more homeowners are facing foreclosure
and the possibility of losing their homes. The anxiety and desperation of
homeowners who are struggling to make their loan payments may lead
them to turn to real estate brokers who offer loan modification services.
Homeowners are hopeful that a real estate broker can use their expertise to
help them modify their existing loan by either making their monthly
payments more affordable or by preventing their current payments from
increasing to an unaffordable amount.
The 2008 and 2009 Real Estate Bulletins, as well as the past two Mortgage
Loan Bulletins, discussed the subject of loan modifications and advance
fees. The DRE has received many submissions of advance fee materials
from real estate brokers who want to offer loan modification services and
also want to collect an advance fee or an upfront fee as compensation for
their services. Before a real estate broker can collect an advance fee, the
broker must comply with BPC §10085 and CR §2970. A real estate broker
must submit their advance fee materials to the DRE for review. The
materials include an advance fee agreement, accounting format, and any
advertising or promotional materials. If DRE issues a “no objection” letter,
the broker, under the terms applicable, is allowed to collect an advance fee
from a client to perform a real estate service.
A real estate broker has a responsibility to follow specific requirements
when collecting trust funds in the form of an advance fee. A real estate
broker is required to follow the requirements of BPC §10145 and CR §§
2831, 2832, 2834, and 2835 any time trust funds are collected. A properly
designated trust account in the name of the broker must be used and exact
record keeping requirements must be followed. However, when an
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advance fee is collected, there are additional requirements a real estate
broker must adhere to besides the listed code sections above.
Advance fees must also be handled accordingly as described in BPC
§10146. This code section states “Any real estate broker who contracts for
or collects an advance fee from any other person, hereinafter referred to as
the ‘principal,’ shall deposit any such amount or amounts, when collected in
a trust account with a bank or other recognized depository. Such funds are
trust funds and not the funds of the agent. Amounts may be withdrawn for
the benefit of the agent only when actually expended for the benefit of the
principal or five days after the verified accounts mentioned hereinafter have
been mailed to the principal.” Importantly, BPC §10146 also states
“…Each principal shall be furnished a verified copy of such accounting at
the end of each calendar quarter and when the contract has been
completely performed by the licensee. The Real Estate Commissioner
shall be furnished a certified copy of any account or all accounts on his
demand therefor.”
CR §2972 details the accounting content that must be provided to the
principal as required by BPC §10146. CR §2972 states “Each verified
accounting to a principal or to the Commissioner as required by BPC
§10146 of the Code shall include at least the following information {see
original article for details} ”
Just because a broker may have successfully satisfied BPC §10085 and
CR §2970, the broker still has to be aware that his fiduciary duty regarding
the collection of an advance fee from his client is not over. The collection
of an advance fee from a client must be handled and accounted for under
DRE’s trust fund provisions as stated in the BPC and CR. In addition, a
separate accounting must be provided to the principal that gives clear and
detailed information on how his or her advance fee is being earned and
spent by the real estate broker. As a reminder, BPC §10146 also states
“Where advance fees actually paid by or on behalf of any principal are not
handled in accordance with the preceding paragraph, it shall be presumed
that the agent has violated §§ 505 and 506a of the Penal Code. The
principal may recover treble damages for amounts so misapplied and shall
be entitled to reasonable attorneys’ fees in any action brought to recover
the same.”
2.1.5.2
ADVERTISING REQUIREMENTS FOR BROKERS HANDLING ESCROW
In our Spring 2010 Real Estate Bulletin, we discussed compliance of the
laws and regulations when a real estate broker is acting as an agent in a
transaction and also handles the escrow pursuant to the exemption from
the Escrow law contained in §10076(a)(4) of the Financial Code. In this
article we will address the advertising criteria as set forth in CR §2731(d)
for brokers handling their own escrows.
When a broker has an in-house escrow division and has been issued a
license with a fictitious business name containing the term “escrow,” or any
term which implies that escrow services are provided, the broker is required
to include the term “a non-independent broker escrow” in any advertising,
signs, or electronic material. This term provides full disclosure to the public
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that they are not dealing with an independent escrow company and that
available services are limited.
In addition to the above, to renew a real estate broker license with a fictitious business name containing the term “escrow,” or any term which
implies that escrow services are provided, the fictitious business name will
not be issued or term “escrow,” or any term which implies that escrow
services are provided, the broker is required to include the term “a nonindependent broker escrow” in any advertising, signs, or electronic material.
This term provides full disclosure to the public that they are not dealing with
an independent escrow company and that available services are limited.
In addition to the above, to renew a real estate broker license with a fictitious business name containing the term “escrow,” or any term which
implies that escrow services are provided, the fictitious business name will
not be issued or renewed by the Department unless the fictitious business
name itself includes the term, “a non-independent broker escrow.”
Renewing real estate brokers will need to file a new fictitious business
name statement (FBN’s) containing the now required language, with the
county in which their main office is located and submit the FBN’s along with
the renewal application.
For further information and instructions on deleting or renewing a fictitious
business name, please review the Department’s RE 282, Fictitious
Business Name Information, available on our Web site at
www.dre.ca.gov/pdf_docs/forms/re282.pdf.
2.1.5.3
ARE APPRAISAL FEES AND CREDIT REPORT FEES TRUST FUNDS?
Generally, a broker who collects fees in advance (advance fees) for the
purpose of arranging a loan, must comply with all of the advance fees laws
and regulations (BPC §§ 10026, 10085 & 10146 and CR §§ 2970 & 2972).
But, there are instances where the broker collects monies for performing a
service such as an appraisal or obtaining a credit report – in these
instances, the Department does not interpret these payments as advance
fees, as the broker collects an amount equal to the cost of performing such
services (the actual appraisal cost and/or the cost of the credit report). Any
excess funds above and beyond the cost to perform these services would
be considered advance fees. Despite not being treated as advance fees,
appraisal and credit report fees are considered to be trust funds.
Depending on the situation, there are ways that appraisal fees and/or credit
report fees must be handled by the broker: (1) they can either be collected
directly from the borrowers up front, or (2) they can be collected at the
close of escrow.
Credit report and appraisal fees are trust funds; they are not broker’s funds.
Collected Directly from Borrowers Up Front
When a broker receives a check in his/her name for credit report and/or
appraisal fees (trust funds), the trust funds should be deposited into a bank
account in the name of the broker as trustee (a trust account), no later than
three business days following receipt of the funds.
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The broker must have a columnar record for all trust funds received and
disbursed and a separate record for each beneficiary should be maintained.
The broker would need to maintain a written monthly reconciliation of the
columnar record to the separate records.
According to BPC §10145(a)(1), “A real estate broker who accepts funds
belonging to others in connection with a transaction subject to this part shall
deposit all those funds … into a trust fund account maintained by the broker
in a bank or recognized depository in this state. All funds deposited by the
broker in a trust fund account shall be maintained there until disbursed by
the broker in accordance with instructions from the person entitled to the
funds.” Also see CR §§ 2832(a), 2831 (a)(b)(c), 2831(e), 2831.1(a), and
2831.2
Collected at the Close of Escrow
When credit report and appraisal fees are collected at the close of escrow,
and if the broker has already paid for the services with his/her own money
prior to receiving these funds at the close of escrow, the broker is just
getting a reimbursement. These are not trust funds.
However, if the broker receives a check from the escrow company, payable
to the broker, for credit report and appraisal fees, and he/she has not paid
for the services, they are not broker’s funds. They are trust funds and have
to be treated as such. They should not be deposited into the broker’s
general account. When a broker deposits trust funds in the general
account, the broker is commingling trust funds with broker’s funds in the
general account, which violates BPC §§10176(e) and 10145 along with the
CR §2832.
BPC §10176 states that “The commissioner may, upon his or her own
motion, and shall, upon the verified complaint in writing of any person,
investigate the actions of any person engaged in the business or acting in
the capacity of a real estate licensee within this state, and he or she may
temporarily suspend or permanently revoke a real estate license at any
time where the licensee, while a real estate licensee, in performing or
attempting to perform any of the acts within the scope of this chapter has
been guilty of any of the following: (e) “Commingling with his or her own
money or property the money or other property of others which is received
and held by him or her.”
If the credit report and appraisal fees are included in the broker’s
commission check (from escrow), the entire check would need to be
deposited into the trust account and the part of the funds belonging to the
broker should be disbursed not later than twenty-five days after their
deposit.
CR §2835 states that “Commingling” as used in BPC §10176(e) is
prohibited except as specified in this section. For purposes of §10176(e),
the following shall not constitute “commingling”:
(b)
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“The deposit into a trust account maintained in compliance with
subdivision (d) of funds belonging in part to the broker’s principal
and in part to the broker when it is not reasonably practicable to
separate such funds, provided the part of the funds belonging to the
broker is disbursed not later than twenty-five days after their deposit
and there is no dispute between the broker and the broker’s
principal as to the broker’s portion of the funds. When the right of a
broker to receive a portion of trust funds is disputed by the broker’s
principal, the disputed portion shall not be withdrawn until the
dispute is finally settled.”
(d)
“The trust fund account into which the funds are deposited is
maintained in accordance with the provisions of §10145 and the
regulations of this article.”
Credit report and appraisal fees paid up front are not usually treated as
advance fees, however, they are trust funds and must comply with trust
fund handling laws and regulations.
2.1.6
FRAUD
2.1.6.1
THE RECOVERY ACCOUNT
BPC 10470 puts this number at
$7.00 for brokers and $4.00 for
salespersons at each renewal.
The DRE’s Recovery Account is a victim’s fund which began operating on
July 1, 1964. The purpose of the Recovery Account is to provide limited
reimbursement to consumers for losses sustained in real estate transactions
because of the fraudulent acts of licensed real estate brokers or
salespersons. The Recovery Account is funded from a portion of the license
fees paid to the DRE by brokers and salespersons , and from monies paid
into the account from orders following disciplinary actions. The body of law
governing the administration of and qualification for payment from the
Recovery Account is found in BPC§§ 10470-10481; and in CR §§ 31003109. Between July 1, 1964 and June 30, 2007, the Recovery Account has
paid out approximately $36,600,000 to 2,300 victims or 56% of the 4,100
victims who have applied for payment.
When the Recovery Account was first established, it was intended that
only those consumer losses caused by a licensee’s intentional fraud be
In 2008, AB 2454 increased the
compensated, assuming all other requirements were met. In 1984, a
payout limits for the recovery
California Court of Appeal held that the Recovery Account was liable for not
account to $50,000 for any one
transaction and $250,000 per
only intentional fraud but also for a licensee’s negligent misrepresentation.
licensee for applications filed after
(Andrepont v. Meeker ,1984) Following that decision, an audit of the
January 1, 2009.
Recovery Account was ordered to determine whether it could meet the
potential liability which would be caused by the lesser standard rather than
intentional fraud. It was determined that, without somehow limiting the
liability of the Recovery Account, it would become insolvent under the new
rule. Effective July 1, 1987, the Legislature amended the Recovery Account
law to provide for liability only for intentional fraud or conversion of trust
funds and to clarify its intent that the Recovery Account is not an insurance
policy but a fund of last resort created to provide limited benefits.
Can victims in criminal cases qualify for payment?
In 1997 the law defining a “qualifying judgment” was amended to include a
criminal restitution order. When a criminal conviction of a licensee is for a
crime with elements similar to intentional fraud or conversion of trust funds,
such as fraud or embezzlement, and the sentence includes restitution to
one or more of the licensee’s victims, the criminal conviction, or judgment,
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may qualify for payment from the Recovery Account. Over the past several
years, the Department’s Recovery Account Unit has received an increasing
number of applications from victims who have been awarded restitution in
criminal cases.
What are the requirements to qualify for payment?
In general, individuals and business entities, with exceptions, may qualify.
An applicant for payment from the Recovery Account must obtain a final
judgment against one who was licensed by the DRE at the time of the
transaction which resulted in the loss. That judgment must be based on
intentional fraud or conversion of trust funds (meaning the theft of a
principal’s money in a transaction requiring a license) and must be rendered
Includes decisions rendered by
by a California state court or a federal court located within the State of
arbitration (BPC §10471) and
small claims court (CR §3100(g)). California. The judgment could be the result of a civil case, a criminal case,
certain arbitration matters, or a federal civil, criminal or bankruptcy case .
The transaction in which the victim was defrauded must have been one in
which the licensee was doing something which required a real estate
license. In other words, the licensee must have been acting as an agent in
connection with an independent buyer and/or seller, borrower and/or
lender, or property owner and/or lessee. If the licensee was acting as a
principal in the transaction, (for example, the licensee was the seller of the
property, or the direct borrower of the funds), he or she did not really
require a real estate license to participate in the transaction. He or she was
not really acting as a licensee, or as an agent, but as a party to the
transaction. A licensee’s judgment based on unpaid commissions does not
qualify for payment from the Recovery Account.
The victim, now a judgment creditor, must then make reasonable efforts to
collect on the judgment against all defendants found liable in the
transaction. At a minimum, that requires the applicant for payment from the
Recovery Account to demonstrate that the licensee, now a judgment
debtor, and all other persons found liable to the victim in the transaction in
question do not have assets, such as an interest in any real property within
California, with sufficient equity which could be attached by proper court
processes, to satisfy all or part of the judgment. The applicant must also
serve a copy of the entire application on the judgment debtor/licensee by
methods prescribed in the Business & Professions Code but not those set
forth in the Code of Civil Procedure, as in civil court cases.
Finally, the application must be received by the DRE no later than one year
after the qualifying judgment became final. That calculation requires an
understanding of the specific time limits for that particular judgment to be
appealed. Those time limits differ from state courts to federal courts,
including bankruptcy court.
The highest possible money
judgment one can obtain from
Small Claims Court is currently
$7,500; however, one can file two
claims per year for an amount
greater than $2500 (more).
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How much can a qualifying victim recover?
If all of the requirements of the law are met, the Commissioner will grant the
application up to a maximum of $20,000 for one transaction and possibly
up to a maximum of $100,000 per licensee, if there are multiple qualifying
transactions.
Since the Recovery Account’s $100,000 limit of liability as to one licensee is
absolute, when there are multiple claims filed against one licensee, those
funds must be prorated among all of the victims who submit timely qualifying
applications. Those victims who desire to participate in any proration of
funds may have to pay additional court filing fees (in a civil or bankruptcy
case but not in a criminal case) if it is determined that a formal court
proration action is required.
In one recent case, there were approximately 90 victims included in a
criminal restitution order against a real estate broker and a salesperson,
both of whom were convicted of fraud. The total amount of restitution
ordered was approximately $2,200,000. In that case, both the broker and
the salesperson committed their own acts of intentional fraud and so there
were two “limits” of $100,000 each available from the Recovery Account,
for a total of $200,000. Of the 90+ victims included in the restitution order,
78 filed applications for payment from the Recovery Account. The amounts
paid to those 78 victims ranged from $162.26 to $16,327.81.
What is the effect of payment from the Recovery Account on a real
estate licensee?
When an application for payment from the Recovery Account is granted,
any license or license rights held by the licensee/judgment debtor will be
suspended immediately upon payment and will remain suspended until the
amount paid from the Recovery Account is paid back with 10% interest.
Where can I get more information?
The staff of the Recovery Account Unit is located in the Department’s
Sacramento office. Their task is to process applications and to make sure
that each applicant provides all of the information required by law to qualify
for payment. Information about the process of filing an application for
payment from the Recovery Account, the application, and other required
forms are available on the DRE’s website under the “Consumers” tab. You
can find the forms here. If you have any further questions about the
Recovery Account, you can contact the Recovery Account Unit directly at
916-227-3947.
2.1.6.2
MISREPRESENTED LOAN DOCS MIGHT RESULT IN FORGERY
CHARGES
by Bob Hunt for Realty Times, December 30, 2008
In California and throughout the country a substantial number of people
have found themselves saddled with adjustable rate mortgages that have
reset to interest rates significantly higher than at loan origination. In many
cases the borrowers cannot afford the new payment amounts. Also, in
many cases, the borrowers really didn’t know what they were getting into.
It is a common and not altogether inappropriate reaction to such situations
to think or say, “Too bad. You shouldn’t have signed something if you didn’t
understand it.” But what if the borrower claimed that the documents are
forged? Well, you’d think that would be an easy claim to refute, especially if
the signatures were notarized.
But the forgery claim might not be as easy to dismiss as it appears. This is
because forgery can occur even when the signature on the document is
authentic. A recent opinion in the case of The People v. Paul Stephen
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Martinez (California Fourth Appellate District, Division Two) is instructive in
this regard.
Defendant Martinez had offered to help Ruth Michiel when she ran into
financial difficulty. She feared that two houses that she owned might go
into foreclosure. At Martinez’s direction, Ms. Michiel signed a number of
documents. Later, she discovered that a trust deed in the amount of
$25,000 and secured by one of the properties had been recorded in favor
of Martinez. The trust deed bore her signature. At trial, Ms. Michiel did not
deny signing the trust deed but she denied doing so knowingly.
Among other things, Mr. Martinez was found guilty of forgery. The decision
was appealed. His defense against the forgery charge was that “there was
no evidence that her signature was not genuine and no evidence that he
used any affirmative misrepresentations … to procure her genuine
signature.” The court disagreed with his claim regarding misrepresentation.
Testimony had showed that he provided her “with a number of documents
to sign to try and help [her] with [her] financial problems.” But, more
importantly, the court held “he could be convicted of forgery even in the
absence of any such affirmative representations.” [my emphasis]
The court referred to an earlier (1967) case, People v. Parker, where
defendants had been found guilty of forgery even without any
misrepresentation. The defendants in that case had been sellers of
aluminum siding. The documents that they gave buyers to sign included a
trust deed on the property. The defendants had not misrepresented the
trust deeds; they simply included them, without disclosure, in the
documents to be signed. That court said, “The crime of forgery is
committed when a defendant, by fraud or trickery, causes another to
execute a deed of trust or other document where the signer is unaware, by
reason of such trickery, that he is executing a document of that nature.”
In fact, there are a number of other California decisions that would tend to
support the ruling in People v. Martinez.
We haven’t heard anything about similar forgery claims in sub-prime
mortgage situations. But, in light of the ruling in People v. Martinez, it
would be no surprise to learn that such charges are being filed against
some lenders.
2.1.6.3
COMMISSIONER’S MESSAGE – LOAN MODIFICATION
SCAMS
Over the past year and a half, the DRE has committed considerable
resources to combat loan modification scams.
The Department is currently investigating over 1,300 loan modification
complaints and, in just the past 12 months, has issued over 400 desist and
refrain orders and accusations against respondents for illegally collecting
advance fees. Most of the cases involve an unlicensed scammer who has
collected an advance fee in exchange for a promise that the homeowner
will receive a sustainable loan modification; yet once the fee was paid little
or nothing was done to get the borrower’s loan modified. A list of persons
and companies that the Department has taken action against can be found
here.
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But, late last year, help arrived. On October 11, 2009, the Governor signed
Senate Bill 94. This measure goes right to the heart of the fraud as it
prohibits any person, including real estate licensees and attorneys, from
demanding, claiming, charging, collecting or receiving an upfront fee from a
borrower in connection with a promise to modify the borrower’s residential
loan or to do some other form of mortgage loan forbearance. The advance
fee prohibition for loan modification and forbearance services applies to
residential property containing four or fewer dwelling units. And as an
urgency bill, it went into effect immediately.
The new bill also requires the following:
written disclosure in at least 14 point bold type regarding loan
modification and/or loan forbearance services prior to entering into
any fee agreement with a borrower:
“It is not necessary to pay a third party to arrange for a loan
modification or other form of forbearance from your mortgage lender
or servicer. You may call your lender directly to ask for a change in
your loan terms. Nonprofit housing counseling agencies also offer
these and other forms of borrower assistance free of charge. A list
of nonprofit housing counseling agencies approved by the United
States Department of Housing and Urban Development (HUD) is
available from your local HUD office or by visiting www.hud.gov.”
If loan modification or other loan forbearance services are
negotiated or offered in Spanish, Chinese, Tagalog, Vietnamese, or
Korean, a translated copy of the disclosure above must be given to
the borrower in that foreign language.
A violation of the law can result in fines and up to a year in jail.
The prohibition regarding advance fees for loan modification and
forbearance services will be repealed on 1/1/2013 unless extended by the
legislature. The requirement to provide a written disclosure that it is not
necessary to pay a third party for loan modification services will not sunset
in 2013.
While it is unlikely SB 94 will stop all mortgage fraud scams, the bill will
help immensely in ridding the marketplace of unlicensed and unscrupulous
profiteers and that will help ensure consumers receive the protections they
deserve.
2.1.6.4
HOMEOWNERS AND PRIVATE INVESTORS – BEWARE!
It is important for licensees to be vigilant in this challenging real estate
market and be well informed of investment schemes meant to defraud the
public. One such scheme is a home-saving program allegedly involving
private investors wanting to assist struggling homeowners. Those who
market this plan say that they assist private investors in identifying and
acquiring distressed mortgages from lenders whose borrowers are no
longer able to afford their mortgages. These companies promise to make it
possible for private investors to obtain very high returns in short periods of
time and to capitalize on reduced home prices, while also making it
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possible for the distressed homeowner to be able to keep their home.
Private investors and distressed homeowners should beware of these
offerings.
Under these cleverly devised schemes, purported to be “foreclosure
reinstatement programs,” the company promises to match delinquent
borrowers with private investors who are willing to purchase the now undersecured mortgage asset from the lenders and refinance the distressed
borrower into a new fixed payment mortgage, ultimately lowering their
monthly payment. They suggest that the program is a win-win situation and
claim that their emphasis is to purchase mortgage notes from lenders at
discounts, and then to restructure the new loan terms at an affordable
monthly mortgage and give the homeowner-turned-buyer/borrower an
equity interest in the property while at the same time, the private investor
has an immediate profit. An example of how the “foreclosure reinstatement
program” allegedly works is as follows:
Loan Balance (now in default)
$550,000
“Current” Market Value
$325,000
Re-Purchase Price (by investors)
$200,000
Amount refinanced to a new loan (to investors; 95% LTV of
“Current” Market Value)
$308,725
Homeowner/Borrower Equity (5% LTV)
Investors Immediate Profit ($308,725-$200,000)
The company to which this article
refers is probably Accelerated
Funding Group. Here’s
Department of Corporation’s
Desist and Refrain order against
the company; here’s a press
release from SEC about the case;
and here’s a report about the
perpetrator’s conviction..
$16,250
$108,725
For this to work (and I had to read the above table several times before I
figured it out), the “debt negotiator” would have to: (1) find someone willing
to invest $200K, (2) convince the lender to accept a short sale to the
facilitator for $200K thereby requiring the lender to take a $350K write-down
($550 - $200 = $350); (3) sell the home back to the owner for $308,725, (4)
find a lender willing to give the original owner a fixed-price loan for
$308,725, and (5) split the profit ($108,725) with the investor. Easy!
The program may call for the homeowners to pay a one-time set-up fee of
$3,500.00 or more, with additional fees required per month if a notice of
default had been filed against the property. In addition, homeowners may
be required to make payments into a reserve account instead of to their
original lender; all indications of possible fraudulent and misleading acts.
First of all, pursuant to BPC §10131(d), it is unlawful to solicit borrowers or
lenders to renegotiate loans, collect payments, or perform services for
borrowers or lenders or note owners in connection with loans secured
directly or collaterally by liens on real property or on a business opportunity
unless they are licensed as a real estate broker. Second, these types of
transactions are misleading at best and fraudulent at worst since lenders
are under no obligation to enter into negotiations with the companies’
representatives nor are lenders required to consider such offerings.
Licensees are urged to be aware of these schemes and are encouraged to
educate their clients to become vigilant to these types of solicitations and
forward this information to the Department so that we may seek disciplinary
action against those intent on harming the public.
In addition, we recommend licensees inform their clients who are private
investors that the Securities and Exchange Commission (SEC) has filed a
complaint in June of 2009 against such a company, alleging that in 2006
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and 2007, the company recruited approximately 150 investors in California
and several other states promising returns of 40% in as little as 30 days
raising approximately $6 million. The SEC alleged that the company
assured the investors that their investments were secured by deeds of
trust; they were not.
These are very unsettling times in the real estate market and it is important
that as licensees you become familiar with the schemes being perpetrated
against the public to protect your clients from such unsavory characters.
2.1.6.5
UNDISCLOSED SHORT SALE PAYMENTS MAY LEAD TO TROUBLE
A recent memorandum from the legal department of CAR® warns CAR®
members as follows: “Undisclosed payments in short sale transactions,
especially those paid outside of escrow, may violate the law, including
RESPA, laws against loan fraud, and licensing laws.”
The cautionary memo goes on to describe as a “common scenario” a
situation “when a short sale seller’s senior lender authorizes a payment of
$3,000, for example, to extinguish a junior lien but the junior lender
demands that the buyer pays an additional $9,000 outside of escrow.”
Other “outside of escrow” payments that a buyer might make could be for a
loan negotiator’s fee, past dues owed the homeowners association, or to
clear some lien on the property.
Now suppose that a buyer were willing to pay for items such as these. Why
would he be willing to do so? Most likely because he or she figures the
agreed-upon purchase price is a very good deal and the price will still be
good even if it is necessary to add some money to cover such other costs.
But why outside of escrow (or “closing” or “settlement”)? Because, the
lender won’t allow it. To put it simply, if there’s more money on the table,
the seller’s senior lender wants it; he doesn’t want it to go to these other
sources. The lender gives approval for a short sale based on certain net
proceeds and certain closing costs. For example – hard as it is to imagine
– a lender might condition his approval on a reduction in the contractual
real estate commissions with the difference going to the lender’s payoff.
Before the closing, the lender must approve a tentative HUD-1 (closing
statement) that shows where the money is going. He will already have
approved a certain amount of closing costs. If the lender, as in the
example, had only authorized $3,000 for the junior lien, he will not approve
a tentative closing that now has the buyer putting more money in, money
which will go to the junior lien but not the senior. If the buyer puts in more
money (essentially, pays more), the senior lender wants it.
What is the solution to such a standoff? It is the practice to which the CAR®
memo is addressed. That is, the practice of payoffs being made outside of
the escrow (closing) process. So the senior lender does not know about it.
Many, many people feel that such a practice is justified. “It is the lenders
who have caused the problem in the first place. Besides, they are stupid,
arrogant, and greedy.” All of this, and more, may be true. Nonetheless, as
the CAR® memo points out, “concealing this additional payment from a
federally-insured senior lender may constitute loan fraud, which is a crime
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punishable by 30 years imprisonment plus a $1 million fine (18 U.S.C.
section 1014)”
And that’s not all. The practice may also be a RESPA violation. Appendix
A to RESPA (24 C.F.R. Part 3500) says that “The settlement agent shall
complete the HUD1 to itemize all charges … whether to be paid at
settlement or outside of settlement … .” Charges paid outside of settlement
“shall be included on the HUD1 but marked P.O.C. for Paid Outside of
Closing… .”
There may, indeed, be compelling arguments for trying to help buyers and
distressed sellers by having payments made outside of a short sale escrow
(settlement). But agents need to remember that this may be considered
fraud, and most, if not all, Errors & Omissions policies don’t cover fraud.
It’s something to think about.
2.2
TAXES
2.2.1
PRIMARY RESIDENCES
2.2.1.1
HOUSING COUNSEL: DEDUCTING INTEREST WHEN YOU ARE
NOT ON TITLE
by Benny L. Kass for Realty Times, October 30, 2006
Question: I want to buy a condominium unit for my son. Although he
makes a decent living, his credit is not good. Accordingly, the lender has
advised that title must be in my name only. My son will live in the property
and make all of the mortgage payments.
Can he deduct the mortgage interest on his tax returns?
Answer: The answer is a qualified “yes.” There are certain rules which
you must follow since if the IRS ever challenges the deduction, the burden
will be on your son to prove that he is eligible to take the deductions.
We must first look to the regulations which have been promulgated by the
IRS.
Regulation 1.163-1(b) reads as follows:
Interest paid by the taxpayer on a mortgage upon real estate of
which he is the legal or equitable owner {explained in following
paragraphs}, even though the taxpayer is not directly liable upon the
bond or note secured by such mortgage, may be deducted as
interest on his indebtedness.
In August of 2003, the United States Tax Court addressed this situation and
denied the interest deduction. The petitioner bought a house for his mother
and although the mortgage loan was not in his name, he made the monthly
loan payments. He argued to the Tax Court that he was obligated to repay
his mother and “that his failure to repay would result, upon his mother’s
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death, in a corresponding reduction in his testamentary share of his
mother’s estate.”
But the tax court rejected this argument. Based on the facts which were
presented in evidence, the Court determined that the petitioner was neither
“directly liable on the note securing the mortgage on his mother’s house,
nor (was) he a legal or equitable owner of the property.” (Montoya v IRS,
decided August 5, 2003.)
What exactly is required to be an “equitable owner”? Our legal dictionaries
define this as ownership by one who does not have legal title.
Let’s look at this example. I own property A; I am the legal title holder to
the property. I enter into a contract to sell the property to you. Based on
that contract, even though you have not yet taken title, you have certain
rights. These rights are based on the legal principles called “equity” –
namely that the courts will do what is fair under the circumstances rather
than strictly interpreting the letter of the law.
Obviously, each case has to be decided on the specific facts presented to
the court. In the Montoya case, the Tax Court determined that the son just
did not have enough evidence to prove that he had some kind of ownership
in his mother’s property.
Several years earlier, this same Tax Court did allow a couple to deduct the
mortgage interest even though they were not on title to the property. In
Uslu v. IRS, the following facts were presented to the Court.
Uslu had filed for Chapter 7 Bankruptcy relief and was not eligible to
obtain a mortgage loan. His brother bought the house in which the
only occupants were Uslu and his wife. The loan was in the
brother’s name only but Uslu made all of the mortgage payments.
He also made all of the repairs and improvements to the property.
The brother signed a Quit Claim Deed conveying the property to
Uslu although this Deed was never recorded on the land records.
The Tax Court found that Uslu’s mortgage payments “constituted payments
on an indebtedness” and thus could be deducted for income tax purposes.
According to the Court:
The Court is satisfied, from all of the evidence presented, that
petitioners (Uslu) have continuously treated the ... property as if they
were the owners and that they, exclusively, held the benefits and
burdens of ownership thereof. On this record, the Court holds that
petitioners established equitable and beneficial ownership of the
(property) and they were liable to (the brother) in respect of the
mortgage indebtedness.
How do you meet the burden? Here are some suggestions:
Your son must continuously live in the property. To prove this, his
driver’s license, voter registration, and utility bills should be in his
name at the property address.
You and your son should enter into a written agreement, spelling
out that he is fully obligated to make the mortgage payments on a
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timely basis and that you reserve the right to evict him should he go
into default; the agreement should specifically state that you
recognize that your son has an equitable interest in the property.
Your son must be responsible for all maintenance and upkeep of
the property.
You should prepare and sign a Quit Claim Deed, in recordable form,
conveying the property to your son. This will not be recorded, but
will be further evidence of your decision that this property is, in
reality if not legally, owned by your son.
There obviously are no guarantees but if you follow the guidelines spelled
out in the Uslu case, you have a good chance of prevailing should the IRS
challenge your son’s deductions.
2.2.1.2
IF YOU CLAIM A HOME OFFICE, WATCH OUT FOR HIDDEN TAX
by Kay Bell for Scripps Howard News Service July 28, 2007
Claiming a home-office deduction lowers your taxable income which lowers
your income tax and your self-employment tax. But it has some
drawbacks.
The deduction adds to your tax-filing work and, potentially, to your
compliance costs. You need to keep more records and fill out extra forms
to claim it.
More significant: A home office can affect your tax bill when you sell.
Although a few years ago the IRS rewrote its regulations so you no longer
have to specifically allocate sale profits to the “home” and “office” part of
your residence, your in-home workplace still could add to your post-sale tax
costs.
The complication comes from that tricky tax factor known as depreciation.
This is the tax break allowed for the wear-and-tear over time on the portion
of your home used for business.
“In the simplest situation, where we’re talking about an office within the
actual house, the home-office depreciation that was taken on prior returns
must be accounted for when you sell,” says Kathy Tollaksen, a CPA with
Sikich in Aurora, Ill.
“In an ordinary home sale, you get a chunk of money that’s completely taxfree,” says Frederick M. Stein, a senior tax analyst with RIA/Thomson Tax
& Accounting. Single homeowners who sell don’t have to pay taxes on up
to $250,000 in profit; the exclusion amount is double for married taxpayers
who file joint returns.
Make a profit greater than your applicable limit and it will be taxed at the
most favorable capital-gains rates. Currently, that’s typically 15%, but
could possibly be as low as 10%.
But those rules, says Mr. Stein, don’t apply to business property and a
home office is considered business property.
A home’s” taxable basis” is its
sale proceeds less the home
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If you depreciate the office portion of your home, the amount of that write-off
will reduce your property’s basis . A lower basis will mean you made
owners investment in the house.
The investment may include
settlement costs, improvements
(not maintenance), casualty
losses, and gain from a previous
sale rolled into the home.
more profit, perhaps enough to push you over the $250,000 or $500,000 tax
exclusion amount.
Even if you stay within the exclusion limit, you still could face some home
office-related tax costs. The issue arises when the IRS “recaptures” the tax
on the depreciation of any business use of a sold property.
Essentially, Uncle Sam wants to make sure the Treasury gets back some of
the depreciation benefits you claimed over the years. This comes into play
if you took a home-office deduction in the past 10 years, specifically since
May 6, 1997.
This recaptured depreciation is taxed regardless of whether your overall
gain is more or less than your allowable home sale-exclusion amount.
Mr. Stein offers an example:
You bought your home in 2000, immediately set up a home office in
one room and correctly deducted expenses and depreciation.
Over the years, you claimed $10,000 in depreciation on your tax
returns. This year, you sell your home and your profit is $100,000.
Your gain is well under your allowable $250,000 tax-free residential
sale exclusion. But of that $100,000, the $10,000 that is allocable
to the depreciation claimed on your home office over the years is
considered taxable gain.
Not only is the $10,000 taxable gain, it’s a special kind of taxable gain, says
Mr. Stein.
Although you report it on Schedule D, the form used to detail all your
capital-gain transactions, it has its own more-costly tax treatment.
“It’s called ‘unrecaptured §1250 gain,’” Mr. Stein says.
It’s taxable at a maximum 25% rate instead of the more familiar 10% to
15% rate that applies when you sell stock.
In essence, because you’ve mixed business and residential uses of the
property, the depreciation deduction you claimed over the years for that
home office is really just a deferral of taxes into the year when you sell the
residence.
And the 25% rate applies regardless of your ordinary income-tax bracket.
What if you didn’t depreciate your home office? You wrote off the space
and proportionate utility and maintenance costs, plus a portion of your rent
or mortgage payment but didn’t bother with the depreciation calculations or
claim it on your tax return. Do you still have to recapture the §1250 costs?
Unfortunately for homeowners, “yes”, says Mr. Stein. The unrecaptured§1250 rule applies to depreciation that is “either allowed or allowable,”
according to IRS language.
“Basically, you get stuck with it if you’re entitled to take it, regardless of
whether you’ve actually taken it.”
So if you’re going to deduct your home office, be sure to take the
depreciation deduction, too.
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2.2.1.3
ARE YOU LEAVING A TAX DEDUCTION ON THE TABLE?
by Diane Kennedy for Realty Times, January 14, 2008
If you refinanced your home recently, you’re not alone. According to
Plunkett Research, approximately $1.1 trillion dollars in mortgage loans
was refinanced in the United States in 2006. But did you remember to take
an increased mortgage interest deduction on your tax return if you were
entitled to one?
Here’s how it works. You are allowed to take a deduction on your personal
tax return for mortgage interest you pay on a loan that is secured by either
your principal residence or a second home, up to one million dollars in
acquisition indebtedness. That means mortgages, lines of credit, and
home equity loans all qualify as long as they are secured by your home and
you are the primary borrower and legally obligated to repay that loan. (This
is a mistake I see many people make who are buying a home using a
lease-option, or “rent-to-own” method – until the title of the home is
transferred to you, you can’t take the mortgage interest deduction.)
What you call your first and second homes can be pretty open to
interpretation. Pretty much anything will qualify if it has sleeping, cooking,
and toilet facilities.
The deductibility of interest paid
on HELOC debt is of two types:
(1) interest paid on that portion of
the debt incurred for home
improvement counts towards the
$1 million dollar exclusion, and (2)
all other HELOC debt counts
toward the 100K exclusion.
The amount you can deduct depends on your mortgage. If your mortgage is
more than $1 million, you can deduct all interest you pay on the first million
but you can’t deduct any more interest after that. Same goes for home
equity loans of more than $100,000. You can deduct all the interest you pay
on the first $100,000 of debt but you can’t deduct any remaining interest. As
with most things, there are some tax loopholes around that as well. It all
has to do with what you do with the money you get from the loan .
If you have an Option ARM (adjustable-rate mortgage), and you have been
paying the interest-only option, then theoretically your entire mortgage
payment is tax-deductible if it fits under the $1 million cap. Another type of
Option ARM featured a “deferred” component, which meant not only could
you defer your principal payments, you were also able to defer a portion of
the interest due.
However, when it comes to your taxes, taking the deferred option route
means your mortgage interest deduction is limited to the interest you
actually paid. This makes sense – after all, why should you get a tax
deduction for money you haven’t paid out? And you don’t lose anything,
either. The interest deduction is merely suspended until such time as those
extra interest payments are made.
When the Option ARMs began to adjust (and turn into traditional
mortgages), many people found that their new mortgage payments were
too high and the rush to refinance into lower payments was on. In most
cases, a portion of the refinanced loan was also attributable to catching up
on all of the unpaid mortgage interest that had accrued to date.
Once you’ve refinanced and paid off all that accrued interest, your
suspended deduction is no longer suspended. So does this mean that the
interest is suddenly deductible when you replace it with a new note?
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Our search in July 2010 found no
ruling or change in the law
regarding the deductibility of
deferred interest when refinancing
a Negative Amortization loan.
Perhaps! As of this moment, the IRS has not yet come up with a strong
position one way or the other. Which means if you take this deduction
(unless the law changed from the time I wrote this article to the time you
read it), you’ll most likely get to keep it . As with all tax strategies, but
especially brand new ideas like this one, make sure you check in with a tax
professional who is clearly versed in the ins and outs of the tax code.
Normally I don’t advise my clients to file amended tax returns unless there
is a significant missed deduction amount. That’s because amendments are
processed at the IRS by hand, rather than through the computer, and the
more attention you draw to yourself … the more attention you draw to
yourself {sic}. There is nothing in the Tax Code that says an IRS examiner
can’t review your entire tax return and not just the amendment you are
making. However, in this case, depending on how much money is on the
table, it may be to your best advantage to contact your CPA or tax-return
preparer and see if you’ve got money on the table that would fit better in
your pocket.
2.2.1.4
HOUSING COUNSEL: FEDERAL JUDGE TELLS IRS TO HAVE A
HEART
by Benny L. Kass for Realty Times, December 18, 2008
Question: I have been divorced for several years. As part of our
settlement agreement, the family home is now owned jointly by my ex and
me. I have just learned that my former husband owes the IRS a lot of
money and I’m concerned whether the house can be foreclosed by the IRS.
Answer: Yes. The IRS has the statutory authority to seek court approval
to sell jointly owned property even if one of the parties does not owe the
government any money.
If a court authorizes the IRS to foreclose on property and you do not owe
any back taxes, you will receive half of the sales proceeds when it is sold.
“Tenancy by the Entirety” is
similar to “Joint Ownership with
Right of Survivorship”.
When you were married, you and your husband owned the property as
tenants by the entirety . Upon divorce, title to the property automatically
changed into a tenant in common arrangement. This means that both you
and your former husband own a divisible half interest in the family home.
The federal statute authorizing such foreclosure sale reads as follows:
The court shall ... proceed to adjudicate all matters involved therein
and finally determine the merits of all claims to and liens upon the
property, and in all cases where a claim or interest of the United
States therein is established, may decree a sale of such property...
(26 U.S.C. §7403)
Notice the emphasis on the word “may.” According to one judge in a very
recent case, the “courts have discretion to refuse foreclosure when equity
dictates.” Equity means “fairness” – doing what the judge believes is right
under the particular facts and circumstances of each case.
Let’s look at this case in more detail. William and Lanell Johns purchased
real property in 1987 and subsequently divorced. As in your case, the
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family home was not sold and William and Lanell then owned the property
at tenants in common.
William moved out of the house but Lanell has resided there since 1990.
She has been diagnosed with cancer and her only income is a monthly
disability check in the amount of $788. William owes the IRS over
$100,000.
Judge Roger Vinson, Senior United States Federal District judge for the
Northern District of Florida, rejected the IRS’s request to foreclose on the
property. Although the judge recognized that the statute gave him
discretion on whether or not to allow the forced sale, he explained that “this
discretion is ‘limited’ and should be exercised rigorously and sparingly,
keeping in mind the Government’s paramount interest in prompt and certain
collection of delinquent taxes.”
In making his decision, the judge looked at a number of factors.
First, Lanell had a reasonable expectation that the property in which she
has lived would not be foreclosed upon “to satisfy a debt owed by her exhusband from whom she has been divorced for 14 years.”
Second, the judge weighed the hardship that a foreclosure would produce
on Lanell. While the judge acknowledged that she would be entitled to her
rightful share of the sales proceeds should foreclosure take place, he also
recognized that “financial compensation may not always be a completely
adequate substitute for a roof over one’s head.”
Accordingly, the judge took into consideration Lanell’s financial and health
status and determined that to force a sale of the family home would be a
significant hardship and burden merely “to satisfy a debt owed solely” by
her former spouse.
In denying the IRS request, the judge wrote:
... the taxes at issue in this case are the sole obligation of Mr.
Johns, who does not reside on the property and who will be
relatively unaffected by the foreclosure. It is only Ms. Johns who will
be significantly affected. To allow the government to foreclose on
the land – and in the process displace an unemployed, disabled
woman of modest and limited means who has lived on the property
for 16 years while battling repeated bouts of cancer – would be an
extremely inequitable and offensive result.
In the Johns case, the facts strongly supported keeping the wife in the
property. But each case is different. The law allows a judge the right to
foreclose but this is not a mandatory requirement.
In most cases, the jointly owned property will be sold. The burden will be
on you to convince the IRS (and perhaps the court) that it would be
inequitable and an extreme hardship if you were displaced from your home.
2.2.1.5
CONGRESS LIMITS GAIN EXCLUSION ON THE SALE OF SOME
PRIMARY RESIDENCES
by Gary Gorman for Realty Times, January 14, 2009
Page 118
When Congress passed the Housing Assistance Act of 2008 a few months
ago, their goal was to help those people who were losing their homes in
foreclosure. One of the side affects of the bill, however, was a change that
could effect taxation on the gain from the sale of your personal residence.
IRS law excludes $250,000 of the gain from taxation if you’re single and
$500,000 if you’re married when you sell a primary residence you’ve lived
in for at least two years of the last five years. This is so even if a portion of
the gain was rolled over into the property in a 1031 exchange transaction.
For example, if you and your spouse sold a rental property in Kansas and
bought a property in Vail, Colorado, rented it out for several years and then
moved into it as your primary residence for a couple of years, your
excluded gain when you sell the Vail house could include gain that was
rolled into it in your exchange.
The new law modifies that rule and penalizes you for time that your
property is not your primary residence; you have to prorate the gain
between the periods the property was not your primary residence and the
periods that it was. (Your primary residence is the place you live; the
address you use on your drivers license; where you’re registered to vote,
etc.) Only the non-residence period after January 1, 2009 is excluded. So,
if you bought, or exchanged into a property on January 1, 2007, rented it for
three years, moved into it on December 31, 2009, then lived in it for three
years until you sold it, you would have owned the property for six years,
during which it was a rental for three and your residence for three.
However, since only one of the rental years was after January 1, 2009, the
numerator in your calculation would be one (the number of rental or nonresidence years after January 1, 2009), and your denominator would be 6
(the total number of years you owned the property). In other words, 1/6 of
your gain would be taxable; if your total gain was $300,000, then $50,000
of that would be taxable even though you would otherwise be entitled to an
exclusion of $500,000.
I talk about the non-residence period rather than the rental period because
it’s not necessary that you actually rent the property – the law deals with
the periods that the property is your residence versus the periods that it is
not. In my example above, if the Vail property had been your vacation
home, instead of a rental, for the three years before you moved into it, and
then your residence for the next three years, the result would have been
exactly the same: $50,000 of the gain would be taxable out of a total gain
of $300,000.
The new law only covers those situations where the period when the
property was a rental or vacation home falls before it becomes your primary
residence. It does not cover situations where it was your residence first,
and then became a rental property – this was done so that homeowners
who were forced to rent their former residence while they tried to sell it
would not be penalized.
As time goes on, we’ll have lots of questions about this new law that will
have to be answered by court cases or IRS rulings (such as what happens
if you build a house on a piece of bare land that you’ve owned for years?),
but my advice is that if you are planning to move into your current rental or
vacation property at some point in the future, you should do so as soon
possible.
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2.2.1.6
SOME IRS BALM FOR SHORT SALES OF HOMES
by Julian Block for Realty Times, October 8, 2009
Congress continues to make changes in the tax code in response to the
housing crisis. A key change helps millions of home sellers who owe more
on their mortgages than their dwellings are worth. These sellers have
negative equity – a condition known colloquially as being “upside down” or
“underwater.” Legislation that went on the books at the start of 2007
significantly benefits some upside downers and does absolutely nothing for
others.
This is how the break works. Suppose Sela Sellers disposes of her
residence in a lender-okayed short sale that erases the unpaid part of her
mortgage. Or suppose the lending company forecloses on the dwelling,
subsequently sells it and cancels a portion of her debt. Generally, the tax
code calls for Sela to report partially or entirely forgiven amounts on her
1040 form. Not any more. The Mortgage Forgiveness Debt Relief Act of
2007 includes a provision that allows home sellers like Sela to exclude as
much as $2,000,000 of canceled debt.
Sela excludes (sidesteps) taxes only if she satisfies two stipulations. First,
the security for her mortgage is her principal residence, meaning the place
she ordinarily lives most of the year. Second, she incurs the debt to buy,
build or substantially improve her principal residence. There is no relief for
Sela’s home equity loans or cash-out refinancings, except to the extent that
she uses the proceeds to make improvements. Other fine print prohibits
relief if her lenders forgive debts on vacation homes and other second
homes or rental properties.
Long-standing rules generally require debtors to report all forgiven debts on
their 1040 forms, just the same as income from salaries or investments.
The IRS taxes forgiven amounts at the rates for ordinary income from
sources like salaries. Some forgiven debts sidestep taxes. The law
specifies several carefully hedged exceptions. They include bankruptcies
and insolvencies.
The exception introduced in 2007 benefits people whose debts are reduced
or cancelled in arrangements that are known as loan modifications,
foreclosures, deeds in lieu of foreclosure, and short sales. This last
category is the term for an owner who, with lender approval, sells for a net
sales price (gross sales price minus legal fees, broker’s commission and
other costs) that is insufficient to cover all of the outstanding debt.
In tax lingo, the exclusion is for income from the discharge of QPRI, short
for qualified-principal-residence-indebtedness. This means mortgages
taken out by owners to buy, build, or substantially improve their principal
residences. And the residences are the securities for the debts.
There also is an exclusion for debt reduced through mortgage restructuring,
as well as for debt used to refinance QPRI. Here, there is relief, but only up
to the amount of the old mortgage principal, just before the refinancing.
Another constraint is that the exclusion does not help homeowners who
took advantage of the run up in real estate prices to do “cash-out”
refinancing in which they did not use the funds for renovations of their
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primary residences. Instead, they used the funds to pay off credit card
debts, tuition charges, medical expenses, or certain other expenditures.
2.2.1.7
TAX RULES FOR FOREIGN INVESTORS
Until 1980, it was possible for a
foreigner to sell a property at a
profit and pay no tax. To close
this loophole, Congress enacted
FIRPTA (the subject of this
article).
U.S. realty and rental agents/property managers are encountering an
increasing number of situations that involve foreign persons, defined as
persons other than U.S. persons, acquiring U.S. real property. The tax rules
governing disposition of any U.S. real property interest by foreign persons
vary in many ways from those that apply to U.S. persons. Understanding
the tax laws is critical for real estate professionals to avoid personal liability
for improper U.S. federal income tax compliance.
The disposition of a U.S. real property interest by a foreign person
(transferor) is subject to income tax withholding under the Foreign
Investment in Real Property Tax Act of 1980 (FIRPTA). FIRPTA authorized
the United States for the first time to tax foreign persons on disposition of
U.S. Real Property Interests (USRPI).
Here’s an example where FIRPTA
would apply:
A USRPI includes any sale of an interest in parcels of real property as well
as sale of any shares in certain U.S. corporations that are considered U.S.
Suppose Sally, a Canadian, sells real property holding corporations. Any purchaser (transferee) of a USRPI
her Palm Springs home to Joe, a from a transferor must withhold ten percent (10%) of the amount realized
U.S. citizen, for $700K. FIRPTA and remit such amount to the IRS within 20 days of the date of transfer,
requires Joe (the transferee) to
using Form 8288 and Form 8288-A.
withhold 10% of the sales amount
($70K) paid to Sally (transferor)
and to send it to the IRS (and, as
you’ll see later, 3.33% to the
Franchise Tax Board).
The transferee of the property must determine if the transferor is a foreign
person. If the transferor is a foreign person and withholding does not take
place in accordance with the law, the transferee and the agent may be held
liable for the tax.
There are exemptions to the withholding requirements of Internal Revenue
Code §1445. One of the most common exemptions to FIRPTA withholding,
where the transferee does not have to withhold, is in a situation where the
real property is purchased for use as a residence and the purchase price is
not more than $300,000. A listing of the exemptions from FIRPTA
withholding is in IRS Publication 515, Withholding of Tax on Nonresident
Aliens and Foreign Entities, and at www.IRS.gov, using “FIRPTA” as a key
search word.
In certain situations, such as when the tax due on the transferor’s gain from
the sale is less than the withholding, the foreign transferor (or the
transferee) can request from the IRS a reduction or elimination of
withholding. The FIRPTA Withholding section on www.irs.gov has more
information about reducing the withholding rate.
Non-resident aliens may avoid the
30% withholding on gross rental
income by filing their annual
federal tax return using Form
1040NR or by incorporating
(source).
Withholding on Rental Income Paid to a Foreign Person
If a foreign person owns U.S. rental property and receives rental/
investment income not connected with a U.S. business , the renter must
withhold a flat rate of 30% (without deductions {for maintenance and finance
costs}) of the rents, unless a tax treaty provides a lower rate or an
exemption. Here are some basic rules regarding withholding on rent:
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IRC section 1441 provides for the withholding of tax paid by a
withholding agent to a nonresident alien on various items of income,
including rental income. The person paying rent, as well as the real
property manager who collects rent on behalf of a foreign owner,
are considered withholding agents.
The person making payment of U.S. source rents to a foreign
person must withhold 30% unless the foreign person claims reduced
withholding based on a tax treaty (W-8BEN) or makes an
irrevocable election with the IRS to treat the income as effectively
connected to a U.S. trade or business (W-8EIC).
Withholding agents must use Form 1042 and 1042S to report the
tax withheld. The requirement to withhold 30% extends to the
manager of the rental property if the tenant has not met the 30%
withholding. Property managers who do not comply with these rules
will be held liable for 30% of gross rent plus penalties and interest.
For more information visit www.irs.gov.
Our thirty-minute Google search of the Web, blogs, and all news articles
failed to turn up a single example of a real estate agent held liable for
failure to withhold the proceeds of a sale or rental income subject to
FIRPTA. We’re not saying it doesn’t happen only that we have never heard
of this actually occurring and our search failed to find an instance of it
having occurred. Be that as it may, you should know the following about
the FIRPTA requirement:
Nonresident: Any foreigner
without a “green card.” A green
card is officially known as “A
United States Permanent
Resident Card,” and attests
permanent resident status of an
alien in the United States of
America.
Page 122
“Foreign Person” means a nonresident alien individual or foreign
corporation (Note: The rules for foreign corporations are complex
and not covered here.)
The following are some of the most important exemptions. Without
an exemption the buyer and his agent may be held liable for failure
to withhold should the seller not pay tax on his capital gains. We
presume the IRS would seek restitution first from the buyer and any
unpaid remainder from the buyer’s agent. In any case, the agent’s
liability is limited to his commission (assuming it is less than 10%).
1.
Liability to the buyer and his agent can be removed when the
seller provides a “nonforeign affidavit” stating under penalty
of perjury that the seller is not a foreign person (use CAR®
form AS). The affidavit must contain the seller’s taxpayer
identification number (e.g., SSN#). The exemption does not
apply if the seller knows the affidavit is false or if the buyer
and/or his agent have actual knowledge that it is false.
2.
If the seller provides the buyer with a “withholding certificate”
(aka, “qualifying statement”) from the IRS stating that no
withholding is required then the buyer and his agent are
exempt.
3.
If the property is acquired for use by the buyer as his
personal residence AND the home sells for no more than
$300,000 then the buyer and his agent are exempt (use
CAR® form AB for this purpose).
4.
If the transaction is a “non-recognition transaction” for the
seller and the seller furnishes the buyer a notice of nonrecognition. This notice informs the buyer that no
withholding is necessary because of a “non-recognition”
provision in the tax law (for example, a 1031 exchange).
The buyer is responsible for obtaining the seller’s taxpayer
identification number (e.g., his SSN#) and, according to FIRPTA, is
liable for failure to withhold should he not obtain it. However, it is
not uncommon for the seller to object to this provision (although
CAR®’s standard purchase agreement makes it a contractual
requirement for the seller to divulge it). In this situation, many
agents have counseled their buyers to accept the transmittal of the
buyer’s SSN directly to the settlement agent with instructions to
hand the affidavit over to the IRS only if requested to do so by the
IRS.
The affidavit needs to be retained for five years.
CAR®’s Real Estate Purchase Contract and Receipt for Deposit,
Standard (form RPA-CA) covers compliance with FIRPTA under the
paragraph entitled “Withholding Taxes.”
CAR® provides an excellent and detailed description of the FIRPTA
withholding requirement in its publication: “Federal Withholding:
The Foreign Investment in Real Property Tax Act (FIRPTA).”
A related withholding must be made and paid to the State’s tax
collection agent, the Franchise Tax Board. This withholding is
required when (a) the seller shows an out-of-state address or the
sale proceeds are to be disbursed to the seller’s financial
intermediary, (b) the sale price exceeds $100,000, (c) the seller
does not certify he is a California resident or that his property is his
personal residence. The withholding is 3⅓% of the total sales price
(see below article). The escrow holder is legally required to notify
the buyer if this withholding applies.
2.2.1.8
NEW LAW WILL EASE WITHHOLDING BURDEN FOR SALES OF
NON-RESIDENCES
by Bob Hunt for Realty Times, October 31, 2006
In the recent state legislative session there was a little-noticed bill (AB 2962
– Benoit) that contained good news for sellers of investment property
{emphasis added} in California. In many cases this new law will result in
reduced withholding when the property is sold.
Existing law provides that most persons selling California property that is
not their personal residence must withhold 3⅓ percent of the gross sale
price. There are a variety of special exceptions to this – too numerous to
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detail here – but they are of little consequence to most individuals. Also,
technically, it is the buyer who withholds the funds but they always come
out of the proceeds due the seller.
Until 2003, withholding was only required when a seller lived out of state.
As part of the 2002-03 budget, the Legislature extended the withholding
requirements to state residents as well. As the Senate bill analysis frankly
puts it, that change was “enacted to generate cash flow for the state during
a time of fiscal crisis”.
The Alternative Minimum Tax
(AMT) applies for high income
earners when their total
deductions, which include local
taxes, exceed a threshold
amount.
The problem, according to both the bill’s author and the legislative analysts,
has been twofold. First, it “resulted in many taxpayers being over-withheld,
because 3⅓ percent of the gross sales price of the property often exceeds
the amount of tax due …” Secondly, “the resulting overwithholding of state
income tax is not only an inconvenience to the taxpayer but can result in an
alternative minimum tax liability at the federal level.” (Don’t even think of
asking me to explain how that works, because I don’t know.)
Under AB 2962, withholding requirements still apply to the same people;
but there is now an alternative to the 3⅓ percent of gross sales price
amount. Now taxpayers can calculate the gain and pay tax on that amount
instead. The alternative amount to be withheld is the maximum tax rate
(9.3 percent) of the taxable gain.
In many cases, that could be very good news. Suppose you had
purchased an investment property a few years back – when everything was
guaranteed to appreciate at 27% – for $600,000; but in 2007 you are happy
to be able to sell it for $650,000. Assuming that $600,000 is your basis,
with selling costs of $15,000 you would be looking at a taxable gain of
$35,000. Under today’s tax laws, you would have to withhold 3⅓ percent of
the gross sales price – $21,645. But the alternative provided by AB 2962
will allow you to withhold on the basis of 9.3 percent of the taxable gain. In
this case, that would mean withholding $3,255. Which would you prefer?
Of course, choosing this alternative will not always be preferable. Suppose
you had purchased the property a long time ago for around $200,000 and
that you had a taxable gain of $400,000. Using the new alternative, you
would have to withhold $37,200. Maybe you would want to stick with the
former method of computing the withholding.
FTB Publication 1016 details
under what circumstances
withholding is required. The most
common circumstance is when
the seller is an individual and the
sales price for the investment
property is over $100K. For
corporate entities, see the
publication.
In applicable transactions, withholding is still required. But, effective Jan. 1,
2007, the taxpayer may choose by which method to calculate the
withholding amount. If the new alternative is used, he must certify his
calculation, under penalty of perjury. The relevant forms as well as
worksheets will be available on the Franchise Tax Board (FTB) website .
The FTB estimated that the fiscal impact of this bill will be to reduce cash
flow to the state by about $70 million in the 2006/07 fiscal year, and by only
$5 million in each of the subsequent two. It was noted that “this bill does
not affect ultimate tax liabilities only the timing of payments.”
AB 2962 sailed through both houses with no opposition. Supporters
included the CAR® and the Howard Jarvis Taxpayers Association. It was
signed by the Governor on September 22.
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2.2.1.9
IRS ISSUES VACATION HOME RULING
by Gary Gorman for Realty Times, March 6, 2008
The IRS has just issued a new ruling that sets forth the guidelines for those
taxpayers that wish to do a 1031 exchange involving a vacation home. By
way of background, you can only exchange property held for investment or
used in a trade or business. Up until last year there was no guidance from
the IRS that said whether vacation homes were investment or personal use
property but that changed when the U.S. Tax Court disallowed a taxpayer’s
exchange from one vacation home into another. The court case
immediately gave rise to the question of what has to be done to qualify a
vacation home for a 1031 exchange – this ruling is the IRS attempt to
answer that question.
The ruling was released as a “Revenue Procedure,” which is a type of
“cook book” ruling – it sets out what a taxpayer must do to achieve a certain
result from the IRS – in this case the result is a promise from them that they
will not dispute the investment nature of your vacation home.
So what do you have to do to achieve this result? First, the ruling imposes
a 24 month holding period for the old property if that is your vacation home,
or the new property if you intend to buy a vacation home or for both if
you’re moving from one vacation home to another.
For each 12 month block of this holding period you must have rented the
vacation home for at least 14 days at a fair market rent. Also during each
12 month block, the owner is only allowed to use the property for the
greater of 14 days or 10% of the days rented. This means that if you
rented the property for 30 days that year, you could still use it for 14 days,
but if you rented it for 200 you could use it for 20. Days that relatives use
the unit, presumably for free, count against you (although I have to believe
that will not be the case if they pay a fair rent).
Although not specifically discussed in the ruling, you are allowed a
reasonable number of “maintenance days” to care for the unit. These days
need to be reasonable – even the IRS knows that it doesn’t take a week to
shampoo the carpets.
So what happens if you don’t meet the test? Before you slit your wrist, just
remember: this is a safe harbor ruling – it doesn’t mean that your
exchange is toast if you fail and it doesn’t mean that they will automatically
audit you (although you can expect closer scrutiny if you do get audited).
Some of you have never rented or tried to rent your unit and some of you
have used it two or three or four months a year the last few years; this
ruling is probably the death knell for your exchange. Most of our clients,
however, actually come amazingly close to meeting it. My advice to all of
you is to tighten up your record keeping and your tax reporting of your
property. Be serious in your rental attempts; charge family members the
going rental rate when they use it. Keep detailed records of the dates you
use it and what you did – especially for each maintenance day. Your
success at doing an exchange could very well come down to how good
your records are.
Page 125
2.2.1.10
ARE YOU A REAL ESTATE PROFESSIONAL? MAYBE NOT, SAYS
IRS
by Diane Kennedy for Realty Times, July 17, 2008
BACKGROUND: Real estate professionals can write-off all rental losses in
the year of the loss on their tax return. No rental losses are carried
forward, they are written off in the year of the loss.
A passive loss is a loss incurred through a rental property, limited
partnership, or other enterprise in which the individual is not actively
involved. Examples of passive losses include interest, depreciation, taxes,
insurance, and maintenance.
Passive losses can only be used to offset passive income, not wage or
portfolio income. Passive income is not subject to the 15.3% selfemployment tax.
If you’re a real estate investor who has ever taken a real estate loss on
your tax return, there is a target on your back. For months, members on
my forum have been complaining about being selected for audit, and
losing, based on the IRS’s new set of real estate professional guidelines.
Under tax law, a “real estate professional” isn’t always a licensed real
estate agent or a broker. It’s a tax classification and it’s an important one.
As a regular real estate investor, you are limited to deducting $25,000 in
passive losses each year against your passive income. That amount
begins phasing out once your taxable income tops $100,000 and
disappears entirely when your income reaches $150,000. Real estate
professionals have neither the dollar nor the income limitation making this
classification an important part of tax-planning.
When the market got hot, the number of real estate professionals shot up.
But as the “tax gap” (the difference between taxes that should be paid and
taxes that are paid) increases, government is looking for ways to turn things
around and this classification is squarely in the cross-hairs.
To meet the IRS requirements {to qualify as a “real estate professional”},
you need two things: (1) spend the majority of your working time
performing qualified real estate activities (regardless of what you do) and
(2) rack up at least 750 hours. Qualified activities include “develop,
redevelop, construct, reconstruct, acquire, convert, rent, operate, manage,
lease, or sell real estate.”
Practically speaking you won’t make the cut if you work elsewhere and
report full-time W-2 income. And there’s a third hurdle: “material
participation.” In a twist that can only make sense in the IRS world, real
estate activities are one of two things: “passive,” or “materially participating
passive” {see following paragraphs}. If you have a passive loss, it can only
be used against passive income. Period.
Ms. Kennedy offers a detailed
explanation of the IRS criteria
used to classify an individual as a
“real estate professional” in this
article.
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Materially participating passive losses, on the other hand, can be used
against materially participating passive income and, in some cases, other
income. This is where the power of the real estate professional
classification comes in: the ability to take the loss from real estate
investments against other income. {emphasis added} Unfortunately,
what has been acceptable in the past, no longer is. Here are three areas
the IRS is focusing on right now:
1.
Limited Partnership Interests: By definition, if you hold property in
a limited partnership as a limited partner, you do not materially
participate. This area is being hit hard and the number of audits of
limited partnerships has increased.
2.
Failure to Aggregate Hours Worked: The material participation
rule requires that you work 500 hours on each property you own, or
make an election to aggregate all the properties together into a
single 500-hour block. Fail to make this election, though, and you
will run into trouble.
3.
Failure to Meet 500 Hour Threshold: To get even the $25,000
deduction you’ve got to meet the 500-hour minimum even if you
aren’t going for full real estate professional status. Fail to meet this
requirement and your passive loss will be limited to the amount of
your passive income.
But the biggest change that we’re seeing is to the material participation
rules and what does and doesn’t constitute a real estate activity. For
example, managing real estate is a qualified activity but managing real
estate through a third-party property management company is being
challenged. So if you live hundreds of miles away from your rental
properties, be on the lookout for this type of question. Another is research.
The hours spent on researching properties and markets is being challenged
by the IRS who consider this a passive activity.
Proper records are also becoming vital. Anyone looking to claim this
classification must be keeping a detailed time log of dates, locations and
activities, preferably backed up with photographs or other evidence
showing you hard at work.
Finally, frustrating everyone is the fact that in many cases the “new” IRS
rules (which came out in December of 2007) are being applied after the fact
and made retroactive to 2007 and earlier – when the old rules were still in
force. Both sides are appealing up to the Tax Court hoping to either set a
new precedent or rein in the IRS. Until the Tax Court rules one way or
another on whether or not the IRS can apply new rules to old earnings,
we’re in limbo. Reviewing your activities and taking steps to make sure
you’re in compliance with the new rules may be your best plan.
A recent (March 2009) tax court case is reassuring.
Mr. and Mrs. Agarwal managed their two rental properties. Mr. Agarwal
worked as an engineer; Mrs. Agarwal as a sales associate for a Century 21
in Encino California. Together they satisified IRS’s rules to claim “material
participation” in their rental business. As a California salesperson licensee,
Ms. Agarwal applied her large losses from her rental properties to offset her
sales commission income on her Schedule C.
The IRS disallowed her use of her losses on her rental properties to offset
her commission income arguing that because she was a 1099-employee
with a salesperson license, not a broker license, she was not by IRS’s
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definition a real estate professional. The IRS definition of a real estate
professional is one who engages in “any real property development,
redevelopment, construction, reconstruction, acquisition, conversion, rental,
operation, management, leasing, or brokerage trade or business.”
The tax court ruled that she was, in fact, a real estate professional despite
her licensed title of “salesperson” rather than “broker” and the course
permitted her to apply her rental losses to offset her commission income
(source).
2.3
INDUSTRY
2.3.1
PROFESSION
2.3.1.1
A DIRECT PLEA TO THE MORTGAGE INDUSTRY
by Henry Savage for Realty Times, July 16, 2007
We include this article to remind licensees of the flagrant excesses of the
mortgage industry before the Bubble burst and to refute those that have
argued that these excesses were not known at the time (see also Peter
Schiff’s 2006 address to the Western Regional Mortgage Banker’s
Association).
I have owned a small mortgage company for more than 15 years and have
been writing mortgage columns for more than ten years. One observation
is becoming more unsettling to me: the mortgage industry is becoming
more irresponsible in its business practices and advertising.
Mr. Savage was prescient; today
(August 2010) we have the new
requirement that all residential
mortgage brokers obtain an MLO
endorsement as required by the
SAFE act.
History has proven that when an industry as a whole becomes irresponsible
– perhaps even unscrupulous, the government steps in and starts to
regulate . While this may be a good thing for the consumer, history has
also shown that too much regulation can be harmful to everyone.
It’s time for the mortgage industry as a whole to put a little more effort in
self-regulation before the government regulates it to death {to late}. I write
this column as an observant consumer and some of my recent observations
aren’t pretty. Consider the following:
Homeowners across the country receive countless solicitation
letters with misleading and false information. I have a stack full of
letters that I have saved up over the last year or so. Every one is
misleading in one form or another. My favorite boasts a 30 year
fixed rate of 1.95 percent. Come on now.
I click on a mortgage advertisement on a very well known Internet
site. The hyperlink simply says, “Mortgage Rates as low as
5.375%.” I go to the site and read the fine print, which was almost
too small for my old eyes. It turns out the 5.375% is only good for
six months and the rate increases by one percent every six months
thereafter. It also confesses that it carries a 2.50 percent origination
fee. 2.50 percent? Come on now.
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A recent study by the Federal Trade Commission found that nine
out of ten borrowers do not understand the charges and closing
costs associated with the loan. Say what? Not one client of mine
has ever left my office without a full and comprehensive
understanding of his loan, the terms and the charges, if any. It’s the
loan officer’s job to ensure that this happens. Come on now.
The mortgage business is highly regulated as it is but unfortunately it’s
pretty evident that the current laws aren’t working. Here are a couple of
examples:
The law requires that the lender issue a “Truth-In-Lending”
statement at time of application. The form requires disclosure of the
APR. The APR is supposed to give the borrower the cost of the
loan, expressed as an interest rate, when you consider the note rate
and any upfront charges, closing costs, and points. The problem is
that it assumes the borrower will hold the loan to the full term, which
is an impractical assumption. A loan with high fees and points that
is paid off early will result in a very high APR.
It would be much better if the HUD-1 Settlement Statement showed the
APR for a progression of years such as one year, five years, and ten years.
The new Truth in Lending form mandated by the Federal Reserve in 2009
fails to address this deficiency.
The Good Faith Estimate of Closing Costs is required to be sent to
the borrower within three days of making the application. What’s up
with that? It seems to me that calculation and explanation of the
closing costs should be part of the application process.
While some laws designed to do something actually work, other laws have
simply exacerbated the consumer’s confusion. It’s time for the mortgage
industry to police its own people. We need to stop the hard-sell, eliminate
misleading advertisements and concentrate on what we’re paid to do – help
folks choose the best loan, help them find the most competitive terms and
ensure that they have a complete understand of their mortgage program.
Members of the Upfront Mortgage Brokers Association are mortgage
brokers whose interests are fully aligned with those of the consumer. The
key element of the UMB Commitment is the requirement that the fee for the
UMB’s services be negotiated and established with the borrower at the start
of the mortgage process. Because the UMB’s compensation is set upfront,
the borrower receives the exact wholesale price with no markup.
2.3.1.2
CALIFORNIA REALTORS TO PAY POLITICAL ASSESSMENT
by Bob Hunt for Realty Times, September 7, 2010
When the 2011 dues billing cycle comes around a few months from now,
members of CAR® will see a new assessment of $49 in addition to their
regular dues. Labeled the “REALTOR® Action Assessment” (RAA), its
purpose is to raise funds for CAR® political activities. The assessment is
not optional, although individuals will have a choice as to which way their
$49 is to be directed: (1) It can go to CAR® political action committees
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which provide funding support for candidates, or (2) It can go the general
fund for political purposes such as “education and mobilizing members on
issues of importance to the real estate industry and not to specific
candidates.”
Just about every California REALTOR® is aware of the fact that legislative
activity constantly affects the real estate business. Moreover, most know
that it is only because of CAR®’s involvement that the business hasn’t been
even more negatively affected than has been experienced. In the past year
alone, CAR® has influenced legislation on topics ranging from deficiency
judgments to income tax withholding for independent contractors to pointof-sale retrofit requirements that would have drastically increased the cost
of selling a home. The list goes on and on.
The REALTORS®’ legislative agenda is supported in three ways: through
direct member involvement, by the lobbying efforts of CAR®’s legislative
staff in Sacramento, and by the election of legislators who are disposed to
have a favorable attitude to the business, tax, property rights, and land use
issues that REALTORS® care about. All of these things cost money; and the
election of legislators is what costs the most.
This is not a partisan issue. At both the national and the (California) state
level, REALTOR® PAC funds are pretty evenly distributed between the
parties {that’s hard to believe}. Many people have the perception that
REALTOR® issues tend to be on the Republican side, but this is not so. In
the current state legislative session, six CAR-sponsored bills are being
carried by Democrats, two by Republicans.
It is practically a self-evident truth that CAR® needs to raise more politicalpurpose money than it has currently been able to generate through strictly
volunteer programs. The economic toll taken by the market downturn has
been evident in this area as well as the more familiar ones. In the past six
years voluntary participation in political-purpose fundraising has dropped
from 37% of the membership to 20%. The amount of funds raised in 2009
was down approximately 50% from 2006. Once among the top 10 PACs in
the state of California, CAR® is now ranked number 37.
The REALTOR® Action Assessment was adopted by CAR®’s Board of
Directors at their June meetings in Sacramento. Details about it have been
on the web site www.car.org and electronic newsletter notification has been
sent to the members. No one should be surprised when the dues billing
statements go out at the turn of the year. Inevitably, though, some will be.
This reminds me of what Adam Smith said about professional groups in
Wealth of Nations (1786): “People of the same trade seldom meet
together, even for merriment and diversion, but the conversation ends in a
conspiracy against the public, or in some contrivance to raise prices. It is
impossible indeed to prevent such meetings, by any law which either could
be executed, or would be consistent with liberty or justice. But though the
law cannot hinder people of the same trade from sometimes assembling
together, it ought to do nothing to facilitate such assemblies; much less to
render them necessary.”
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2.3.2
GOVERNMENT POLICY
2.3.2.1
WHAT IS THE FED’S “DISCOUNT” RATE AND DOES IT AFFECT
HOUSING?
by Blanche Evans for Realty Times, August 21, 2007
The Federal Reserve rate cut of last Friday failed to stop the bleeding in the
U.S. stock market. That’s because the Fed cut the “discount” rate, not the
federal funds interest rate. What’s the difference and how will housing be
impacted?
You won’t find the answer on financial news sites. They talk in jargon.
Either that, or the journalists themselves don’t know what the differences
mean. So if they don’t know, you probably don’t know either.
So here’s a little lesson in American federal money flow management.
The Federal Reserve is like the bank of the federal government and the
guardian of the U.S. economy and, as such, oversees monetary and credit
policies such as buying and selling securities, setting the cost of credit
(interest rates), how much money is available to banks for borrowing, and
how fast and at what rates the money has to be repaid. The idea behind
the Federal Reserve is to keep things running smoothly, so banks that are
members of the Fed are federally insured, which is reassuring to depositors
like you and me.
To accomplish the flow of money, the Fed operates 12 regional banks, who
monitor the economy and loan money to “member” depository banks –
(“Member FDIC.”)
During the ‘credit crunch’ of 20072009, the term of the discount
rate was changed from overnight
to 30-days, and then later to 90days. The spread between the
discount rate and the federal
funds rate, normally 100 basis
points, was reduced to 25 basis
points (source).
There are two ways banks can borrow money using Fed-insured funds.
They can borrow money directly from the Fed using the “discount” rate or
they can borrow from each other using the “federal funds” interest rate .
Both are short-term or overnight rates .
The “federal funds rate” is not a fixed rate but rather the weighted average
of all rates charged by banks for overnight loans to other banks. It is not set
by the Fed.
The discount rate is designed to improve liquidity for the banks themselves.
The federal funds interest rate is designed to improve or limit liquidity or
access to credit for consumers .
I think a better way of putting it is that the federal funds interest rate is the
average going rate for overnight loans between member banks and the
discount rate is the rate the Fed charges a member bank for an overnight
loan. The Fed encourages member banks to borrow from other member
banks by intentionally setting its discount rate higher (usually by 100 basis
points) than the current federal funds rate. Remember, the Fed is often
called, “the lender of last resort.”
Because the Fed can’t dictate what happens in the open market or between
banks, the Fed will issue a “target” rate for federal funds, which most banks
stick close to {This is misleading, please see note at bottom of article}.
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They {the member banks} can then charge consumers whatever they feel
they can get away with in the form of credit card interest rates, mortgage
interest rates, car loans, and so on.
If the economy is sluggish and consumers aren’t spending, the Fed will
lower target rates to encourage banks to lower the cost of borrowing. If the
economy is heating up more than about 3% of annualized growth, inflation
is a danger, and the Fed will make credit more expensive to slow things
down.
As of August 2010, the discount
rate is .75% – just 75 basis points.
Therefore, money from the Fed is
almost free especially when you
factor in inflation. (A year ago the
discount was 50 basis points.)
This past Friday, the Fed cut its discount rate by 50 basis points, from
6.25% to 5.75% . Since the discount rate is used by banks for their own
liquidity, it’s considered a “secondary” rate because it doesn’t impact
consumers directly. The lowering of the discount rate is viewed by many in
the economy as a largely symbolic gesture that the Fed is acknowledging
that the economy might be slowing to the point that it will consider a cut in
the federal funds rate so that consumers can benefit.
The Federal Reserve can decide at any time to raise or lower the cost of
the discount rate to banks but raising or lowering federal funds rates is
done by the Federal Open Market Committee, composed of the Board of
Governors and the 12 Reserve Bank presidents, although only five of those
can vote at any single meeting. The Committee meets eight times annually
to decide whether or not to raise key interest rates – the discount and
federal funds rates.
As of August 2010, the federal
funds rate is .25% (a quarter of a
percent).
Last week, the FOMC had just met and decided not to raise or lower federal
funds rate, leaving the 5.25% funds rate in place for the ninth meeting in a
row. But after the Fed cut discount rates, many pundits believe that the next
time the Fed meets, in September, the FOMC will vote to lower key interest
rates by 25 to 50 basis points.
Meanwhile, what housing consumers can look forward to is a general
calming of the markets with less panic than has been shown lately.
As of August 2010, the prevailing
interest for a 15-year, fixed-rate
mortgage is 3.67 – very close to
its historic low.
Mortgage interest rates, in the face of expanding liquidity, are likely to drift
downward, which will make buying a home more affordable in the shortterm.
Ms. Evans errs when she says the Fed “sets the federal funds rate.” No
one bank sets the federal funds rate; instead, it is the weighted average of
individually negotiated rates between member banks for overnight loans.
Banks seek overnight loans from one another to keep their cash reserves
adequate for demand. For example, when you write a check the bank must
have the cash on hand to fund your check.
The Fed dictates the percentage of cash on hand which member banks
must have relative to its deposits (called the “reserve requirement”); that
number is usually somewhere around 10%. The reserve requirement is
also used by the Fed to implement monetary policy. By increasing it, the
Fed takes money out of the banking system; by lowering it, it puts money
into the system.
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If at the end of the day a bank doesn’t meet the Fed’s reserve requirement,
it seeks to borrow funds from other banks at the cheapest rate it can find.
The weighted average of all these rates is the “federal funds rate.” If the
bank can’t get a rate cheaper from one of its member banks than the Fed’s
discount rate (perhaps because the member banks don’t trust the
borrowing bank), it can get the needed funds from the Fed (aka, “the lender
of last resort”).
What the Fed sets is a “target federal funds rate.” For example, if the
federal funds rate is 4% (remember it’s an average rate determined by
market forces) and the Fed wants it to be 3%; it buys securities from
dealers and its member banks thus putting dollars (i.e., Federal Reserve
Notes) into the banking system. By increasing the dollars in the banking
system, banks have more dollars to lend relative to existing loan demand.
By virtue of the “Law of Supply and Demand,” this lowers the cost of
borrowing.
Conversely, if the Fed wants to slow the economy, it sells securities thereby
taking dollars out of the economy leaving banks with fewer dollars to lend.
It should be emphasized, that this technique of buying and selling securities
(called “open market transactions”) doesn’t always work. Today, for
example, the federal funds rate is just .25% – for all practical purposes
zero.
The Fed has other tools in its bag of tricks to stimulate the economy. This
includes the power of the “magic check book;” that is, the power to create
dollars out of thin air. Recently the Fed has used this power (called
“quantitative easing”) to bail out the banks and inject nearly two trillion
dollars into the banking system. It’s used its magic checkbook to purchase
mortgage backed securities, fund the Nation’s deficit spending (aka,
“monetize the debt”), and to purchase many other forms of debt of dubious
value.
2.3.2.2
WASHINGTON REPORT: SEIZURE OF FANNIE AND FREDDIE
by Kenneth R. Harney for Realty Times, September 15, 2008
Reuters reported on July 21, 2010
that the U.S. Treasury has
injected over 145 billion of the
taxpayer’s money into Fannie and
Freddie with much more expected
to be needed.
The dramatic seizure of Fannie Mae and Freddie Mac by the federal
government has had no downsides for real estate – although it could
ultimately cost taxpayers billions if the companies’ loan portfolios continue
to bleed red ink .
So how does that all sort out for individual home buyers, sellers, builders
and real estate professionals?
Here’s a quick overview with a Washington perspective: Fannie and
Freddie provided – and will continue to provide – liquidity to the American
home mortgage market … that is, plenty of money for qualified buyers and
refinancers.
They’re not going away. Only their top brass pulling down eight figure
annual salaries and $100,000 country club membership perks are going
away.
And most lamented of all in the corridors of Capitol Hill, the two companies’
notoriously generous political action committees, which put $3 million into
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the campaign coffers of carefully selected congressional and senate
leaders in recent years, are going away.
Ironically, although Fannie and Freddie claimed that they lowered mortgage
rates, the reality is that the biggest impact they ever had on ordinary folks’
interest rate quotes was when the feds busted in and took them over.
Rates dropped anywhere from half a point to three quarters of a point within
the first week, slashing hundreds of dollars off monthly principal and
interest payments for thousands of home buyers and refinancers who
rushed to lock during the free fall.
As of August 2010, both
companies are still under
government conservatorship.
Government rule of the bankrupt companies is likely to extend through 2009
– or as long as it takes for Congress and a new administration to figure
out how to reconstruct them.
In the meantime, it should be pretty much business as usual for new
borrowers. But don’t expect federally-run Fannie and Freddie to get out
front and innovate with lower downpayments or easier underwriting
standards.
The American Recovery and
Reinvestment Act of 2009
extended FHA’s loan limits
through the end of 2010 ranging
from $271,050-$729,750. The
maximum amount of $729,750 is
applicable to extremely high-cost
metropolitan areas, such as New
York, Los Angeles, San Francisco
and Washington, D.C (source).
Anyone needing a really low downpayment or more consumer-friendly credit
to buy a house will need to turn to FHA, not Fannie or Freddie. Between
now and January 1 , FHA will be able to do three percent down loans of
up $729,750.
After January 1, FHA will offer three and a half percent downpayments on
maximum loans of $625,500. Fannie and Freddie will have the same upper
limit for high-cost areas but won’t be able to come close on downpayments
or credit standards.
Bottom line: Weep not for Fannie and Freddie, who drove themselves into
bankruptcy. Instead, raise your glass and toast FHA. It’s been around
since the Depression, its leaders aren’t paid millions, and for many home
buyers it’s going to be the only game in town.
2.3.2.3
CALIFORNIA: LAND OF SUNSHINE AND A YEAR OF FREE LIVING
by Bob Schwartz for Realty Times, July 23, 2009
The state of California has more than doubled the normal foreclosure time
by an additional 90 days for homeowners with troubled mortgages. This is
on top of the 30 day extension put in to place in 2008. Is this the state
where living is free or are these actions only prolonging the pain? Sen.
Ellen Corbett (D-San Leandro) introduced a bill as an add-on to the
California “budget” package to add a 90-day moratorium on California
home foreclosures. Gov. Arnold Schwarzenegger signed into the bill on
02/20/09. It applies to owner-occupied homes and first-mortgages made
from 2003 to 2007.
State regulators can grant loan servicers and lenders exemptions, if they
have a mortgage modification program in place that meets certain criteria.
These include programs that defer a portion of the principal, lower interest
rates for at least five years, or extend loan terms.
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In 2008, the state of California extended the foreclosure process by
approximately 30 days by adding a requirement that lenders document their
efforts to contact the delinquent homeowner.
So, now for 2009, the state of California has more than doubled the normal
foreclosure time periods by extending the normal California foreclosure for
an additional 90 days. This is after the 30 day extension applied in 2008.
Instead of helping these actions are only prolonging the pain. Perhaps the
State should stay out of the mortgage business.
The market can’t recover until all these foreclosures get flushed through the
system. Delaying the inevitable will not change the end result; it will
probably only make it worse. In a declining market, the lenders will recover
even less when the property eventually sells.
Personally, I’m not aware of one mortgage lender that starts the foreclosure
process as soon as the homeowner is late one month. In the vast majority
of cases, the lender does not start the process for four months or more. Do
the math: Four months slow motion by the lender, the original 90 day
foreclosure process (plus a 21 day advertising period), the 2008 delay of 30
days, and now the 90 day moratorium passed in February 2009. That’s a
potential of free living for almost a year! Who is really paying for this ‘free
California living?’ With a lot of these toxic loans being purchased by the
federal government, it’s the U.S. taxpayer who is paying.
Other fallout resulting from the state’s legislated moratorium on
foreclosures is the many homeowner associations adversely affected by a
delay in collecting normal monthly maintenance dues. It’s a sure bet
homeowners are not paying their monthly maintenance fees when they
aren’t making their mortgage payments. Most San Diego monthly
homeowner fees run over $250 per month. Who ultimately pays for the
additional $1,000 in delinquent dues? It’s the existing association
homeowners. HOAs will either have to increase the dues, or require
special assessments from the owners who are left. Once a property has
been foreclosed, the lenders are responsible for paying the dues on the
property. All outstanding balances prior to the foreclosure date are wiped
out! The “moratorium penalty” can be especially devastating for small
condo complexes with six to twelve units, like those which dominate the
North Park/Normal Heights neighborhoods in San Diego.
The California legislature continues to amaze … but not impress … with
stupid ideas put into law.
2.3.2.4
FEDS HELP SPEED UP YOUR MORTGAGE MODIFICATION
by Broderick Perkins for Realty Times, March 4, 2010
The latest spin on government-sponsored mortgage modifications demands
that home owners provide an initial package of documents before the first
phase of a modification can begin.
The newest plan for the ever-evolving Obama Administration’s Home
Affordable Modification Program (HAMP) {see note following this article for
an explanation of HAMP} also requires lenders (or servicers) to review the
documentation and respond with an approval or rejection within 30 days.
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The new guidance also details how lenders must convert a trial modification
to a permanent one.
Effective June 1, 2010, the new provisions are designed to speed up the
process of getting struggling home owners into mortgage modifications they
can afford. It doesn’t really change the documents required, just the
process.
As of December, only about 100,000 of a potential four million eligible
home owners were enjoying permanent mortgage modifications with
average mortgage payment reductions of $500 a month, according to the
U.S. Treasury. Another 750,000 home owners have trial modifications with
the same average mortgage payment reduction.
A mortgage modification occurs when the lender reworks the terms of an
existing home loan, typically to lower payments and make the home more
affordable. To get the payment down, lenders lower the interest rate,
extend the loan term, reduce the principal, or use any combination of those
approaches. Reducing the principal is rare, but there is a push afoot to
encourage more principal reductions.
While a modification might stain your credit, it’s considered a better deal
than losing your home and your credit standing to a foreclosure or short
sale.
Home owners who sign up for HAMP mortgage modifications begin with a
trial modification period of at least three months. Previously, some home
owners entered the trial modification with less documentation than is now
required.
Now, before obtaining a trial modification, home owners who believe they
are qualified must supply three types of documentation:
1)
A completed “Request for Modification and Affidavit” (RMA) form,
which provides information about the property and the home
owner’s financial situation.
2)
IRS Form 4506T-EZ, which allows the lender to look at a home
owner’s tax return and not rely upon “stated incomes” – the bane of
many failed mortgages.
3)
Proof of income. A checklist is available to tell home owners what
documents they need for proof if they are a wage earner, selfemployed, or receive retirement or receiving other income.
Within ten days of receiving a home owner’s information, the lender must,
in writing, acknowledge receipt of the paperwork and describe, with a
timeline, the next phase – the evaluation process.
Within 30 days of receipt of the application, the lender must evaluate the
application and request additional information if the application is
incomplete. Also within 30 days, if the home owner’s information is
complete and otherwise meets modification eligibility requirements and the
lender grants a modification, the lender must send the home owner a trial
modification plan notice.
If the requirements aren’t met, the lender must notify the home owner that
he or she is not eligible for a HAMP modification.
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For home owners who are not eligible for a HAMP deal, the lender is
required to consider the home owner for other loss mitigation options,
including refinance, forbearance, non-HAMP modifications, and ultimately
short sales, or deeds in lieu of foreclosure.
During the 30 days, in order to review the application, the lender has a right
to get a copy of a home owner’s credit report and to verify the property is
the home owner’s principal residence.
The lender can also determine the property’s value using an onsite
appraisal, automated valuation model (AVM), or a real estate broker’s price
opinion (BPO).
Home owners who achieve a trial modification must make all payments on
time to move to a permanent modification. A “permanent” modification isn’t
necessarily so. Years down the road, the lender can determine to continue
or end the modification and revert to the original terms of the mortgage or
take other steps.
Throughout the ordeal, lenders must track and maintain records of the
process including phoned, written, and emailed contacts with the home
owner.
In February 2009, the Obama Administration introduced the Making Home
Affordable Program to stabilize the housing market and help distressed
homeowners.
According to the government’s website for the program, over one million
homeowners have already received help under the program.
In March 2010, the Making Home Affordable program was extended with
three new plans:
1.
The Second Lien Modification Program offers homeowners a way
to modify their second mortgages to make them more affordable
when their first mortgage is modified under the Home Affordable
Modification Program.
2.
The Home Affordable Refinance Program gives homeowners with
loans owned or guaranteed by Fannie or Freddie an opportunity to
refinance into more affordable monthly payments.
3.
The Home Affordable Foreclosure Alternatives Program
provides opportunities for homeowners who can no longer afford to
stay in their home but want to avoid foreclosure to transition to more
affordable housing through a short sale or deed-in-lieu of
foreclosure.
According to a recent (June 24, 2010) article in the Wall Street Journal,
lenders are unhappy with the program because they find it too complicated
and confusing for their customers. The article states that according to
Treasury’s most recent data, nearly one out of four homeowners offered
help under the program have fallen out of HAMP. About 1.2 million trial
modifications had been started under the plan and about 281,000
homeowners had been dropped by the end of April.
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2.3.2.5
CA HOMEOWNERSHIP WITHOUT MORTGAGE PAYMENTS: HOA’S
PAY FOR CA MORTGAGE MORATORIUMS
by Bob Schwartz for Realty Times, March 10, 2010
While some people struggle to keep their mortgage payments current,
others are living in their houses for free. Not only are they not making
mortgage payments but they are being offered incentives when they don’t
{move out}. The Federal government has pressured lenders to work out
foreclosure alternatives because of the larger number of foreclosure
activity. There are also both Federal and State foreclosure moratoriums
extending this “live free” courtesy.
The media outlets continue to show hard working families with five or six
kids being ‘forced’ to leave their home . It makes for good emotional
“news.” There is another side to the story. Sadly, the taxpayers (and future
generations) end up paying.
Last week Citigroup announced plans for a pilot program. Delinquent
borrowers who don’t qualify for, or decline, mortgage relief would be allowed
to stay in their homes without making payments for up to six months. In
return, the owner/tenant must keep the property in good condition. Let’s
look at this a different way. Hypothetically, say the monthly payment is
$1,900. Can the bank not get a gardener and a security service for MUCH
less? Who will make the property tax, insurance, and utility payments? In
the case of condominiums and planned communities, who pays the monthly
homeowners dues?
In San Diego, and probably all of California, many of the foreclosures
involve condominiums or communities with homeowner fees. Typically, if
after a number of months a homeowner is delinquent in their dues, the
Association files a lien notice. In severe cases the Association will
foreclose on this lien. Now with all the “underwater” homeowners, many
homeowner associations are not even incurring the expense of filing a lien.
Since there is negative equity the associations are rendered impotent.
If that is not bad enough, the California legislature in its infinite wisdom
passed two new laws last year that effectively more than double the time
before a lender can think of a foreclosure . If they had added a provision
that moratoriums only applied to homeowners who kept up with their tax,
insurance, and homeowner fees it wouldn’t have been so bad. In my
opinion a portion of the regular monthly mortgage payment should have
been included.
These two laws are:
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1.
Effective in 2008, SB 1137 (Perata) requires lenders to contact
borrowers to set up a meeting where the lenders and consumers
discuss potential ways to avoid foreclosure. It applies to loans
made from 2003 to the end of 2007.
2.
Effective in 2009 and sunsetting January 1, 2011, ABX2 7 (Lieu)
prohibits lenders and servicers from foreclosing for an additional 90
days on specified residential loans unless the lender has an
approved comprehensive loan modification program.
In a preceding article, “California: Land of Sunshine and a Year of Free
Living”, Bob Schwartz claims these laws make it possible for homeowners
to live for a full year without paying their mortgage until evicted.
Perhaps that is too much common sense to expect from the government.
Unfortunately, this has created a problem for California homeowner
associations. Had the government stayed out of the process and not
pressured lenders, the normal foreclosure time frames would not have hit
the homeowner associations as hard.
In California, a foreclosure previously took 90 days plus a 21-day
advertising period. If there are no buyers, the property reverts back to the
lender. Once the lender owns the property the monthly expenses, including
the homeowner’s fee became the responsibility of the lender.
In California and many western states, on a first loan to purchase your
principal residence, the lender’s ONLY recourse is to take back the
property. They are barred by law from any other actions against the
troubled homeowner (liens, pay garnishments, personal property
repossession, etc.). Whether the owner is $100,000 under water or stays
rent free for another year and becomes an additional $25,000 under water,
it really does not matter. The credit rating is going to take a toll for normally
seven years. With the extent of the current housing problem this credit hit
will likely have a lessened impact. Even with the negative hit to credit,
many are deciding walking away/staying without paying is an easy way out
of the substantial negative equity position.
It’s becoming common for troubled Californian homeowner to live payment
free for a year and possibly longer. Unfortunately for the paying members
of homeowner associations, they will have to cover the delinquent dues.
Adding insult to injury, they have no hope of recovering these additional
costs without raising dues or imposing special assessments.
2.3.2.6
CA GOVERNOR SIGNS NEW $10K HOME BUYER’S CREDIT BILL
by Bob Schwartz for Realty Times, April 19, 2010
California offered a $10,000 tax
credit (in addition to the Federal
government’s $8,000 federal tax
credit for first time home buyers)
for taxpayers purchasing new
homes (no resales) from March 1,
2009 to March 1, 2010.
The bill discussed in this article
was enthusiastically signed by
Governor Schwarzenegger on
March 25th, 2010.
California homeowners might be seeing another $10,000 tax credit offer
soon. Despite the economic woes of the state, the governor has signed a
bill offering this tax credit to home buyers.
Is this sound business judgment? California has a $20.7 billion deficit in the
general fund budget over the next 16 months and owes $8.8 billion in shortterm loans that have to be paid off by June. There is an additional $120plus billion in outstanding bonds and interest that will be paid over decades.
The state’s pension fund, CalPers, has $16.3 billion more in liabilities than
assets plus California also faces a $51.8 billion for the health and dental
benefits of state retirees and future retirees.
The bottom line for California is that it has the lowest credit rating of any
state in the nation, just above junk bond status. One major problem is the
rise in California’s debt-service ratio (DSR). That is, the ratio of annual
general fund debt-service costs to annual general fund revenues and
transfers.
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This is often used as one indicator of the state’s debt burden. The higher it
is and more rapidly it rises, the more closely bond raters, financial analysts,
and investors tend to look at the state’s debt practices, and the more debtservice expenses limit the use of revenues for other programs. Debt
servicing is projected to comprise 9% of general fund revenues by the end
of 2014-15. According to Bloomberg News, the market believes a
developing country like Kazakhstan, with about 15.7 million people, is less
likely to default on its debt than California, which is the eighth largest
economy in the world.
The credit is on a first-come, firstserve basis. The original $100
million tax credit approved in
2009, ran out after just four
months with 10,659 Californians
claiming the credit (source).
Despite the economic woes of the State, the new (some say extension of
the 2009 new home credit) bill, AB 183 will provide $200 million for home
buyer tax credits, allocating $100 million for qualified first-time home buyers
of existing homes and $100 million for purchasers of new, or previously
unoccupied homes.
The eligible taxpayer who purchases a qualified personal residence on and
after May 1, 2010, and on or before Dec. 31, 2010, or who purchases a
qualified principal residence on and after Dec. 31, 2010, and closes the
sale before Aug. 1, 2011, will be able to take the allowed tax credit. The
credit is equal to the lesser of 5% of the purchase price or $10,000, in equal
installments over three consecutive years. Purchasers will be required to
live in the home for at least two years or forfeit the credit. (Before acting on
this preliminary information for the tax credit, one should first consult your
legal/tax professional.)
According to my 2009 California income tax table; a married couple filing
jointly would need an adjusted gross income of at least $60K to make full
use of the $10K credit ($3.33K/year for three years).
2.3.3
DEMOGRAPHICS
2.3.3.1
HOUSING AFFECTED BY DEMOGRAPHIC TRENDS
by Phoebe Chongchua for Realty Times, February 5, 2010
The Urban Land Institute predicts there will be two major changes
beginning in this new decade in our country that will affect the housing
market.
The first is that home appreciation will slow. The report predicts annual
appreciation of 1 to 2%. The second change is that the record-high U.S.
homeownership rate will decline from 69 to 62%.
Baby Boomers
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Four other demographic trends are likely to have an impact as well. Aging
baby boomers , those 55 to 64 years old, will keep working, and, some
may stay put in their current suburban homes until the values recover. And,
just as I wrote about last week, those in this group who do move will look for
comfortable, easy homes (first-floor master bedroom), but the report
indicates they’ll look for mixed-age living environments that cater to active
lifestyles.
The second major demographic trend could impact the second-home
market. Those between the ages of 46 to 54 years old, according to the
report, are in their prime earning years; however, they lack home equity
and may not be able to afford second homes (unlike the older baby
boomers).
Generation Y; aka, “Millenials,”
“Echo Boomers.”
There are approximately 68-million people that make up Generation Y
{20 to 35 years old}. This group is even larger than the baby boomers. But
the report indicates this group is less interested in homeownership. The
author of the report, John K. McIlwain, wrote, “They will be renters by
necessity or choice for years ahead.” Not surprisingly, this tech-savvy
group places high value on communities – real and virtual – where
information and ideas can be shared.
This generation likes walkable, close-in communities. They’re not seeking
to escape to the outer edges of town, unless they can’t afford anything
nearby. Another big draw – “net zero” homes – green and powered
exclusively by alternative energy.
The fourth major demographic trend involves immigrants. This group is
often attracted to multi-generational housing in areas that have a strong
sense of community. So, larger homes are preferred, if affordable.
Multi-Generation Home.
Overall, the lasting stability of the U.S. housing market, according to
McIlwain, will depend most on the structure and revitalization of the private
home mortgage finance system.
“Re-establishing a robust private mortgage market will require both strong
market fundamentals and a reformed mortgage securitization structure that
eliminates past abuses,” McIlwain said. Bye-bye suburbia, study says.
Well, not completely. But the study does indicate that several factors are
escalating the popularity of urbanization: two-person household growth
(including those households without children), fewer baby boomers moving
to the suburbs, Gen Y opting/forced to rent rather than own, and public
policies that encourage compact development.
However, the author of the study says that urban infill development can’t
accommodate all the housing demand from the demographic groups.
McIlwain cautions that suburban development “must adapt or it will be
obsolete.” A new era is blossoming, “The suburban century is over. This is
the urban century.”
2.3.3.2
MULTIGENERATIONAL HOUSEHOLDS GO BACK TO THE FUTURE
by Broderick Perkins for Realty Times, April 1, 2010
Page 141
The nation’s First Family mirrors a growing housing trend in America.
Marian Robinson lives with her daughter, Michelle Obama; her
granddaughters, Malia and Sasha; and her son-in-law, President Barack
Obama.
The primary reason other families triple up is often an economic one that
doesn’t impact the First Family, but the White House home is an example of
why multigenerational living isn’t only about hard times.
“To have grandma and grandpa living with their grandkids, getting to know
them better, bonding and caring for each other is a an experience they
would not have had living separately,” said Diann Patton, the Coldwell
Banker’s real estate consumer specialist.
Over the past year, more than one in three Coldwell Banker real estate
professionals surveyed said they’ve noted an increase in home buyers
looking to create a multigenerational household.
A multigenerational household typically is one in which there are more than
two generations, say grandparents, parents and children, including adult
children, but it can also include aunts, uncles, cousins and other family
members.
A US Census’s report says there were nearly 5.5 million multigenerational
households in America last year. In households with parents and their kids,
nearly two million households also included both grandparents; another 2.8
million included a grandmother; and another 655,000 included a
grandfather.
Gardena, CA-based geriatric care manager, Dr. Marion Somers, Ph.D. says
having an older person in the house helps keep the family roots firmly
grounded.
Multigenerational households are a way, in the oral tradition, to learn about
ancestors and family history and to reincorporate old, long lost family
traditions.
For many ethnicities, multigenerational living is simply a cultural way of life.
“Multigenerational homes are certainly wonderful for older and younger
Americans on an emotional level, but aside from this, it may be a necessity.
As our population ages and lives longer than ever before, we’re beginning
to turn to our children and other family members for financial, physical and
emotional help as we age,” Dr. Somers said.
Affordability: Indeed, topping the list of why families are huddling more
generations under one roof is a financial decision.
39% of Coldwell Banker agents cited financial reasons as the trend’s
driving force. Sharing the mortgage and having adult children paying rent
makes housing more affordable.
According to a survey of Coldwell Banker agents, the principal reason cited
by buyers of multi-generational housing is to share housing expenses
among several adult children.
“The current economic climate has certainly contributed to the increased
demand for multigenerational housing. Not only are we seeing parents with
dwindling retirement accounts move in with their children, we’re also seeing
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children move in with their parents,” said Kurt Gleeson, vice president of
sales for RealEstate.com.
Likewise, sharing other household costs – insurance, property taxes,
upkeep, groceries, etc. – helps keep a roof over head.
“My mom was a single mother. My sisters and I lived downstairs and my
grandparents lived upstairs,” said Kim DiBenedetto, a real estate agent with
Coldwell Banker Del Monte Realty-Junipero in Carmel.
“It’s good for children because they have grandparents around, as well as
the savings on property taxes, utilities, and other shared expenses. If you
are pooling resources you can get something larger and nicer, also” she
added.
Health care: Among Coldwell Banker agents approached about
multigenerational living, 29% said health care was a reason. The bottom
line, again, is saving on the cost of assisted living or other health care
facilities, but there’s also the psychological benefit of not shipping older
relatives off to some strange place.
“The current economy just reinforces the fact that nursing homes, assisted
living facilities, and other care facilities may no longer be financially-viable
options. We’re only going to continue to see more of this trend,” said Dr.
Somers.
Family bonding: Family bonding was another prominent reason
for multigenerational housing being on the rise, according to
Coldwell Banker agents surveyed. Grandparents, as well as aunts,
uncles and cousins under the same roof creates a stronger
connection, a close-knit family.
“I think this is one of the unexpected surprises that come with
multigenerational living,” said Patton.
2.3.4
ECONOMY
2.3.4.1
REAL ESTATE SKY WON’T FALL: HERE’S WHY
by George W. Mantor for Realty Times, June 7, 2007
You may skip this article – it really has no content. It reflects the
conventional thinking just as the Mortgage Bubble was beginning to deflate.
Real estate hasn’t made much of a case for itself lately and it’s not getting
much help from any of the sub-industries such as builders and mortgage
makers. Just in the past few weeks, so called experts from the mortgage
industry, the building industry, and the resale real estate industry have all
been quoted as saying that the sky is falling.
Nice job guys!
And while real estate’s reputation as the number one investment is on the
ropes, the general media and other investment categories have stepped up
their attacks on real estate value.
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What do you need to know?
The Sky isn’t falling .
The real estate market always fluctuates.
Real estate sales prices are largely determined by the principal of
substitution and reflect the uniqueness of the property, at a specific point in
time, competing against only those other similar properties that happen to
be available for sale, at that point in time.
Chicken Little
A basic principle of appraisal
theory is the “Principle of
Substitution.” This principle is the
basis of the appraisal process.
Simply stated, value will tend to
be set by the cost of acquiring an
equally desirable substitute. The
value of a property to its owner
cannot ordinarily exceed the value
in the market to persons
generally, when it can be
substituted without undue
expense or serious delay. In a
free market, the buyer can be
expected to pay no more and a
seller can expect to receive no
less, than the price of an
equivalent substitute.
If there are many similar homes available at that time, there will be
downward pressure on sales prices. As an expanding population absorbs
the excess, competition for a dwindling resource will cause selling prices to
escalate.
There’s a reason that homes and real estate aren’t traded like commodities
on the Chicago Mercantile. They are too dissimilar . Even each tract
home has a somewhat different location, orientation, lot dimension,
proximity, and view.
There is no bubble {!}.
The value of real estate isn’t driven by speculation; it’s driven by its utility. If
the economy moves away, such as in the rust-belt, that utility may decline.
If high paying jobs are headed into a region, the value of the scarcest of all
commodities, real estate will rise.
Increasing development costs absolutely guarantee that new construction
will cost more than existing properties are selling for.
This factor alone has caused many developers to mothball projects in the
pipeline until shortages again push prices up.
Value is a complicated cocktail.
Assessed value, appraised value, market value, replacement value, and
selling price all mean something different. When the media says that real
estate values are falling, they really mean that the prices people paid for a
small number of homes, last month, was less than what a different group of
people paid for a different assortment the month before.
There is always a baseline of demand.
An increasing population must be housed. There is a natural ebb and flow,
not a boom {and} bust. At various times, demand outstrips supply; supply
is increased until the surge recedes to baseline or below.
There is always a baseline of mortgage defaults.
There will always be unforeseen circumstances that will bring some
homeowners into default. Even in good economic times. And even with
good mortgage loans. In an appreciating market, they are able to sell in a
short period of time. So, in most markets, foreclosure activity has been
below the historic baseline.
Now, it could increase, spiking a little to reflect those who can no longer
survive on increasing equity and then may level out at baseline again.
When the next rapid appreciation cycle begins, and it almost assuredly will,
rates may fall back below the newly adjusted baseline.
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There is no risk. {☺}
Save the term risk for high stakes poker in Vegas.
Buying real estate isn’t inherently risky. But it isn’t a get-rich-quick scheme,
either. It’s a formula for building long term wealth.
Real estate is a great way to build wealth.
You have to live somewhere. If you rent, you are making some or all of
someone else’s mortgage payment. But even if you have to work two jobs
and barely scrape by to make your own mortgage payment, you are
building equity that over time will be quite substantial.
So, perhaps, don’t believe every “the sky is falling” report or article.
Educate yourself on the market and happy wealth home owning!
“There is no bubble” [?!] “There is no risk” [?!]. Obviously from the vantage
of hindsight, Mr. Mantor, “The Real Estate Professor,” was dead wrong.
Specifically, he was wrong in maintaining that real estate values were
increasing because of demand created by population growth, and in
ignoring the influence of “easy money,” lax lending standards, and the
growing indebtedness among all sectors of the economy.
One must always be of leery of industry experts. Instead, one should
understand basic economic principals and think for himself.
2.3.4.2
REAL ESTATE OUTLOOK: NO RECESSION IN SIGHT
by Kenneth R. Harney for Realty Times, July 24, 2008
In December 2008, the National Bureau Economic Research declared that
the United States entered into recession in December 2007 – seven
months before this article was written. This article is typical of articles
written at the time about the short-term future of the real estate industry and
the general economy. We present it to remind licensees that economists
are not to be relied upon.
If you want an independent, authoritative guide to where the economy is
heading, check out the composite quarterly forecast of the members of the
National Association of Business Economics.
The economists polled in the survey work for companies in every
manufacturing and business category, so their composite forecasts aren’t
biased toward one industry or another.
The latest survey refutes the gloom and doom predictions of some Wall
Street analysts that we’re heading for recession or are on the brink of a
financial meltdown .
Fully 44% of top business economists now forecast a slow but steady
economic expansion – at a rate of 1% or higher – for the next two quarters.
Another 45% look for positive growth but at a rate below 1%. Just 10%
expect negative Gross Domestic Product (GDP) growth during the period –
the technical definition of a recession.
So 90% of the top business economists agree: We’re NOT headed for
recession.
Page 145
That’s encouraging for anyone looking to buy, sell, or broker real estate in
the coming months because negative national economic growth would put
a damper on any housing recovery. If the economists’ crystal ball is
accurate – that’s just not going to happen. {…}
As we’ve said before here at Realty Times: The real estate recovery will
manifest itself gradually – market by market, rather than through national
statistics. You just need to have your eyes open for the improvements,
modest as they may be in the early stages.
2.3.5
TECHNOLOGY
2.3.5.1
VACATION RENTAL MARKETING NEEDS SPAWN COTTAGE
INDUSTRY
by Broderick Perkins for Realty Times, December 5, 2006
Vacation rental owners have an expanding circle of resources to help them
both find tenants and keep their investment in tip top shape and they can
do it with varying levels of hands-on or hands-off participation.
Drew Macdonald, a vacation rental property manager and founder of Direct
Home Rentals, a year-old vacation rental listings site serving the Marco
Island-to-Sarasota area along Florida’s western peninsula region, says a
cottage industry of services allows vacation rental owners to choose
several marketing paths each with its own set of pros and cons.
Knowing which to choose for your vacation rental property is key.
Do-It-Yourself Marketing
Websites like DirectHomeRentals.com and dozens of others – large and
small, mom-and-pop and corporate sized – make it easy and cost effective
to reach a global travel market.
“Property owners are able to exchange leases by email and accept
deposits through PayPal. Properties get booked and vacation owners
retain more of their rental income,” says Macdonald.
Recent studies reveal vacation rentals are as attractive as amenity-laden
resort hotels but the do-it-yourself crowd has missed out on some exposure
because of the cost of marketing, says Emily Glossbrenner, co-author of
“How to Make Your Vacation Property Work For You” (Fire Crystal
Communications, $99) book and CD kit.
“Travel agents won’t tell people about them because vacation-rental
owners aren’t willing to pay the 10% (or more) commission that hotels and
resorts pay them. You won’t discover these properties in the travel
sections of magazines and newspapers because ads are too expensive.
The leading vacation-rental websites aren’t much help because their search
features are limited,” said Glossbrenner.
But that’s changing thanks to mergers, acquisitions, and the growing level
of sophistication that can give vacation property owners a special marketing
boost.
Page 146
“Over the past year, with HomeAway.com’s purchase of leading vacationrental sites, this has begun to change. People will soon be able to search a
master database of properties to find just the right place with availability for
the dates they need and with the features and amenities they want –
whether it’s a rustic cabin in the woods or a luxury-filled villa to rival the
finest five-star resort,” said Glossbrenner.
Many of those features already exist online for the vacation rental home
seeker.
But the do-it-yourself rental property owner needs to know a lot more than
just marketing.
“It’s too easy for the ‘rental by owner’ to make a mistake in violating Fair
Housing Laws. Your fine for violating Fair Housing laws could easily be
$25,000. Always use professionals to handle rentals and liability,” said
Romeo Danais, a real estate investor/owner of Romic Financials in
Oklahoma City, OK.
MacDonald says, however, it’s more common to see problems arise from
owners trying to maintain property from a distance, relying on neighbors
and friends to keep an eye on their investment. Not a prudent approach.
Professional home watch services can help bridge the gap for a fee that
cuts into rental income and hoped for do-it-yourself savings.
The best do-it-yourselfers have a background in property management, live
within ‘emergency distance’ of the property, or can otherwise get there
quickly should the need arise. They also tend to be fast learners with
flexible time schedules.
“They also want control of their investments. Just as E-trade and other
stock trading sites are popular, there are many property owners who have
the same mentality,” says Christine Karpinski, real estate investor, author
and Director of Owner Advocacy for HomeAway.com, a network of vacation
rental listing websites.
Rental Agency/Property Manager Marketing
Rental agencies, property managers, and similar companies take the
guesswork out of doing-it-yourself and stand in for the property owner on all
aspects of property management from finding renters (and kicking them
out, if necessary) to maintaining the property inside and out, all depending
upon the level of service the owner buys.
They can provide housekeeping services, repairs, maintenance and
cosmetic upkeep, rental contracts, bookkeeping, and virtually any related
service the owner needs and chooses to buy.
Many full-service firms are operated by real estate agents carrying the
NAR® Resort & Second-Home Property Specialist designation indicating
experience in the business.
“With the stiff online competition created by ‘by owner’ websites, rental
agencies have been forced to adapt to the changing market. Many rental
agencies have designed and developed websites that offer many of the
features and capabilities of their online competitors. In addition, rental
agents also list their properties on competing rental websites,” said
Macdonald.
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Perhaps the only drawback is the cost, typically 10 to 20% or more of the
gross rental income which obviously eats into the cash flow. In hot
markets, the cut can be much higher – as high as 50%!
Karpinski says property owners use a property manager because they don’t
have the time or desire to handle the chores or they don’t have a choice
because they purchased in a development where the property manager
has exclusive rental agency rights.
“Others do it because they think they have no other option. Often their real
estate agent will coax them into using their property manager services.
Some real estate agents make more money in the residual income from
renting than they do from the commissions on the sale itself,” said
Karpinski.
Vacation Rental Marketing Hybridization
Just as discount real estate brokers have become more viable in the resale
home market to meet the needs of those who don’t need full service
brokers to buy or sell a home, hybridization has hit the vacation rental
marketing business.
“As the online competition for vacation rentals increases, some rental
agents have begun to hybridize their industry with the Internet. These
rental hybrids offer all the benefits of online marketing with services like
home watch and residential cleaning after tenants check out. These hybrid
rental companies can offer fee-based services and lower commissions,”
said Macdonald.
The vacation home owner gets to choose from a menu of services that offer
the best of both worlds.
Karpinski says property owners who go hybrid typically are “generally
happy with auxiliary services the property manager offers but don’t want to
pay high commissions.”
They also perhaps are not fully satisfied with property management
services and are using it as a stepping stone before going solo and renting
on their own.
Also, Karpinski said, “They (property owners) are too uneasy to cut off all of
their ties with the property manager” and retain their services as a fail safe
measure.
2.3.5.2
PROPERTY OWNERS EMBRACE AUTOMATION
by Peter L. Mosca for Realty Times, September 10, 2008
Technology is a key component to a higher quality of life and the rise of the
multi-billion dollar home automation industry is a sign that Americans want
more from the properties they buy, own, and sell. While information,
security and entertainment are today delivered instantly, next generation
technological offerings will forever impact a property and its owners and
could serve as a market niche for builders looking to redefine themselves
and the markets they work in.
A new study from ABI Research may shed light on this coming technological
paradigm. For 30 years, home automation equipment to control lights,
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DIY: Do It Yourself
blinds, access and heating/air-conditioning fell into two broad categories:
custom-installed systems for luxury homes and low-end DIY products
using technologies aimed at tech-savvy enthusiasts. The expense of the
former and the limitations and unreliability of the latter acted to constrain the
size of the market. Now, the ABI Research found, a new breed of
standards-based wireless technologies promise a middle ground.
“The introduction of ZigBee , Z-Wave
and similar standards-based
technologies has led to new systems for mainstream consumers,” said ABI
senior analyst Sam Lucero, referring to comprehensive but more
economical systems for the consumer to own and home automation and
monitoring as a managed service. “ABI Research thinks this movement
holds great promise.”
ZigBee is a specification for a suite of communication protocols using
small, low-power digital radios for wireless personal area networks. The
ZigBee protocol is intended to be simpler and less expensive than other
wireless protocols such as Bluetooth. It is targeted at radio-frequency
applications requiring low data rate, long battery life, and secure
networking.
Z-Wave is a wireless communications standard designed for home
automation, specifically to remote control applications in residential and
light commercial environments. The technology uses a low-power radio
embedded into home electronics devices such as lighting, home access
control, entertainment systems, and household appliances.
Digital Wireless Lighting and
Appliance Control – Sylvania ZWave Deluxe Starter Kit; Price
~$120
D-Life Internet Surveillance
Camera Starter Kit; Price ~$250
The managed services approach enables service providers, like builders
and contractors, to include remote home monitoring and automation as
additions to bundled packages. “Rather than trying to ‘reinvent the home
automation wheel,’” advises Lucero, “aspiring service providers should take
advantage of the excellent turnkey solutions available from vendors such as
4HomeMedia, iControl Networks, Portus, uControl, Xanboo, and others.”
Another one of those vendors is HAI, a leading manufacturer of integrated
automation and security products since 1985, who recently announced a
new software product of interest called WL3 for Windows Home Server, a
monitor and home control system that operates from any device with a Web
browser, including the newly announced iPhoneTM 2.0, iPod TouchTM,
BlackBerryTM, Smartphone, computer, PDA, etc. With the WL3 for Windows
Home Server Add-in installed, it continually monitors a home and informs
the owner of events such as the alarm system being disarmed or activated,
by a car entering the garage/driveway, or even if the wine cellar door or pool
gate has been opened.
UPnP (Universal Plug and Play):
A PC standard that permits new
devices to be added without
telling the operating system.
“The WL3 allows you to change your home’s temperatures, adjust the lights
or security settings, or view any supported camera securely and easily. It
automatically configures supported UPnP IP cameras on your home
network and allows you to manually configure other IP cameras on your
IP: A unique numeric address for
network or cameras that reside anywhere on the Internet,” the HAI reports
a device on the Internet.
“It also allows you to view and record video from cameras in your home or
from public IP cameras around town, such as traffic and weather cameras.”
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For the movie buff, Admit One’s traditional luxury to stylish contemporary
custom home cinemas in Minnesota have drawn attention around the U.S.,
earning the 2008 Innovative Housing Technology Award (IHTA) for Home
Technology Integrator Excellence in the Midwest.
“We pride ourselves on balancing aesthetics and performance to give each
client the theater experience they can enjoy for years. We design and build
systems that rival some of the greatest cinemas in America and we make
sure each one looks as good when it’s off as it does when it’s on,” said
Lance Anderson, Owner of Admit One, whose firm has over 50 years of
experience in the home technology industry. “The best part of owning this
company is when a cinema is completely installed and customers turn it on
for the first time. Their expressions are priceless.”
Remotely Feed & View Your Pets
from Anywhere in the World –
Panasonic; Price: ~$300.00.
The fascination with automation isn’t only an American phenomenon.
According to new research from the Consumer Electronics Association
(CEA), 85% of online consumers in the Middle East believe technology is a
key component to a higher quality of life, resulting in high ownership and
intent to buy rates.
“Middle Eastern consumers place a high value on technology and
consumer electronics,” says Tim Herbert, CEA’s senior director of market
research, who presented the research at the International CES/HomeTech
in Dubai, United Arab Emirates. “Whether for work or for play, consumer
electronics are an integral part of everyday life in the Middle East.”
The CEA also released some staggering numbers that, if you thought
automation is a phase, think again. The consumer electronics industry will
see overall shipment revenues top $173 billion in the U.S. in 2008. The
semi-annual U.S. Consumer Electronics Sales and Forecast shows CEA
shipment revenues will grow by 7.3% this year, reaching more than $183
billion by 2009.
An obvious but simple application would be home security. You could
program these devices to turn on and off radios, lights, and TVs to make an
unoccupied home appear occupied.
2.3.5.3
CONDO TRENDS: WIRELESS SOLUTIONS LATEST AMENITY FOR
CONDO DWELLERS
by M. Anthony Carr for Realty Times, July 13, 2009
In the early days of the Internet (at least in its use by the public) a clear
phone line was the key to access, hopefully with a 56k modem to
guarantee fastest results. Today’s choices for condo dwellers include
development-wide wireless and it’s a growing industry.
Groups like Hospitality WiFi, WiFiFee, and Meraki are some of the up and
coming companies that are making the Internet available to condo dwellers
and renters worldwide. Internet usage and the expectation of such is now
becoming a defining amenity to renters and purchasers, according to some
rental agents.
“Prospective renters, as well as residents, have come to expect reliable
wireless Internet as an included amenity,” according to Condo Management
Magazine (www.CondoMgmt.com). “Our rental guests expect WiFi before
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they expect a stove,” Kathy Holdrum, tells the online publication. Holdrum
is manager of SunDial East, a condo community on Sanibel Island, Florida.
Rental agents in the area report that when they show two comparable units,
only one of which has WiFi, renters almost exclusively choose the unit with
WiFi. “That’s a key advantage for rentals,” according to Bret Fisher, CEO
of Caller-IP. “They don’t lose business to other developments that don’t
carry area-wide WiFi.”
The decision to install a WiFi system at SunDial could save residents as
much as $600 per year as the full-coverage system to serve more than 400
units costs roughly $6 per unit – about $50 per unit less than what it would
cost individual owners to install DSL or cable Internet access.
2.3.5.4
FUTURE ARCHITECTS DESIGN SUSTAINABLE ARCHITECTURE
by Peter L. Mosca for Realty Times, March 3, 2010
Whether you are a believer in the GREEN movement or not, designing
buildings that use strategies aimed at improving the performance of metrics
that matter most: water efficiency, CO2 emissions reduction, and energy
savings makes sense. The last two years have been a wake-up call for not
only Americans but for citizens of the world. We have all been faced with
the rising cost of the natural resources we use every day and have come to
understand the wisdom of conservation.
LEED is a certification developed by U.S. Green Building Council
(USGBC), “to promote design and construction practices that increase
profitability while reducing the negative environmental impacts of buildings
and improving occupant health and well-being.” Architects and building
professionals are increasingly adding this certification to their repertoire.
Michael Scott Anderson with Eaton Architecture located in Salt Lake City,
UT, is LEED Certified and has been the lead architect on some very exciting
projects. In one Salt Lake City home slated for construction this spring,
FSC-certified wood is wood that is Michael incorporates several design features that reduce its impact on the
environment. He used water-wise native plants, low flow fixtures, solar hot
certified by FSC (Forest
Stewardship Council) as being
water, energy efficient mechanical system, energy efficient light fixtures;
harvested from sustainable
recycled content in the building material, FSC certified wood , low emitting
sources.
materials in adhesives, paint, flooring and furniture.
The home is designed intelligent so that lighting systems and mechanical
systems are controllable and monitored continually. The windows are
oriented to maximize views while minimizing solar heat gain and loss. He
further explains through the use of computer-aided modeling they can
analyze shadows and how they impact the design. This information can be
useful in sizing and locating windows and overhangs. These features,
along with other features not mentioned, have dramatically reduced the
environmental impact of the building not just in construction but over the life
span of the building.
Eaton Architecture has always been diverse in the projects they accept.
They design high performance buildings: from residential design to local
and federal government projects, to projects for Native Americans. Michael
Anderson with Eaton Architecture has collaborated on the design of
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buildings for government projects. These projects have been invaluable to
him because of the extensive requirements which include energy modeling
of the building before any work can commence.
To see a user of Autodesk’s Revit
MEP design an entire building
and perform an energy modeling
analysis on that building in 14
minutes (real time!), go to this
Youtube video.
“Energy modeling has allowed us to play with various ways of achieving the
goals set out by the federal government for their new generation of high
performance buildings at the lowest possible cost, as most of these projects
are cost competitive” he said. “The computer-generated energy models we
create illustrate how to best spend the client’s money to achieve the
greatest impact on the building performance. We take this knowledge into
every new project we design and it is exciting.”
Michael with Eaton Architecture designed a project for the federal
government at Hill Air Force Base in North Davis County, Utah. The project
is seeking LEED silver certification. It has many of the features described
above but it has the added benefit of more extensive energy modeling.
“This energy modeling has given us great insight to how the building will
perform; an understanding of the building in its totality, from the heat gained
from the light fixtures, to heat gained from the occupants, to loss through
the exterior envelope of the building combined with a myriad of factors that
impact the performance of the building. The energy modeling allowed us to
down size both the mechanical and electrical systems.”
All these factors play into reducing the overall negative impact on the
natural environment, economy, health and productivity. By taking
advantage of these breakthroughs in building science and technology we
are able to reduce our carbon foot print.
“It seems that whether it is a commercial project or residential project our
clients have become more sophisticated in their understanding of GREEN
architecture and the value of increasing the performance of their buildings”
he explains. “I am seeing less need to convince clients of the validity of
high performance buildings and more on how to use their money in the
most efficient way to ensure maximum performance.”
The last few years have seen a downturn in the quality of life that many
have enjoyed. America is resilient and ever changing. GREEN building is
perhaps that little flicker of light that ignites the start to a healthier, smarter,
and more successful way of living.
2.3.5.5
DON’T FORGET SOLAR, YOUR CUSTOMERS STILL WANT IT
by Peter L. Mosca for Realty Times, April 21, 2010
Irvine Inn
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It seems that energy efficiency has taken a back seat in the media lately but
now that health care has been enacted, look for more coverage as more
and more businesses continue to install varying systems and customers
demand it from their suppliers. Recently, for example, Solar Electrical
Systems of Westlake Village (CA) installed a solar electrical system on the
Irvine Inn , an affordable housing apartment building in Orange County,
and Southern California’s first affordable housing project to go solar as part
of the California Solar Initiative’s MASH (Multifamily Affordable Solar
Housing) program.
Irvine Inn’s owners were quick to see the advantages of investing in solar.
The solar electrical system reduces or eliminates electric bills for the owner
and tenants, keeping rents the lowest in the county. Rebates and tax
incentives offset 82% of the cost, with the $585,000 project costing less
than $105,000 out-of-pocket. The system pays for itself in six years,
provides another 30-40 years of fixed electrical costs for the owners, and
results in over $5 Million in savings over its lifetime.
Because of Solar Electrical Systems’ extensive experience in rebate
application, interconnection approvals, and solar design and installation,
the project finished ahead of schedule and started saving the owners
money immediately.
The news of the first affordable housing project to go solar comes on the
heels of a new study by the Solar Energy Industries Association (SEIA) that
shows 75% of those surveyed support the development of solar energy
plants on public lands. The poll was conducted by Gotham Research
Group. Solar industry and environmental leaders, as well as
Congresswoman Gabrielle Giffords (AZ-8th) and pollster Jeff Levine joined
SEIA President Rhone Resch on a call to discuss the results.
“The polling data we are releasing today confirms what we already knew,”
said SEIA President and CEO Rhone Resch. “The American public
overwhelming supports the development of solar energy. It is time for our
elected officials to respond to this high public demand and enact policies
that allow solar to compete with other energy sources on a level playing
field.” The survey also revealed that solar power was the top choice (38%)
as the best use of public land. Respondents also selected solar farms and
wind power (22% each) as the top energy sources that the government
should prioritize for support, beating out natural gas (16%), nuclear (16%),
oil (11%) and coal (4%).
“When Americans talk about solar energy, they usually envision rooftop
systems, which are great. But it’s important to also realize the significant
role that utility-scale solar has to play. Large solar installations use
economies of scale to achieve significant cost savings and help Americans
to get the most solar ‘bang for the buck.’ It’s great to confirm that the rest
of America is just as excited about utility solar as we are,” said Giffords.
This is the maximum amount of
energy produced each hour.
Since the average American
household uses about .6% of a
gigawatt (or 6,000kWh) per year.
Therefore, if all the solar projects
were to be completed and each
was to run at maximum capacity
for a year, they would provide
enough energy for 2.5million
homes.
A typical coal power station
generates 1500 MW.
“The 17 gigawatts of utility-scale solar projects proposed in the United
States offer great opportunities for companies like ours,” said Tom Hecht,
Vice President of Sales & Marketing, SCHOTT Solar. “Not only will these
projects produce clean, reliable energy, but they will create tens of
thousands of high-paying, American jobs in manufacturing and construction
trades from coast to coast. This would include significant new jobs at our
state-of-the-art manufacturing facility in New Mexico, where we manufacture
both high-quality photovoltaic panels and concentrating solar power
receivers. With a successful 10 megawatt pilot project , more than 3,000
megawatts in the pipeline, and two recent PPAs with Nevada Energy and
PG&E, we are primed for explosive growth in the United States, as is the
entire utility-scale solar sector,” said Tom Georgis, Vice President,
Development, SolarReserve. “This industry can provide clean solar power
to millions of households while creating thousands of new green energy
jobs. We have seen what utility-scale solar such as the eSolar Sierra
SunTower project can do. We know that solar energy can be generated
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eSolar SunTower in Lancaster,
CA. It produces 5MW – enough
for 4000 homes.
cleanly, reliably and with a stable fuel price,” said Marc Ulrich, Vice
President of Renewable & Alternative Power, Southern California Edison.
“Solar is California’s great untapped renewable resource and we look
forward to integrating more into our energy generation portfolio and to
working toward the state’s renewables goal.” The industry leaders also
discussed the promising outlook for utility-scale solar in the U.S. Five new
pilot plants came on line in 2009 and there are more than 100 utility-scale
solar projects under development. These projects represent more than 17
gigawatts of capacity, enough to provide clean power to 3.4 million {I
calculate just 2.5million} households and to create more than 100,000
American jobs.
“The sun provides more energy in an hour than all the coal mines and oil
wells do in a year. This solar energy is limitless and pollution free,” said
Sean Garren, Clean Energy Advocate, Environment America. “Solar
energy will play a major role in weaning the nation from dangerous,
polluting, unstable and, in many cases, increasingly expensive forms of
energy. America can and must figure out how to tap the heat and power of
the sun.” One last note: jobs. For our economy, for builders and real
estate as a whole to move forward and get stronger, jobs are the primary
driver. Let’s hope that the-powers-that-be understand this and get our
people working on creating a sustainable America.
2.3.5.6
GREEN BUILDING BECOMES MAINSTREAM
by Carla Hill for Realty Times, May 18, 2010
Green building and remodeling broke into mainstream culture in the past
decade, leading to a changing home landscape across the nation.
As this landscape changes, trends are changing as well. So, just what are
the trends to be on the lookout for in green housing?
Earth Advantage Institute, a free standing nonprofit organization acting as
the Northwest’s premier green building program, has identified ten trends
that you'll see in 2010.
As of September 2010, Google is
developing a free home energy
monitoring program called
“Powermeter.” (Details)
The first of these is the smart grid and connecting home . This
terminology means, simply, that energy usage now has some
accountability. “The development of custom and web-based display panels
that show real-time home energy use, and even real-time energy use
broken out by individual appliance, will go a long way towards helping
change homeowners’ energy behavior and drive energy conservation,” says
Earth Advantage.
Energy labeling: A grade which
rates an appliance’s use of
energy.
Next on the list is energy labeling . This is a great way for builders and
homebuyers alike to compare green versus standard. This great tool helps
everyone involved know how to get to most “bang for their buck.”
Using this software together with
location and meteorological data,
architects can easily design
homes to make them far more
efficient in their use of energy
(details via YouTube).
Have you heard of BIM software? It’s another great green trend on the rise
in 2010. And while you may not be seeing its use on small scales, for those
larger residential and commercial projects it could be just the ticket to
savings. The process includes making and managing building data, through
the use of 3D, real-time modeling software. Increased productivity and
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efficiency are just two of the effects
.
Number four on their list is the “buy-in to green by financial community.”
This means that lenders are wising up about the facts on green
homeowners. According to Earth Advantage, “Lenders and insurers are
realizing that green home owners are more responsible, place higher value
on maintenance, and are less likely to default due to lower operating costs
of homes and office buildings.”
Another great green trend that comes not a moment too soon is the end of
McMansions , and the rightsizing of homes. Homeowners have found
over the last few years that bigger is not always better. Beside the
increased cost of construction, energy costs can be extremely high for large
square footage homes.
McMansion; aka, “Frankenhouse,”
“Starter Castle,” “Garage Mahall,”
and “Hummer House.”
USA Today reported just last year that new homes, after doubling in size
since 1960, are shrinking. Reporter Wendy Koch wrote, “Last year [2008],
for the first time in at least 10 years, the average square footage of singlefamily homes under construction fell dramatically, from 2,629 in the second
quarter to 2,343 in the fourth quarter, Census data show.”
The spread of eco-districts. In definitive terms, eco-districts are “an
integrated and resilient district or neighborhood that is resource efficient;
captures, manages, and reuses a majority of energy, water, and waste on
site; is home to a range of transportation options; provides a rich diversity
of habitat and open space; and enhances community engagement and
well-being.” (Portland Sustainability Institute) Be on the lookout for more of
these great areas in your neighborhood and town.
Water conservation is on the minds of many as summer heats up. And
because of this, there have been great strides made, to increase the
efficiency of the big water users in our homes. Appliances that are Energy
Star rated can use a fraction of the water of older models. Low flush toilets
and high efficiency showerheads add to the water savings. The
showerheads alone can save 750 gallons of water each month.
Carbon calculation is number eight on the Earth Advantage list. They
report, “With buildings contributing roughly half the carbon emissions in the
environment, the progressive elements in the building industry are looking
at ways to document, measure, and reduce greenhouse gas creation in
building materials and processes.” Did you know you can calculate and
counter-balance your own carbon footprint. Visit such sites as The Nature
Conservancy to find out how.
Home geothermal systems are
practical in cold climates where
there is a big difference between
air and ground temperatures.
Net zero buildings are another trend. This means a building produces
more energy than it uses. This is done through the use of geothermal ,
wind, and solar forms of energy, which are produced at the building’s
location.
And finally, sustainable building education. The more builders that know
about and are committed to, green building, the more the trend will spread
and have greater effect. NAHB chairman, Bob Jones, reports, “Our
members are leading the way in sustainable design and construction and
helping to drive the market toward greener, more efficient home building.”
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For example, more than 5,200 builders, remodelers and other industry
professionals – including Jones – have achieved the Certified Green
Professional educational designation. It is NAHB’s fastest growing
professional designation and demand for advanced education and
professional credentials is strong.
2.3.6
BUILDING TRENDS
2.3.6.1
WARMING UP TO THE NEEDS OF TODAY’S HOMEBUYERS AND
OWNERS
by Peter L. Mosca for Realty Times, December 6, 2006
Control. Cost-efficiencies. Choice. These are three of many reasons why
radiant heat is gaining in popularity with today’s time-strapped,
environmentally-conscious, value-driven homeowners. For builders,
radiant heat can help drive higher profits and bring back to market Gen X
and Gen Y buyers who purchase products and services that afford them
control, cost- efficiencies, and choice.
“Electric radiant floor heat is more efficient than forced air
or convection heat for two reasons: first, because comfort
can be achieved at a lower set point on the thermostat,
typically 65 to 67 degrees for electric radiant heat as
opposed to 71 to 74 degrees for forced or hot air heat;
and, second because electric radiant heat does not heat
the air, but rather it heats objects, including human beings,
in the same manner that the sun warms objects behind a
window on a cold winter day,” explained Steven D. Bench,
Managing Member, Heatizon Systems. “While it is true
that hot air rises it is also true that heat has a propensity to
go to cold. The hot air produced by a forced air
convection heating system carries the heat with it towards
the ceiling where it is not needed, resulting in wasted
energy and a higher set point at the thermostat to achieve
comfort.”
Radiant floor heating is an environmentally-friendly, clean and energyefficient heating solution for consumers seeking alternatives to traditional
sources of staying warm. Overall, there are three types of radiant heat
flooring systems. They are:
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1.
Radiant Air Floors: Used mainly in commercial buildings.
2.
Electric Radiant Floors: The more costly of the two systems used
in homes (see next bullet).
3.
Hydronic or Liquid Floors: More affordable, and as a result most
often installed in residential homes. Running hot water beneath the
floor, hydronics provide warmth from underneath the floors by going
through PEX polyurethane, durable tubing that has a lifespan of
more than 100 years. It serpentines underneath the floor and uses
the whole floor as a heat-distribution system tubing. The water in
the tubing radiates the heat into the areas of the home set forth by
the homeowner.
The aforementioned benefits of radiant floor heating include:
Control: Consumers can say goodbye to chilly toes in the morning
as they can direct heat to tile floors in a bathroom or kitchen.
Systems are programmable.
Cost-Effective: More efficient disbursement equals less waste and
lower monthly heating bills. Heat is no longer wasted in areas like
an unused guest room or basement. Plus, radiant heat is a sound
investment because it increases a property’s value.
Choice: Consumers can choose from a variety of radiant heat
products. Plus, its aesthetic quality; i.e., the heating system;
remains hidden beneath the floor with no vents or radiators in sight,
allows for more creativity to the would-be interior designer.
“Electric radiant heating is comprised of a family of technologies that heats
surfaces, or radiant panels, that in turn radiate or transfer heat to the
occupants and other objects in a room, the snow and ice on a roof, or the
snow on a driveway, walkway, or other surface,” added Bench.
A prominent radiant heating technology for the home is The ThermiqueTM
towel warmer by Engineered Glass Products, a recent winner of the “Best
New Bath Product” according to voters at the Kitchen and Bathroom
Industry Show (KBIS). A sign of this burgeoning market is that The
ThermiqueTM towel warmer was chosen over 125 other innovative new
products on display.
$799 on Amazon (08/2010)
“The elegant design of the ThermiqueTM towel warmer is the first thing to
catch people’s attention. Then, once they feel the warmth of the glass, they
are absolutely amazed,” says Mike Hobbs, CEO of Engineered Glass
Products. “The response has been simply incredible. Considering the
spectacular array of new technology on display at KBIS, we couldn’t be
more proud that the voters chose us as the best new bath product.”
This towel warmer consists of two pieces of laminated glass with a thin
conductive film between them and copper buss bars running along the
outside edges. Heat is produced when electric current flows up the copper
buss bars and across the conductive coating.
The ThermiqueTM towel warmer can be customized with designs such as a
personal monogram or company logo. The product is UL approved, and all
components are UL recognized. ThermiqueTM Hot Glass TechnologyTM is
also being developed for a number of other commercial applications, such
as architectural windows, warming shelves for high end stoves, hot food
display cases, stovetop burners, and more.
Members of Generation X were
born between 1961-1981;
members of Generation Y were
born between 1981-1995.
Looking ahead, the future of radiant heat is even brighter. Implementation
and product applications in both new and existing homes will be made
easier. Plus, future buyers, the Gen X and Gen Y crowd, who currently
perceive this new technology as ‘cool’ will come to expect radiant heat, like
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high-speed Internet access, as a regular feature in the homes they buy.
2.3.6.2
TRADITIONAL LIVING ROOM OBSOLETE?
by Mark Nash for Realty Times, June 26, 2007
Is the living room as we knew it, from post-World War II, close to obsolete?
The living room has been an endangered species in American homes since
it was revived in tract housing after World War II.
Living rooms and parlors were rooms of formality whose purpose was to
entertain and impress visitors. The finest in furniture, rugs, art, and linens
were displayed in, sometimes, stiff arrangements that reflected the times.
The old saying of “look, don’t touch” comes to mind.
Throughout the decades in the 1900’s the living room didn’t seem to change
much, except perhaps in the latest “contemporary” furnishings. Their
commonality was the isolated location within the home, with four walls, right
off the main entrance.
Home builders since the 1990’s, however, have seen the slow demise of
the importance of the living room in new construction homes. New home
buyers shrunk living room dimensions, even in large, upscale homes.
Around 2000 new construction buyers finally said enough; why pay $300 a
square foot for a room they’ll never use? And, so the living room funeral
march started with not much grieving from resale buyers of these living
room-less homes.
Now, the great room
has replaced the living room.
Informal living styles, with eating, cooking and
living spaces combined so that family members
and visiting friends could congregate together
through various activities are popular. Open floor
plans and voluminous space were desired more
by baby boomer buyers.
Great Room
As one mid-twenties buyer said to me with her
arms folded in front of herself while viewing a
traditional living room: “It’s weird, Mark, what’s it
for?” Having grown up in a combination kitchen,
breakfast room open to a family room, this newage buyer had never experienced the leftover
formality from another time.
The living room might be dying, but there are many memorials to them
around the country. They are used as work-out spaces, home offices, and
craft or hobby rooms. And sometimes they stand as the home to a solitary
pool table. In modern remodels – formal living rooms have seen their walls
come down, literally, to open up floor plans.
What about my own living room? It’s used once a year for our holiday
bash. What a waste! But then maybe the apple doesn’t fall far from the
tree; I can remember my mother in the 1960’s, wandering into her museum
(i.e., living room) once a month to sit down and bask in the room.
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2.3.6.3
GOING GREEN: IMPROVING ENERGY SAVINGS WITH INSULATED
SIDING
by Peter L. Mosca for Realty Times, June 23, 2008
With energy costs expected to rise, builders are turning to insulated siding
as yet another way to meet the needs of the environmentally-friendly – and
cost-conscious – consumer. While few homeowners are aware that
insulated siding can reduce consumption by up to 20 percent, they do know
that replacing doors and windows enhances a property’s energy savings
potential and its corresponding return on investment. The trick for builders
is to create homeowner awareness to the positive impact of insulated
sliding.
Insulated siding showing
polystyrene foam backing.
The higher the R-value, the better
the insulation.
Cladding: A protective or
insulating layer fixed to the
outside of a building or another
structure.
Infrared photo – note the studs.
“People know about the four most common ways to insulate their home, by
upgrading doors and windows, and sealing the roof and foundation. But the
wood framing within their walls is a significant area that most people fail to
address,” said Pat Culpepper, President of Progressive Foam Technologies,
Inc., inventor of insulated siding , who describes the product as the ‘fifth
dimension of home energy savings.’ Up to 40% of energy is lost through the
wood studs, which conduct heat and cold. That’s the fifth dimension of
home energy savings.”
According to the Environmental Protection Agency’s ENERGY STAR
program, the average American household spends more than $1,900 each
year on energy bills. Insulated siding, precision cut and contoured to fill the
gap between the siding and home, cuts energy costs, says Progressive
Foam Technologies, by delivering an average system R-value of 3.96,
which is more than triple that of any other exterior cladding . In
comparison, popular products like fiber cement, brick and manufactured
stone veneer, built without insulation, has average R-values of 0.15 to 0.62.
“Wall studs make up 25% of the wall surface of an average home and that’s
like having one whole wall in your home that is not insulated,” added
Culpepper, whose firm is headquartered in Beach City (OH). “Each of those
studs is a thermal bridge that allows warm or cool air, depending on the
season, to pass right through the wall. Imagine the home energy savings if
you closed that gap.”
By closing the gap, the return on investment ultimately pays off for many
homeowners. According to the National Association of Home Builders
(NAHB), 51% of recently surveyed home buyers said they were willing to
invest $5,000-$10,999 in their homes if energy costs could be reduced by
roughly $1,000 a year.
There’s more good news for builders and consumers. The Vinyl Siding
Institute, Inc. (VSI) recently announced that it has certified more than 3,000
installers and updated its Vinyl Siding Installation Manual, the core content
for the VSI Certified Installer Program which trains and tests experienced
professionals on the proper installation techniques for vinyl siding.
“Whether on new homes or residing projects, VSI Certified Installers have
demonstrated their knowledge of the proper techniques for installing vinyl
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siding,” said VSI President Jerry Y. Huntley. “Just three years into the
program, we’re proud to continue our commitment to quality installation with
this updated manual and the growing availability of qualified installers and
trainers.”
Builders, remodelers, contractors, architects, etc. can download an
electronic version of the manual on VSI’s website at vinylsiding.org. Since
the program was launched in 2005, VSI has certified 100 vinyl siding
installation trainers to educate more than 3,000 certified installers. VSI
certified installers must take a test and renew their certification every three
years.
Insulated siding is available through a range of premium siding
manufacturers including Alcoa Home Exteriors, Alside, CertainTeed, Crane
Performance Siding, Heartland Building Products, Mitten Inc.,
Norandex/Reynolds, KP Building Products, Revere Building Products,
RMC/Style Crest and Variform.
2.3.6.4
NEW HOMES: RADIO-CONTROLLED LIGHTING HITS THE U.S.
MARKET
by Dena Kouremetis for Realty Times, July 8, 2008
It’s night and you pull into your driveway and reach for the remote – no, not
the remote control for the garage door – the remote for your home’s lighting
system. One click-turn operates a radio-controlled network that makes the
lights both inside and outside your home respond to your command.
Sound like the house of the future?
This is just one cutting edge product introduced for the first time at this
year’s Pacific Coast Builder’s Conference for homes being built from the
ground up. It’s the Verve Living system, Masco Corporation’s innovative
product for lighting control.
Verve relies on a unique technology developed by European manufacturer
EnOcean, a spin-off of Siemens Corporation and is a breakthrough in
energy-harvesting, radio frequency science. EnOcean engineers
discovered a way to gather energy from the simple act of clicking a switch –
energy that can be used to transmit a small, compact radio signal wirelessly
and at astonishing speeds. The little transmissions from a clicker sends
instructions through a ten-channel controller to lighting fixtures and outlets
throughout the house.
For homebuilders, this is a huge breakthrough. The lighting system
eliminates wires, batteries and – best of all – change orders when building
a home. This saves them thousands of dollars during the build itself.
Want more? Nothing is hardwired. Verve switches can be mounted on
virtually anything , anywhere within the house. Want to place switches
low so your little ones or wheelchair-bound homeowners can reach them?
How about on a sliding glass door? Homeowners can also lower the
intensity of any light in their home from any switch or combination of
switches, creating ambience while saving on energy costs and bulb life
No wires; no batteries! Verve
within their homes.
Switches can be moved anywhere
and don’t require batteries.
The technology has already become popular in Europe over the past five
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years and now it’s here for the American market. For more information
about this wireless lighting control system, go to
www.vervelivingsystems.com.
2.3.6.5
ENVIRONMENTALLY SENSITIVE AND COST-EFFECTIVE CONCRETE
GAINING GROUND
by Peter L. Mosca for Realty Times, August 13, 2008
Business in general and the construction and building sectors specifically,
are more competitive, cost-conscious, and environmentally aware than at
any other time in our nation’s history. With profits shrinking and consumers
choosing more and more ‘green’ developers, a product that has been
around since the mid 1990’s is gaining ground in developments across the
country.
E-Crete or Autoclaved Aerated Concrete (AAC), according to
the Autoclaved Aerated Concrete Products Association, is
manufactured from common and abundant natural raw
materials with the finished product up to twice the volume of
the raw materials used. Plus, the energy consumed in the
production process is only a fraction compared to the
production of other materials; and the manufacturing process
emits no pollutants and creates no by-products or toxic waste
products.
Example of E-Crete Construction
“AAC is made with all fine aggregates, nothing more coarse
than a grain of sand, cement, and a natural expansion agent
that causes the concrete to rise like bread dough, with countless small air
pockets. In fact, this concrete is 80% air,” says the AACPA, whose mission
is to nurture and champion the autoclaved aerated concrete industry, by
creating and maintaining a dynamic network bringing together resources,
knowledge, and innovation. “AAC has proven to be a very durable
material. It will not rot, warp, rust, corrode, or otherwise decompose and
provides a very low maintenance building, saving considerable time and
money in upkeep over the life of the building.”
In addition to being durable, of high quality, and environmentally sensitive;
AAC provides architects, developers, and contractors – and their customers
– a variety of other benefits. A list includes:
High Thermal Insulation: Buildings constructed with AAC tend to be
cooler in summer and warmer in winter. An AAC wall provides solid
insulation without the thermal bridging (cold spots) associated with throughwall framing members or fasteners. As a result, the building’s air
conditioning or heating use may be lower and makes the use of additional
thermal insulation unnecessary.
Fire Resistance: AAC is an inorganic material that does not burn and
provides a U.L. classified four-hour fire rating. The melting point of AAC is
over 2900ºF, more than twice the typical temperature in a building fire of
1200 ºF. As a result, the use of AAC eliminates the need for applying
costly fireproofing materials.
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Mold Resistance: AAC does not offer the nutrients needed for mold
growth. The AACPA points to tests conducted by an independent
laboratory on AAC block against the three fungi most commonly involved in
indoor air quality studies showed AAC to be fungal resistant and repressive
in allowing mold to multiply.
Acoustic Insulation: AAC’s porous structure and high surface mass,
coupled with its ability to dampen mechanical vibration energy, greatly
reduces outside environmental noise pollution and the indoor echo effect
(i.e. reflecting sound) in empty rooms, providing a quieter, more
comfortable interior for the occupants.
Reveal: The outer side of a
window or door frame.
Design Flexibility: AAC blocks can be incised to create reveals ,
signage, and graphics, and corners of walls can be rasped and arches cut
with saws.
Seismic Design: AAC buildings have shown good resistance to
earthquake forces. The non-combustible and fire resistant characteristics
provide further advantage against fires commonly associated with
earthquakes.
E-Crete Blocks
Offgassing is the evaporation of
volatile chemicals in non-metallic
materials at normal atmospheric
pressure.
Pest Resistance: As an inorganic, insect resistant, solid wall construction
material, it is impossible for insects and rodents to inhabit in AAC.
Improved Indoor Air Quality: AAC is an inorganic material that contains
no toxic substances and does not decompose or off-gas . In addition,
since AAC is both a structural and insulation material, it allows the
elimination of other materials that may contribute to poor indoor air quality.
Workability: In addition to being cut with a band saw or hand saw, AAC
can also be drilled, nailed, grooved, routed, shaped, sculpted, carved,
coated, floated, screwed into and milled with common tools and finished
with paint, tile, drywall, plaster, or veneer. AAC is economical, sustainable
and cost-effective. It has been a popular building material in Europe {why
does all the good stuff start in Europe?} for over 50 years and is gaining in
popularity today in the U.S. as an environmentally safer choice, something
that real estate consumers are increasingly demanding from their builders,
contractors and developers.
According to a 2006 UC Davis report (source), there are three
disadvantages to building with autoclaved aerated concrete: 1)
Transportation costs may be high since only five AAC manufacturing
facilities exist in the United States; 2) Few contractors are familiar with the
product and masons must learn a new technique to construct walls from
AAC blocks; and 3) Planning commissions are also largely unfamiliar with
AAC which may cause difficulties in satisfying local building codes.
My wife and I purchased our home in 1986, it was built in 1979. We live in
Los Angeles – a desert receiving an average of 12” of rain per year. We
have spent hundreds of thousands of dollars maintaining and repairing our
home. The most expensive repairs were for damage caused by water
intrusion which caused wood rot. We have had to our home tented on two
occasions to kill termites.
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We also spend about $400/month during the spring and summer cooling
our home because it has such poor insulation. Not only does our wood
frame home transmit heat; it also transmits sound – we hear everything
happening in the neighborhood and our neighbors hear us.
After reading this article, I got to wondering why homes are not built of steel
or e-crete. I did a little bit of research and learned that it costs a little bit
more to build with e-crete than wood – according to one study about 3.5%
more. If that’s true, given what I now know about how expensive it is to
keep a wooden house in good repair, if I ever do purchase another home it
will not be made of wood.
My advice to people looking for homes, particularly people in their twenties
and thirties, is to select a home based on the home’s long term
maintenance costs rather than the home’s initial cost.
2.4
FINANCING
2.4.1
CREDIT
2.4.1.1
CREDIT CONSEQUENCES OF HOME LOSS
by Bob Hunt for Realty Times, March 23, 2010
Financially distressed homeowners not only face painful personal
circumstances but also they must consider choices that have both tax and
credit implications. While a variety of professionals may be able to explain
taxation issues in these circumstances, not as much seems to be known
about credit consequences – other than that they are bad.
Recently, the legal department of the CAR® issued a memorandum titled
“Credit After Foreclosure, Bankruptcy, or Short Sale.” It is an extremely
useful document for those who have questions about how credit is affected
by the various ways in which one might lose his or her home.
In large part the memo is based on the 2008 update of Fannie Mae
guidelines (Fannie Mae Announcement 08-16), so it should be clear that
the explanations are not completely general or unqualified. When, for
example, it is said that a person is not eligible to obtain a home loan for a
certain number of years, that means that Fannie Mae won’t buy a home
loan made to that person during that time. Granted, most lenders want to
be able to sell their loans to Fannie Mae or Freddie Mac (whose rules tend
to be similar), but there might be portfolio lenders or other institutions that
would make such a loan.
That said, it is well worthwhile to review the contents of the memo.
Five years after a foreclosure, a consumer may be eligible to obtain a home
loan. Of course, certain restrictions may apply. At least a 10% down
payment is required and a minimum credit score of 680. Also, purchase of
a second home or investment property is not permitted.
A consumer may be eligible three years after foreclosure if “extenuating
circumstances” had led to the foreclosure. Extenuating circumstances are
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“nonrecurring events that are beyond the borrower’s control that result in a
sudden, significant, and prolonged reduction in income or a catastrophic
increase in financial obligations.”
Four years after giving a deed-in-lieu of foreclosure, a consumer may be
eligible for a home loan. If there had been extenuating circumstances, that
period is shortened to two years.
In the case of a short-sale, when the mortgage had been delinquent a
consumer may be eligible for a home loan two years after completion of the
short sale. There are no exceptions due to extenuating circumstances.
If the consumer had executed a short sale but had not been delinquent on
his or her mortgage, then there is no two-year period applicable. To be
eligible for a home loan, the borrower must not have had any mortgage
delinquencies of sixty days or more during the past twelve months and the
borrower must not have “entered into any agreement with the short sale
lender to repay any amounts associated with the short sale, including a
deficiency judgment.”
In the case of bankruptcies, other than Chapter 13, there is a four year
period from the discharge or dismissal date of the bankruptcy before the
consumer may be eligible to obtain a home loan. With a Chapter 13
bankruptcy, the period is two years.
It is frequently said that short sales have a less damaging effect on credit
than do foreclosures. While this may be true with respect to the length of
time before one can obtain a home loan again, it should also be noted that
a short sale has no greater effect than a deed-in-lieu when there are
extenuating circumstances. Moreover, it is certainly not true with respect to
one’s FICO score. A deed-in-lieu, a foreclosure or a short sale all have the
same impact as far as FICO is concerned. Some people will not believe
this. They should visit the FICO web site and look at the question
regarding alternatives to foreclosure.
2.4.1.2
DEBUNKING CREDIT SCORE MYTHS
by Broderick Perkins for Realty Times, June 24, 2010
Parents aren’t so bright when it comes to what behaviors will impact their
credit scores and that could brush off on their kids.
In March, ING Direct bank commissioned Harris Interactive to conduct an
online survey of 1,042 parents of children age 17 years and younger.
The survey discovered more than half, 56 percent, of those
surveyed thought bouncing a check or paying a fee for having nonsufficient funds in their bank account would reduce their credit
scores.
Wrong.
Credit reports typically don’t include information about checking and
debit accounts, nor non-sufficient fund issues unless they somehow
impact an attached credit account.
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Also one in five (21%) thought checking their credit scores would
hurt credit scores. Nearly as many (18%) thought accessing their
credit report, would hurt their credit scores.
Wrong and wrong.
Obtaining your credit report and credit score has no bearing on your
credit standing.
In fact, you should check your credit reports regularly. Every year,
federal regulations allow you three free credit reports (ONLY
through AnnualCreditReport.com), one each from the three credit
reporting agencies, Equifax, Experian and TransUnion.
If you visit some other sound-alike, come-on web site, instead of
AnnualCreditReport.com, expect to pay for credit services you may not
need in exchange for that so-called “free” report.
From AnnualCreditReport.com, get the three free reports all at once if you
haven’t seen them for years. Otherwise get one from a different company
every four months to regularly monitor your credit report for errors, identity
theft, black marks you may need to work on and other issues.
For your credit score it will cost you a nominal fee (it's worth it) paid to each
of the three credit reporting agencies.
A credit score – virtually always examined by lenders when you apply for a
mortgage, credit card, car loan, other credit, even homeowners insurance
and other financial accounts – is a numerical rendition of your
creditworthiness.
Scores range from about 300 to about 850. The higher the number the
more likely you are to get credit and the more likely you are to get cheap
credit. Your score should be at 760 or above to land the best interest rate,
according to FICO, a leading credit scoring system provider.
2.4.2
GSES
2.4.2.1
INVESTOR REPORT: CONDO LOAN RULES
by Kenneth R. Harney for Realty Times, June 29, 2009
FHA has come out with its long-awaited rules on condominium loans and
they’re a mixed bag for investors, second home, and other buyers and
sellers.
On the one hand, the rules allow lenders more flexibility in reviewing condo
project eligibility and documentation. That’s good – it should allow more
lenders to increase their condo activity in the red-hot FHA segment of the
market.
On the other hand, the agency is imposing a number of important
restrictions. Here’s a quick overview of the rules:
Condo hotels (aka, “Condotels”)
are typically high-rise buildings
Units in condo hotels
are prohibited. Ditto for units in time share or
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developed and operated as luxury
hotels, usually in major cities and
resorts. Units, when not occupied
by their owners, may be rented by
hotel management.
“segmented ownership” projects, houseboat condo developments, and
projects where there are multiple dwellings inside single condominium units.
FHA said it won’t insure units in condominiums where more than 25% of the
total space is allotted to commercial uses, such as retail stores or offices. In
fact, the agency made a point of emphasizing that it will reject loan
applications from any property that it deems not “to be primarily residential”
in character.
FHA also won’t insure condo loans if more than 10% of the units are owned
by investors. That’s a much stricter standard than Fannie Mae’s, which
permits up to 49% of units to be investor owned. The 10% rule applies as
well to situations where a builder or developer is left with unsold units and
rents them out.
The agency won’t endorse loans from projects where less than 50% of the
total units already have been sold or where less than 50% of the units are
owner-occupied or sold to buyers “who intend to occupy them.”
FHA doesn’t even want to insure loans on units located in buildings with
heavy concentrations of units that are FHA-financed. If more than 30% of
the unit owners in a project took out FHA-backed loans, the agency doesn’t
want to do any more business in that condominium.
In a concession to rental apartment project investors who convert their
buildings to condo, FHA is abandoning its current one-year mandatory
waiting period before considering loan applications on condo units.
Finally, FHA said it doesn’t want to have anything to do with condo projects
that might be affected by negative environmental factors. For example, it
won’t insure units in buildings located within a thousand feet of a major
highway – it wants to avoid adverse noise pollution impacts on property
values – or within 3,000 feet of a dump, landfill, or EPA Superfund site.
2.4.2.2
WASHINGTON REPORT: CONGRESS PRESSURES FHA
by Kenneth R. Harney for Realty Times, November 23, 2009
Congressional pressure on FHA continued to mount
last week, with the ranking Republican on the House
Financial Services Committee demanding hearings
on the stability of the housing agency.
From the Wall Street Journal, August 23, 2010 (source).
Congressman Spencer Bachus of Alabama said
FHA’s declining capital reserves, estimated by
independent auditors as barely one quarter of the
congressionally-mandated minimum, raises the
possibility that FHA could come hat in hand to
Congress seeking a bailout {see note at bottom}.
“It is incumbent (that we) get prompt answers to the many questions
surrounding FHA’s risk management practices and finances,” Bachus said
in a letter to committee chairman Barney Frank, a Massachusetts
Democrat.
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Both HUD Secretary Shaun Donovan and FHA Commissioner David
Stevens have acknowledged that FHA faces financial challenges as a
result of the recession and housing price declines, but insist that there will
be no need for appropriations from Congress.
Shaun Donovan
Donovan said the agency is now actively considering ways to raise its
capital reserves, including increasing insurance premiums and minimum
downpayments. Stevens noted that FHA is cracking down on lenders that
underwrite loans poorly or violate agency guidelines.
But the drumbeats on Capitol Hill are getting louder. One bill has been
introduced in the House that would require FHA to raise its downpayment
minimum from the current 3.5 percent to 5 percent.
David Stevens
On the Senate side, Kansas Republican Kit Bond called the recent audit
results further evidence that FHA “is a power keg that will explode unless we
act now.”
Potshots at FHA also are coming from private industry, including from
companies who use its financing.
Robert Toll, the CEO of Toll Brothers, a large, publicly-traded home builder,
called the agency’s rapid growth – from a 3% market share a few years
back to a 30% share of higher of home purchase loans –“a trainwreck”
waiting to happen.
Roughly one in twelve of Toll Brothers home buyers reportedly use FHA
financing on their purchase, so Mr. Toll’s critique of FHA drew significant
attention on Wall Street.
Edward Pinto, the chief credit officer for Fannie Mae during the late 1980s
and now a mortgage industry consultant, told Congress recently that FHA
should raise its downpayment minimum to 10% and slash home seller
contributions to buyers’ closing costs from 6% of the house price to just 2%.
FHA officials, for their part, insist that the quality of new loans they are
insuring is high – and that capital reserves, even under a worst case
scenario, are adequate to handle claims as far out as 30 years.
On October 5, 2010, Dow Jones reported that FHA’s capital reserves
increased by $1.3 billion after a series of reforms that included higher
mortgage-insurance premiums. Last year (2009) FHA’s reserves had fallen
to .52% – a figure well below the required 2% (source).
2.4.2.3
REALTOR® ORGANIZATION OPPOSED FHA ANTI-FLIPPING RULE
by Bob Hunt for Realty Times, December 1, 2009
A flipped house.
At their recent fall meetings, directors of CAR® adopted the following
motion: “That CAR®, in conjunction with NAR®, ‘SUPPORT’ the elimination
of the FHA 90-day, anti-flipping rule, and that CAR® write and publish a
letter to the FHA Commissioner in opposition to the FHA 90-day anti-flipping
rule.” While support for the motion was not unanimous, it passed by a
significant majority. Why would CAR® oppose the anti-flipping rule?
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In a 2006 Mortgagee Letter, the HUD described flipping and explained its
opposition to it in the following way: “Property flipping is a practice whereby
a property is resold a short period of time after it is purchased by the seller
for a considerable profit with an artificially inflated value, often abetted by a
lender’s collusion with the appraiser. FHA’s policy prohibiting property
flipping eliminates the most egregious examples of predatory flips of
properties with the FHA mortgage insurance programs.”
The primary component of FHA’s anti-flipping policy is the 90-day rule. No
FHA funding will be provided for properties purchased within 90 days of the
seller’s acquisition of the property. The intent of this policy is to protect
buyers from overpaying (and, of course, to protect FHA’s insurance
program). Now, being against that sounds like opposing motherhood and
apple pie.
However, proponents of the CAR® motion argued that, in the current
environment, the effect of the anti-flipping rule was actually to harm
potential FHA buyers and to shut them out of the real estate market.
Conventional Loan: A home
mortgage loan that is not insured
or guaranteed by FHA, VA, or
USDA (an agency of the
Department of Agriculture).
The argument begins with the fact that buyers using FHA financing are less
preferable to many sellers than are those who have cash or who are
qualified for a conventional loan . This is especially true in the REO arena
(i.e., bank-owned properties that were acquired through foreclosure). It is
common for a listing of an REO property to state that offers with FHA
financing will not be considered. Institutional owners of REOs want faster
escrows than can be expected from FHA. Moreover, it is frequently the
case that an REO property will be in poor condition, requiring repairs, and
will not pass an FHA appraisal. Effectively, then, FHA buyers are out of the
REO market.
Some investors buy REOs to hold; others buy to realize a short-term profit.
The latter usually must do rehab work to bring the property into marketable
condition. That work adds value and, of course, the investor(s) will seek to
profit from it. Does that mean the property will be sold for “an artificially
inflated value?” Of course not. Especially in today’s appraisal environment
where it is hard enough to get an appraisal to come in even at market
value! (There will always be fraud, of course; but no set of rules is going to
completely overcome that.)
Market realities shut FHA buyers out of the REO market. With the 90-day
rule, they are also shut out of the opportunity to buy a rehabbed house,
ones which are being snapped up by buyers – often first-time buyers – who
have conventional financing.
During the debate at CAR® there were impassioned arguments from agents
who had seen their FHA buyers repeatedly excluded from legitimate
purchase opportunities. While opponents of the motion did not deny this,
they argued against it for primarily political reasons. They believed that
opposition to the anti-flip policy made the organization (CAR®) appear to be
in favor of unfair profits being made at the expense of unwary buyers.
The argument about appearances failed to carry, and directors voted to
oppose the anti-flipping rule. Now the organization needs to do what it can
to convince FHA.
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Update: January 31, 2010, the Los Angeles Times (source) reported that
the FHA had suspended its anti-flipping rule for at least one year. The FHA
now provides insurance on mortgage loans regardless for how long the
owner has owned the property.
2.4.2.4
INVESTOR REPORT: REO LISTINGS
by Kenneth R. Harney for Realty Times, December 4, 2009
Fannie Mae calls its latest REO home sales program “First Look,” but
investors might want to call it “Second Look.”
That’s because the “first look” at all of Fannie’s new REO listings, starting
this month, will now go to home buyers who plan to occupy the units they
purchase, or to local public agencies participating in “neighborhood
stabilization” or community development programs.
When Fannie lists one of its tens of thousands of foreclosed and
repossessed houses for sale through a participating real estate broker,
investors will be barred from submitting bids for the first fifteen days.
Now that Fannie and Freddie are
owned by the Government, we
should expect more policy such
as this: policy set to achieve
Government objectives rather
than financial objectives.
During that time, Fannie will only consider offers from owner-occupant
purchasers and local agencies – even if investors are ready to make
superior, all cash competing bids.
Once the fifteen days are up, everybody will be free to bid – investors,
ordinary home buyers, and government agencies.
Terry Edwards, Fannie’s executive vice president for credit portfolio
management, explained that the company is intentionally trying to give a
leg up to ordinary buyers over private investors in order to increase owner
occupancy levels in neighborhoods hard hit by waves of foreclosures.
“First Look provides owner occupants and public entities that are committed
to the community an early opportunity to purchase one of Fannie Mae’s
REO properties,” he said.
Under the revised First Look policy, owner occupants who have qualified
for local financing assistance using the Obama administration’s
neighborhood stabilization program will also be eligible for deal-sweeteners
that won’t be available to investors.
For example, they won’t have to come up with the usual earnest money
deposits that other bidders are required to make, but instead can put down
as little as $500 to tie up the property. Owner occupant purchasers will
also get up to 45 days to close on their transactions – 15 days longer than
other bidders get from Fannie Mae.
Despite the second tracking for private investors, however, Fannie will
continue to offer its favorable Home Path financing options for investors –
including low downpayments and no appraisal fees.
What’s the likely impact of the new policy on investors? At the moment
that’s not clear. Investors have been key partners to Fannie in disposing of
its ever-growing inventory of REO, and Fannie’s goal as a corporation
remains that of maximizing its returns on its assets. Fannie doesn’t want to
chase away investors.
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But let’s face it: Fannie is also a totally federally controlled entity today –
and politically it makes a lot of sense to work with the Obama
administration when it comes to promoting home ownership.
2.4.2.4.1
LITTLE KNOWN PLAYER HELPS FHA PROVIDE MUCH NEEDED TRUSTBUILDING GUIDELINES FOR CONDOMINIUMS
by David Fletcher for Realty Times, January 7, 2010
The latest FHA condominium guidelines eliminated the two main reasons
the public quit buying condominiums:
1.
FHA’s logo.
They couldn’t afford the down payment.
2.
They lost confidence in the association’s financial status.
Condominiums that received FHA approval soon learned that approval
alone was not enough to draw buyers. Lack of confidence in the financial
stability of association fees and reserve accounts kept buyers and
REALTOR®s away as well.
The new guidelines call for FHA-approved condominiums to be financially
stable and require the mortgage lender to approve the association budget,
reserve account, and more.
This is exactly the policy needed to boost confidence in condominium
association finances. Lenders may resist it because it will be more work for
them, but it is a great idea.
Condominium buyers can purchase knowing that their lender has reviewed
the association’s financials and found them to be mortgage worthy.
The Community Associations
Institute is an HOA service
vendor trade association,
dominated by lawyers and
property managers.
We owe the FHA our thanks, but we owe the Community Association
Institute (CAI) a standing ovation.
CAI is the one organization in this country that exists to protect the interests
of people living and working in community associations.
It lobbied for strong financial controls within condominium associations and
the FHA listened.
Not only can the buyer purchase with only a 3.5% down payment, the
mortgage lender must review the reserves and make sure the insurance
policy is current. CAI is the national voice of association-governed
communities which include homeowners associations, condominiums,
cooperatives, and other planned communities.
According to its website:
The estimated real estate value of all homes in community
associations approaches $4 trillion, approximately 20% of the value
of all U.S. residential real estate.
The total annual operating revenue for all community associations in
the U.S. is more than $41 billion. Most of this is spent in
associations’ local economies for goods and services.
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Community association boards also maintain investment accounts
of more than $35 billion for the long-term maintenance and
replacement of common property.
Homeowners associations and other planned communities account
for 52-55% of the totals above, condominiums for 38-42%, and
cooperatives for 5-7%. In all, this represents an estimated sixty
million owners in twenty-four million housing units located in more
than 300,000 communities.
40% or 24 million are condominium owners living in an estimated
ten million units, within 120,000 communities.
The one advantage CAI has over other interest groups fighting for their
members is that they focus on policy that does not cost the taxpayer yet
directly affects the marketability of the community. The National
Associations of REALTOR®s, homebuilders, and mortgage bankers are
hammering away at ways to make their products simpler, less expensive,
or easier to sell. The National Association of Homebuilders fought
unsuccessfully for a 30% presale requirement instead of the 50% presale
requirement now in effect. They lost that battle but not the war.
The 50% presale requirement will not sound the death knell for
condominium projects as some have claimed.
A more conservative presale approach will give commercial lenders more
confidence in closing projections. Pricing strategies and incentive
promotions can help build urgency within the framework provided. There
are other pending issues that the industry will continue to push HUD {FHA
is part of HUD} to permit, but with the two fundamentals now in place –
financial integrity and presale stability – the issues should become more
realistic on both sides. Everyone including HUD and the FHA wants to see
the condominium market reach the sales momentum corner it so
desperately needs to turn.
I for one am ready, after leaning on President Obama in past columns
about the condo mess, to support HUD and the FHA to encourage them to
keep listening. We can expect the National Association of Homebuilders to
continue to fight for liberal presale and other sales-friendly requirements
and for lenders to fight for their interests.
As REALTOR®s come to understand and see the sales impact that good
management and financial stability means to the value of existing
condominiums, they will tend to take harder looks listing and selling
opportunities within the condominium community. The stroke of a pen
changes interest rates, presale requirements, and down payment
requirements, but the reputation for good management and a stable
financial condition comes with time. No matter what other issues must be
addressed, it is comforting to know that, if “FHA approved” financial stability
of its condominium association will not be one of them.
“We are pleased to have this opportunity to work with FHA and other
stakeholders on this critical issue,” said CAI Chief Executive Officer
Thomas M. Skiba, CAE.
“This is just the first step to correcting the historic challenges in the
condominium market. More needs to be done and we will continue to do
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everything we can to restore confidence in housing and protect
homeowners and homebuyers.” Well said. And well done.
2.4.2.5
ABOUT THE CALFHA
Chuck Milbourne, Editor: August 1, 2010
I found several articles about the California Housing Finance Agency
(CalFHA) in both the Real Estate Bulletin and Realty Times and I found
important recent news stories about CalFHA in Google News. Rather than
present several articles about individual programs offered by CalFHA, I’ve
summarized their programs in the below article.
The California Housing Finance Agency (CalHFA) is the largest public
housing finance agency in the country. It was created in 1975 to provide
below-market-rate loans to first-time homebuyers with average to below
average incomes. It acquires its funding from the sale of tax-exempt
bonds.
CalHFA resumed lending in June 2009 after an 18-month hiatus attributed
to the Mortgage Crises. Currently (August 2010) it offers the following
programs:
According to Equifax (source)
the distribution of FICO scores is:
1.
20% above 780
20% between 745 – 780
20% between 690 - 745[*]
20% between 620 – 690
20% below 619
The Cal30 Conventional Loan is a fixed interest rate, 30-year
mortgage. The loan cannot exceed 95% of the appraised value for
the property. Borrowers require at least a 640 FICA . They may
receive down payment assistance to cover closing costs (see
following program). Such borrowers are required to contribute three
percent of the sales price or the property’s appraised value,
whichever is less, from their own funds.
CalHFA requires PMI for any Cal30 loan with an LTV greater than
80%. CalHFA accepts PMI Certificates of Insurance from the
following Fannie Mae and Bank of America approved insurers:
Radian, Genworth, MGIC, PMI, RMIC and UGIC. Borrower’s who
require PMI must meet the insurer’s guidelines which are currently
more exclusive than CalHFA’s for its Cal30 program.
The American Dream Down
Payment Act (2003) is a down
payment assistance initiative that
allows grants to be given to
participating jurisdictions to assist
low- to mid-income families and
uniformed employees (e.g.,
policemen, firemen, sanitation,
and public teachers) to achieve
homeownership.
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2.
CalHFA’s California Homebuyer's Downpayment Assistance
Program (CHDAP) offers loans to cover the down payment or
closing costs for first-time homebuyers. The loan finances up to 3%
of the purchase price or the appraised value of the home, which ever
is less. This loan may be combined with any first mortgage loan –
not just a CalFHA loan. The American Dream Down Payment Act
gives grants to local cities throughout California so that these types
of loans can be given to low- and middle-income families.
3.
The Affordable Housing Partnership Program (AHPP) is a joint
effort between CalHFA and over 300 cities, counties, redevelopment
agencies, housing authorities, and nonprofit housing organizations.
This program allows borrowers to combine a CalHFA first mortgage
loan with down payment and/or closing cost assistance from an
AHPP partner. AHPP provides mortgages to people who fit within
the low-income bracket. The income limits are based on family size
and the county in which the house is located.
4.
CalHFA’s Community Stabilization Home Loan Program
provides a 30-year fixed rate loan for bank-owned properties in a
federally-designated low-income neighborhood. One hundred
percent financing is available through this program.
5.
CalHFA’s Keep Your Home Program began June 2010 when
CalHFA received $700 million in stimulus funds to help homeowners
struggling to stay in their homes. CalHFA intends to provide
assistance using these funds beginning in November 2010.
The Keep Your Home Program should not be confused with the
federal Home Affordable Modification Program. The federal
program provides some unemployed homeowners with mortgage
“forbearance” – adding missed payments to the back end of the loan
– but will not make payment towards the homeowner’s principal as
does the CalHFA plan.
CalHFA believes it will help up to 40,000 households by providing
(1) up to six months of mortgage assistance for unemployed
homeowners (capped at $1,500/month), (2) assisting delinquent
borrowers in making their mortgage payments providing the lender
forgives an equal amount (capped at $15,000), (3) reducing the
principal reduction for underwater borrowers, and (4) providing
moving expenses for borrowers who can’t afford to stay in their
homes (details: www.KeepYourHomeCalifornia.com).
2.4.3
MORTGAGES
2.4.3.1
INS, OUTS OF EQUITY SHARING
by Broderick Perkins for Realty Times, March 5, 2008
Consider equity sharing a symbiotic relationship – as well as a legal
agreement – between two or more people holding title to one home.
Las Vegas-based Creative Real Estate Online publisher, J. P. Vaughan,
also a trial lawyer and real estate investor says, properly designed, the
creative financing strategy can be a triple-win proposition.
An equity sharing deal is typically struck to help sell a home, often in a
tough market, but a tough market isn’t a prerequisite. It also helps enable a
home purchase when it might not otherwise be possible. And it is used to
provide an investment with a financial return.
Typically savings-poor but income-rich, one person becomes the
occupying homeowner with no or little money down.
A second participant, the investor, provides the initial leverage
usually in the form of a down payment stake. With time, he or she
can enjoy a joint venture-like return on his or her money.
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The seller, in a slow market, can choose to become the investor or
otherwise use the creative financing strategy to quickly seal a deal.
Deals vary, but in its simplest form, an equity sharing agreement works
something like this:
The buyer-occupant generally lives in the residence, pays the
mortgage and other costs associated with owning and operating a
home – including taxes, insurance, maintenance and the like. He or
she gets to deduct a portion of the mortgage interest, property
taxes, and others.
The non-resident, often an investor, perhaps a family member,
trusted friend or professional investor, provides all or part of the
down payment and in return gets tax deductions for her or his share
of the mortgage interest and property taxes.
Title to the home can be held in a variety of ways – joint tenancy
with right of survivorship, tenancy in common, partnership, or as a
living trust.
Equity sharing deals should be legal and binding contracts designed to
provide an equitable means to an end. It should also include provisions for
any disputes or disagreements that might arise during its term.
Contracts generally indicate that the parties cannot extract any returns until
the deal is over. Escape clauses can come with stipulations providing for
cash penalties for early outs or other resolutions.
At the end of some specified period, five, seven, ten years or so, the net
proceeds from the sale are split between the buyer and investor, again,
based on contractual provisions.
Generally and theoretically, through appreciation, an equity deal is set so
that the occupant eventually earns a share sufficient to allow him or her to
buy a home without help and to give the supporting investor a shot at a
profit. Other resolutions can be contracted.
The creative financing tool isn’t perfect for every market. While tight money
markets can make equity sharing a viable financial avenue to
homeownership, a market with flat or reverse home prices requires a deftly
drawn contract with a term long enough to allow the deal to gel.
As is the case with any major financial transaction, assistance from a
professional experienced in equity sharing agreements is paramount. In
addition to the transactional contractual considerations, tax implications
abound.
Entering an equity sharing deal with a verbal agreement and or non-binding
contract is like searching for fools gold without a pickaxe.
Referrals from trusted resources – real estate agents, tax professionals,
accountants, other finance experts, and the like, are good resources to tap.
Most professionals have a network of peers involved in various aspects of
real estate.
The Internet’s vast reach can also help make it easy to find qualified help.
Keep in mind, the Internet is no better than the Yellow Pages if you don’t
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thoroughly check out professionals’ credentials, experience, and track
record for success.
A few resources include:
Marilyn D. Sullivan’s Home Equity Share network
J. P. Vaughan’s Creative Real Estate Online.
The Don Reedy, Peter Haglund, Howard Schwartz and Richard
Borkowski BuyHalfAHouse.com team.
The DirtLawyer.com team at Hoge Fenton Jones & Appel, Inc.
Andy Sirkin’s Sirkin Paul Associates.
Investors should realize that over the long run, the land holds its value
while the home depreciates. Investors should stipulate that the occupant
must maintain the home to keep its depreciation to a minimum.
2.4.3.2
GET THE FACTS BEFORE YOU OPT FOR A REVERSE MORTGAGE
by Phoebe Chongchua for Realty Times, July 11, 2008
There’s a useful, albeit fear-invoking, mortgage tool that’s available to many
homeowners over the age of 62 who need to get some cash out of their
homes to use for investing in other properties or any other financial needs
they have.
“A forward mortgage, you make payments to. A reverse mortgage you
receive payments from and based on the sum of money that you receive,
interest accrues,” says Michael V. Scarantino, founder and President of
Florida Household Mortgage and Southern Tier Home Loans.
While the reverse mortgage may be a helpful tool, it’s often perceived as
undesirable.
“After 40 years there’s this blight on them and that number one knee jerk is,
‘I’m going to lose my home,’” says Scarantino. He says people have a fear
of banks. “The bank will never own your home if you take a reverse
mortgage unless you leave the home for a 365-day period; then you’re
deemed not to be a permanent resident such as in the case of a long
nursing home stay.”
According to Scarantino, the other ways that people default on a reverse
mortgage are by not paying taxes or their homeowner’s insurance. “That’s
it. There’s nothing else that can remove them from their home. It virtually
creates a life estate,” says Scarantino.
Scarantino explains how the non-recourse mortgage works.
“Let’s assume that at 77 year old, Mary B. Smith, has a house worth
$100,000, owned free and clear. She executes the instrument and gets a
reverse mortgage and decides to take a line of equity credit (an account on
the equity in the home). Let’s say she lives to be 101 years old and is
healthy enough to stay at home. What the bank has done is, every time
that she has drawn money, the bank has started to accrue interest to that
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sum that she withdrew. Typically today it’s a variable rate. There are very
few fixed-rate long-term reverse mortgages,” says Scarantino.
But how are the homeowner’s heirs protected?
“On all government-backed reverse mortgages there is a mandatory 2%
mortgage insurance premium that is paid upfront. That will cover any
overages so that the taxpayers, in some future date, don’t get saddled with
that public debt or have to turn it into a public debt to satisfy and bail some
lenders out. So the insurance premium takes care of that in the beginning,”
says Scarantino .
Here’s a better explanation: As part of the closing costs, you must pay a
mortgage insurance premium (MIP) equal to 2% of the loan amount upfront, plus an annual premium thereafter equal to 0.5% of the loan amount.
The premium guarantees that if the company managing your account –
commonly called the loan “servicer” – goes out of business, the government
will step in and make sure you have continued access to your loan funds.
Furthermore, the MIP guarantees you will never owe more than the value of
your home when the reverse mortgage must be repaid.
Scarantino says the first reverse mortgage was written decades ago. But
there still remains a considerable amount of fear and misunderstanding
surrounding it. This makes doing your homework an extremely important
task. Separating fact from fiction can provide {you} insight about whether
this style of mortgage is right for you. Here are some common questions
and answers.
When is a reverse mortgage paid? A reverse mortgage is a loan against
your home that you are not required to pay back as long as you live there.
The loan is repaid from the borrower’s estate or the eventual sale of the
home when the last surviving borrower no longer lives in the home. Money
can be received in a lump sum, monthly payments, or through a line of
credit.
How do you qualify for a reverse mortgage? You must be 62 years or older
to qualify and there are no income or credit requirements for a reverse
mortgage. The amount you can borrow in a reverse mortgage is
determined by your age, your home’s value, and interest rates. The older
you are, the more you can borrow.
Will I lose my home? The bank never takes over the deed unless there is a
default. Defaults can occur if the taxes and insurance are not paid current
or the homeowner doesn’t live in the home for a one-year period.
How you can benefit from a reverse mortgage? Reverse mortgages can be
used to eliminate larger payments, free-up cash in order to invest, travel,
pay for college educations, and many other expenses.
A reverse mortgage may be the answer for you but first make sure you
meet with an expert who handles these types of loans. Be sure that the
expert fully understands your specific needs and can identify if this is the
best approach for you. Also, be aware that reverse mortgages cost about
1% more than a traditional mortgage.
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2.4.3.3
WHO OWNS MY MORTGAGE?
by Ralph Roberts for Realty Times, April 27, 2009
When trying to contact your lender to work out a payment plan or some
other deal, knowing who owns your mortgage can be very helpful.
Unfortunately finding out is not as easy as it sounds. You should be able to
call the phone number on your last mortgage statement or the number in
your payment coupon book and connect directly with your lender. More
often than not, this merely puts you in touch with the servicer – the
business that collects and processes your payments. In some cases, the
servicer is prohibited from divulging the true identity of your lender. In other
cases, the person you’re dealing with has no idea who your lender is.
Mortgages are often sliced and diced and repackaged into mortgage
backed securities (MBS's) that are sold and traded on Wall Street. Many
investors subscribe to an automated system called MERS (Mortgage
Electronic Registration System) that keeps track of who owns the mortgage
and note as it changes hands among investors, as well as who services it
for that investor. MERS can provide another level of anonymity to the
process. On many mortgages, the mortgagee (the party that was granted
the mortgage) is listed only as MOM (MERS as Original Mortgagee). No,
that doesn’t mean you can call your mom to find out who owns your
mortgage note. It means you have to try to look it up in the MERS registry.
Customers trying to look up the investor on the MERS registry will not find
it. MERS makes the name and contact information of the servicer
available, but not the name and contact of the investor. That information is
for the servicer or investor to disclose, not MERS.
To add to the confusion, the Mortgage Meltdown sank many banks and
other lending institutions which were taken over by other banks or
regulators.
So, what should you do if you’re trying to track down your lender? Take the
following approach:
1.
Call the phone number on your most recent mortgage statement or
your payment coupon book. This will put you in touch with the
servicer who may also be the lender who owns your mortgage or at
least be able to tell you the name of your lender. (Remember, the
person may not know or may not be permitted to tell you.)
2.
If you have an FHA loan, contact FHA's National Servicing Center to
determine who owns your mortgage: (800) CALL- FHA / (800) 2255342; [email protected]
Department of Housing and Urban Development National Servicing
Center 301 NW 6th Street, Suite 200 Oklahoma City, OK 73102
3.
You can try to contact Fannie Mae. If they own the note, they may
provide the identity of the investor: 1-800-7FANNIE (1-800-7326643).
4.
If the mortgage is listed as MOM or has a MIN (Mortgage
Identification Number) assigned to it, you can search the MERS
database by mortgage identification number (MIN), your name and
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social security number, or the property’s address. Dial the toll-free
MERS Servicer Identification System at 888-679-6377 (an
automated touch-tone system) or search online.
5.
If you know the name of the bank or other lending institution that
owns your mortgage but have no contact information for them,
check out Hope Now.
One of the most important steps to saving your home from foreclosure is to
get in touch with your lender immediately. Better yet, hire a qualified
attorney with experience in foreclosures and loan modifications to contact
your lender on your behalf, so you have legal representation on your side. I
can guarantee that your lender has an attorney reviewing the paperwork.
You should have one to watch your back, too.
2.4.4
MORTGAGE SHOPPING
2.4.4.1
MORTGAGE PRE-APPROVAL VERSUS MORTGAGE PREQUALIFICATION
by David Fialk for Realty Times, March 11, 2008
Is there a difference between a mortgage pre-qualification letter and a
mortgage pre-approval letter?
The reality is that most all buyers need to obtain a mortgage loan to
purchase a home. Since mortgage approval is such an integral aspect of a
home purchase, wouldn’t it make sense that REALTORS® have a better
understanding of the mortgage pre-approval process, since so few buyers
are able to buy a home and pay cash.
These terms appear to be similar but can be quite different. Not only do
they cause confusion for home buyers, there seems to be many
interpretations from those in the real estate and mortgage industry as well.
Speaking as a REALTOR®, the difference is in documentation and
verification. In other words, is the buyer providing copies of income pay
stubs and bank account statements to the mortgage lender or is the
mortgage lender simply relying on verbal information provided by the
buyer? More often than not, the difference between the two terms is that
one is issued without any verification of information and the other starts
with the buyer providing written documentation of all information provided.
While neither is considered to be a mortgage commitment, nor a written
mortgage guarantee, obtaining a mortgage pre-approval letter is more
preferred than obtaining a mortgage pre-qualification letter.
Based upon my experiences in selling real estate since 1971 and helping
buyers obtain mortgage financing, mortgage pre-qualification is generally a
process where a buyer contacts a mortgage lender/mortgage
representative, often on the telephone, who then asks the buyer to provide
some information. The information requested involves a current address
and how long living there, a social security number and permission to order
a credit report, annual income, and hopefully the amount of down payment.
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After the credit check is ordered and received by the mortgage lender, the
mortgage rep then estimates the amount of mortgage the buyer can afford
and sends (via fax or email) a letter to the buyer with the title
“Congratulations, you are pre-qualified for a mortgage loan in the amount of
$__” or “Congratulations, you are pre-qualified for a mortgage loan in the
amount of $__ and a purchase price of $__”. This is usually done within a
half hour or so of the initial phone call and at best can be described as an
estimate of potential mortgage ability and purchasing power and not
mortgage pre-approval.
The pre-qualification letter always includes varying type disclaimer
information, such as: “Subject to a formal mortgage application and
payment of an application fee, subject to verification of employment,
subject to verification of assets, subject to credit review, subject to
mortgage underwriting guidelines, interest rate to be the prevailing rate of
interest for the mortgage type applied for” among many other subject-to-like
statements. In other words, we will give you a mortgage when we see that
the information you provided is correct and meets certain qualifying
standards.
What problems could arise when a formal mortgage application is
submitted by a buyer after they’ve obtained a mortgage pre-qualification
letter like that? The mortgage application process involves somewhat
standard underwriting criteria and guidelines for each particular type
mortgage whether the mortgage is VA, FHA, or conventional. The varying
underwriting criteria involves guidelines whether Fannie Mae, Freddie Mac
or the Lender’s specific qualifying criteria for verification of income, income
qualifying ratios, verification of down payment, cash reserves after closing,
credit check scores, and work history, among others.
Yes, it is possible that the buyer provided correct information and will obtain
a mortgage commitment when a mortgage application is submitted.
However, there are many circumstances where even though the
information verbally provided is accurate, certain other details are not
mentioned which may have a negative impact on the mortgage approval
process. Details like income being received off the books, down payment
being borrowed (not gifted from a family member), and savings for the
down payment but no other assets for closing costs or inconsistency in
work history, to name just a few situations that can cause problems in
obtaining mortgage approval.
While pre-qualification letters like the previous example are common, not all
mortgage lenders provide them in that manner. Many mortgage lenders
require a more thorough process in providing mortgage pre-approval. In
addition to obtaining a credit report, many lenders require the buyer to
provide proof of two years of work history, pay-stubs or income tax forms,
copies of bank statements for source of funds verification, and copies of
charge card statements.
When the documentation is provided, it is then submitted to the mortgage
underwriter for review and approval. The mortgage pre-approval letter is
worded something like this: “Congratulations, You are pre-approved for a
mortgage loan in the amount of $__ and a purchase price of $__ subject to
a contract of sale and a satisfactory bank appraisal on the home being
purchased.” While more time consuming than the previous pre-qualification
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practice discussed above, it is more thorough and more reliable, shortens
the formal mortgage application and approval process, and provides the
ability for a fast closing if one is desired.
Consider the advantages of this type mortgage pre-approval. First of all,
the buyer and REALTOR® will have confidence in a price range and
confidence in obtaining mortgage approval. In submitting offers, sellers will
know they have a serious buyer who has taken the time to arrange for
mortgage financing first. And just as important, the buyer will be more
relaxed in spending money to hire an attorney for contract review {not
applicable in California}, providing the earnest money deposit, hiring a
home inspector to perform the home inspection, termite inspection, radon
inspection plus any other required inspections and paying for the mortgage
application and appraisal fee. Why? They are concentrating on the home
they have purchased and not worrying about the mortgage approval
process.
Needless to say, I can’t even count the number of real estate transactions
I’ve noticed fall apart after a buyer has paid all those fees for the home they
hoped to purchase only to find out they were not able to obtain mortgage
approval even with a pre-qualification letter. These are the financial
ramifications for a buyer but what about the ramifications for the others
involved in a lost real estate transaction, the selling agent, the listing agent
and the seller? Consider the time, energy, emotional strains, and on and
on. Real estate is a people business, a service business. Not much good
can occur when a real estate transaction is cancelled for mortgage denial,
especially when it occurs a month or so after contract acceptance.
Provide better service to your buyer clients, review their mortgage prequalification letter with them, and don’t be afraid to ask questions. Provide
better service to your seller clients, read the mortgage pre-qualification
letter the selling agent is providing at the contract presentation, and don’t
be afraid to ask questions.
2.4.4.2
CREDIT SCORES REMAIN MISUNDERSTOOD
by Broderick Perkins for Realty Times, July 15, 2008
Too many consumers still don’t get it when it comes to credit scores. And
what you don’t know about credit scores can hurt you when it’s time to buy
a home – especially in a tight credit market.
Only 28% of consumers are aware they need at least a 700 credit score to
qualify for a low-rate mortgage.
Three of every four consumers incorrectly believe that credit scores are
influenced by income.
And even more, 79%, erroneously believe that credit scores can be
obtained for free once a year. (They’re probably thinking about their credit
report, instead.)
Those are among the findings of a new report, “Consumer Understanding
Of Credit Scores Improves But Remains Poor” commissioned by the
Consumer Federation of America (CFA) and Washington Mutual Bank
(WaMu).
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First, your credit score is a number assigned to your creditworthiness.
Your credit score indicates how well or how poorly you’ll repay a debt. The
higher the number, the more likely you’ll repay on time.
Your bill paying information on credit reports provides the basis for your
credit score.
Consumers who take the time to obtain their credit score, for only about
$15 under most circumstances, are more likely to have a better
understanding of the scores.
That includes knowledge that mortgage lenders rely heavily upon credit
scores to approve or reject home loan applications. Informed consumers
also know they can generally raise their credit score by consistently paying
bills on time every time; by paying off debt and closing those paid off
accounts; by not coming close to maxing out credit cards, and by regularly
checking their credit reports to make sure they are accurate.
Your credit report is free from AnnualCreditReport.Com. For more
information about your credit score go to MyFICO.com.
The study also found that consumers could save $28 billion a year in lower
finance charges if they improved their credit scores by 30 points.
“Lack of consumer knowledge about credit scores not only increases the
costs of their credit and insurance but also reduces the availability of these
and other services,’ said CFA Executive Director Stephen Brobeck.
The study’s findings include:
When asked to define “credit score,” only 31% correctly identified the
answer “risk of not repaying the loan” in a multiple choice question that also
included “financial resources to pay back loans” (21%), “amount of
consumer debt” (16%), “knowledge of consumer credit” (15%), and “attitude
toward consumer credit” (9%) as other options.
Consumers typically fail to understand that a credit score reflects only how
they use credit, not factors such as income and age. Significant
percentages incorrectly believe that credit scores are influenced by income
(74%); age (40%); marital status (38%); the state in which they live (29%);
level of education (29%); and ethnicity (15%).
Majorities correctly understand that they can learn their credit scores if they
are denied a mortgage loan (72%) or declined for a credit card (65%). But,
an even larger group (79%) incorrectly believes that credit scores can be
obtained for free once a year. Only credit reports are free every year.
2.4.4.3
NEW FANNIE MAE OWNER-OCCUPANCY RULES WILL HELP
BOOST INVESTOR SALES
by Bob Hunt for Realty Times, February 5, 2009
On December 16, 2008, Fannie Mae released announcement 08-34 to
lenders around the country. This document contains good news for
investors, agents of investors, and lenders who are trying to reduce their
REO (“real estate owned”) inventory. The good news consists of a
loosening of Fannie Mae’s owner-occupancy ratio requirements for loans
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made to investor purchasers of condominiums. Actually, the
announcement characterizes itself as a “clarification” of the policy.
Whatever.
As it stands, “Fannie Mae requires that established condominium projects
consisting of attached units have an owner-occupancy ratio of at least 51%
… if the mortgage loan being delivered is secured by an investment
property.” The owner-occupancy ratio is not at issue in cases of
“established projects where borrowers will occupy the unit or use the unit
as a second home…”
Suppose that a 100-unit condominium project has 45 units that are rentals.
Its owner-occupancy ratio is 55%; thus an investor could obtain a purchase
loan which might then be sold to Fannie Mae.
But suppose, now, that of the 55 owner-occupied units, eight are lost to
foreclosure. (This would not be an unheard of percentage – of the total 100
units – in many parts of the country today.) These eight become REO
inventory and are listed for sale. What is the owner-occupancy ratio now?
Most of us, I think, would say that the REO properties are not owneroccupied; hence the ratio of owner-occupied units would be reduced to
47%. Apparently, many lenders around the country have thought the same
way. Based on that understanding, the project would not be eligible for
investor financing acceptable to Fannie Mae. In general, that would simply
be another way of saying that no investor financing would be available.
As many have noted, a turn of events such as this can easily become the
beginning of a downward spiral for the condominium project. For, while it is
true that the ratio only applies in the case of investor buyers, there simply
are not that many potential owner-occupants who are both motivated and
qualified. Even with dramatic price drops, most of the potential buyers are
investors. But, given the understanding about the ratio, they are not eligible
for financing. Hence, many of the units are left vacant and the HOA may
find itself short of dues income. (Yes, the foreclosing lender is responsible
for paying dues in a timely manner; but they are not always forthcoming.)
As more “for sale” signs sprout, the lower unit values drop.
Fannie Mae’s December 16th change – “clarification” – is “to include REO
units that are for sale (not rented) as owner-occupied units in the owneroccupancy ratio.” This means that there will be more sales of these units;
and that will be good for everybody.
During the past couple of years, more than a few would-be investor buyers
have been unable to purchase condominium units because of the owneroccupancy ratio requirement. Agents who worked with those people should
give them a call. There are more opportunities today than there were a few
weeks ago.
2.4.4.4
LANDMARK CONSUMER PROTECTION LAW HEAVY WITH STRONG
MORTGAGE RULES
by Broderick Perkins for Realty Times, September 23, 2010
President Obama recently signed the landmark H.R. 4173: Restoring
American Financial Stability (RAFS) Act of 2010 which, in part, eliminates
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many of the lax mortgage lending practices that sparked the financial
meltdown.
Among its provisions, the far-reaching new law creates a new Federal
Reserve-based watchdog, the Consumer Financial Protection Bureau to
ensure consumers get clear, accurate information necessary to shop for
mortgages, credit cards and other financial products. It also protects
consumers from hidden fees, predatory terms and deception.
It’s not clear when all the provisions will roll out, but an overwhelming
majority of consumers demanded the protections.
Often called “Wall Street Reform,” the RAFS Act has many provisions for
those who live on Main Street, including a national consumer complaint
hotline so consumers will have, for the first time, a single, toll-free number
to report problems with financial products and services; a new Office of
Financial Literacy; and a new HUD Office of Housing Counseling to boost
homeownership and rental housing counseling.
The bureau will be lead by an independent director appointed by President
Obama and confirmed by the Senate, who will be able to autonomously
write rules for consumer protections governing all financial institutions,
banks and non-banks, offering consumer financial services or products.
The new director will oversee the enforcement of federal laws intended to
ensure the fair, equitable, and nondiscriminatory access to credit for
individuals and communities.
The new law governs banks and credit unions with assets of over $10
billion and all mortgage-related businesses (lenders, servicers, mortgage
brokers, and foreclosure scam operators), payday lenders, and student
lenders as well as other non-bank financial companies, including debt
collectors and consumer reporting agencies. Banks and credit unions with
assets of $10 billion or less will be examined for consumer complaints by
the appropriate regulator.
Among it’s provisions, the RAFS Act includes help for homeowners and
home buyers, including:
Prohibiting unfair lending. It prohibits "yield spread premiums" and
other financial incentives that encourage lenders to steer borrowers
to more costly loans and pre-payment penalties that trapped so
many borrowers in unaffordable loans.
Establishing penalties for irresponsible lending. Lenders and
mortgage brokers who don’t comply with new standards will be held
accountable by consumers for as much as three-years of interest
payments and damages plus attorney’s fees. The law also protects
borrowers against foreclosure for violations of these standards.
Expanding consumer protections for high-cost mortgages. The new
law expands the protections available under federal rules on highcost loans by lowering the interest rate and the points and fee
triggers that define high cost loans. Also, lenders must disclose the
maximum a consumer could pay on a variable rate mortgage, with a
warning that payments will vary based on interest rate changes.
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Requiring lenders to ensure borrowers’ ability to repay. The act
establishes a simple federal standard for all home loans: institutions
must ensure that borrowers can repay the loans they are sold.
Requiring additional mortgage disclosures. Lenders must disclose
the maximum a consumer could pay on a variable rate mortgage,
with a warning that payments will vary based on interest rate
changes.
Emergency mortgage relief. Based on a successful Pennsylvania
program, the new law provides $1 billion for bridge loans to qualified
unemployed homeowners with reasonable prospects for
reemployment to help cover mortgage payments until they are
reemployed.
Foreclosure legal assistance. The law authorizes a HUDadministered program for making grants to provide foreclosure legal
assistance to low- and moderate-income homeowners and tenants
related to homeownership preservation, home foreclosure
prevention, and tenancy associated with home foreclosure.
Free credit scores. Consumers will get free access to their credit
score if their score negatively affects them in a financial transaction
or a hiring decision.
2.4.5
DISTRESSED PROPERTIES
2.4.5.1
LENDERS VIEWS ON CHAPTERS 7 AND 13
by David Reed for Realty Times, September 22, 2006
With Chapter 7, aka “Straight
Bankruptcy,” the bankrupt is given
a fresh start – all of his nonexempt assets are sold (if any)
and the proceeds are distributed
to his creditors. With Chapter 13
bankruptcy, aka “reorganization,”
the bankrupt provides a plan for
paying off his debts over a period
of three to five years.
Interestingly enough, and fair or not, lenders view a Chapter 13 and Chapter
7 almost the very same when it comes to determining creditworthiness.
With the exception of most subprime mortgage loans, lenders look at the
actual discharge date of a bankruptcy when deciding whether or not they
want to issue a loan for a potential homeowner.
For instance, a conventional mortgage asks that a bankruptcy be
discharged for four years before being able to qualify for a new conventional
mortgage. And not the filing date, the discharge date. If a person files for
Chapter 7, the clock begins ticking immediately upon discharge.
But with a Chapter 13, where the borrower makes a good faith attempt to
not simply wipe the creditor slate clean and start all over but establishes a
repayment plan to pay everyone off, the clock doesn’t start ticking for these
folks until the Chapter 13 is completely discharged. That means everyone
included in the Chapter 13 filing has been paid off as agreed, typically over
a 3 to 5 year period.
A consumer can file for Chapter 13, pay it off over five years, and then have
it discharged. If the consumer then wants a conventional Fannie Mae or
Freddie Mac mortgage, she must wait for that four year period to pass.
Five years in Chapter 13 and four years waiting period equals nine years.
That’s a lot of time, folks.
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So which is better, a Chapter 13 or a Chapter 7? I’m not telling and I really
don’t know, it’s just the nature of the lending guidelines. Is the person filing
for Chapter 13 actually being penalized? Maybe, maybe not. But that’s the
rule alright, four years from the discharge, not the filing date.
Median: One type of average,
found by arranging the values in
order and selecting the middle
number. E.g., the median for the
values 2, 3, 9928383 is ‘3’.
As of March 14, 2009, the
California median for a single
earner is $47,363; for a twoincome family it is $62,690
(source).
I very much doubt that these
programs still exist.
Bankruptcy laws changed last year. People used to have a choice as to
which would be better for them, a 13 or 7. Now the consumers must pass a
litmus test to see if they can even qualify for a 7. That litmus test is made
up of a lot of things but most importantly requires that the consumer make
no more than the median income for their area {state}. I live in Austin and
I think the median income is somewhere around $49,000 and change.
If you make above that, you go Chapter 13. For your credit to begin
repairing itself, the bankruptcy needs to be discharged. Yet most Chapter
13 repayment plans last longer than a couple of years.
However, there are “niche” mortgage programs called “Chapter 13 Buyout”
plans that refinance the consumer’s home, pay off the Chapter 13 balance
and live happily ever after . At least from a bankruptcy discharge date.
Not every lender offers such programs and there are some very strict rules
to qualify for them, primarily the consumer must prove he has not been late
on either his mortgage payment or his Chapter 13 payments for the
previous 12 month period. If the consumer can show that, then, given
sufficient equity in their home, they can get themselves out of the Chapter
13 sooner than their scheduled repayment plan, repairing their credit more
quickly.
Bankruptcy is not fun and bankruptcy protection rules that were changed
last year make it more difficult to get started again. But if you’re one of
those few who are in a Chapter 13 and want out of it, a Chapter 13 Bailout
just might be your ticket. You pay everyone off as you had planned, you do
it quicker, and you begin repairing your credit sooner.
2.4.5.2
FACING FORECLOSURE? KNOW YOUR OPTIONS!
by Ralph Roberts for Realty Times, November 27, 2007
If you are a homeowner facing foreclosure, chances are pretty good that
you are not thinking straight. You have no money, you can’t pay your bills,
and the bank is sending you one notice after another warning you that if
you fail to do something promptly they will be forced to kick you out of your
home. Unless you win the lottery, what recourse do you have?
It’s easy to get overwhelmed in these dire situations – so overwhelmed, in
fact, that you may not even realize that you have numerous options to
explore. In this article, I explain the most popular options, along with a few
that are not quite so common. Depending on your situation, not all of these
solutions will be available, but it’s likely that at least a few of them will be.
Tip: Contact the bank who holds your mortgage immediately to discuss
your options. One of the worst things you can do is avoid discussing the
situation with your bank. I know it’s uncomfortable, but how uncomfortable
are you going to be when the sheriff shows up to evict you?
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Staying put
If you really want to remain in your home and are willing to work hard to
keep it, you probably have several options that enable you to do so:
Reinstate the mortgage: If you can borrow some money from
relatives or friends, you can reinstate the mortgage by catching up
on missed payments along with any interest, penalties, and fees
your bank has applied to your account.
Negotiate a forbearance: Your bank may be willing to set you up
with a payment plan that enables you to catch up on your payments.
Just be careful that the payment plan is affordable, so you don’t end
up in the same situation six months down the road.
Refinance: If you have equity built up in the property, consider
refinancing the current mortgage to reduce payments. If you have
credit card debt, you may be able to consolidate all your debts into a
single monthly payment that is less than the total payments you are
currently making.
Sell to an investor and buy it back: If you are running out of time,
you may be able to sell your home to an investor and purchase it
back with a lease-option agreement or a land-sale contract (also
called a contract for deed).
A lease-option agreement is sort of a rent-to-own deal in which you
rent the property for a fixed period of time and then have the option
to buy the property back at the end of that time. With a land-sale
contract, you simply make payments to the investor who purchased
the property rather than to the bank. In both cases, you sign a
contract that almost always has a forfeiture clause stating that you
lose the house and everything you paid on it if you do not honor the
agreement, so check with your attorney before signing anything.
Sell to an investor and rent it: If the investor is buying the
property for long-term rental income, he or she may be willing to
rent it back to you, assuming you have proven that you properly
maintain the property. This is an excellent option if you have kids in
school and need several months or even a year or two to get them
through school before moving.
Redeem the property after the sale: Many states have a
mandatory redemption period {in California, this is rare }, during
which time you can purchase the property from whoever bought it at
the auction. You have to pay the buyer the amount he or she paid
plus interest and any qualifying expenses the person paid (such as
property taxes and insurance). Contact your register of deeds at the
county courthouse to find out whether your area has a mandatory
redemption period and how long it is. This option typically requires
borrowing money from a relative, friend, or private investor.
Trust deeds are by far the most common instrument used in the financing of
real estate purchases in California. A far distant second are mortgages.
The foreclosed borrower under a trust deed has no right of redemption.
Once the home is sold, that’s it, the borrower can not redeem title.
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Foreclosure under a mortgage (in contrast to a trust deed) may be “judicial”
or, if the mortgage contains a power-of-sale clause, “non-judicial.”
Judicial foreclosures must follow a well-defined legal process administered
by the courts in accordance with statute. This process provides a right-ofredemption for up to one year following the foreclosure sale.
Selling your home
In almost 90-percent of foreclosure cases, distressed homeowners are best
served by selling their home and finding more affordable accommodations.
This is especially true if you have equity in the home – that is, if you can
sell the home for more than you owe on it. That way, you don’t lose the
equity (along with your home) in foreclosure. Here are some options for
selling your home:
Placing your home on the market: Hire the REALTOR® in your
area who seems to be selling the most homes to list your property.
Tell the REALTOR® that you are facing foreclosure and ask whether
he or she would be willing to accept a lower commission. (Some
will, if only to generate a little positive PR.) On average, a
REALTOR® can sell your home in half the time and for significantly
more money than you can sell it for by yourself.
Selling your home to an investor: If you don’t have at least a
couple months to sell your house, you may be able to sell it to an
investor who can pay cash and close the deal in a hurry. In most
cases, however, you are looking at having to accept about 20
percent less than the true market value of your home.
Negotiating a short sale: If you cannot sell the home for enough
to break even, your bank and other lenders may be willing to
negotiate a short sale – that is, accept less than the full amount
owed on their loans. Lenders who hold second mortgages or other
liens against the property may be more willing to negotiate, because
they stand to lose everything if your home ends up being sold at
auction.
This article was written before the introduction of the Obama’s Making
Home Affordable Program (HAMP) as authorized though the Financial
Stability Act of 2009. This program requires lenders and servicers to follow
standardized loan modification guidelines when evaluating a borrower for a
potential loan modification. Among these guidelines is the requirement that
lenders respond to borrowers requesting modifications within 30 days of
having submitted a standard application for a mortgage modification. (See
the article, “Feds Help Speed Up Your Mortgage Modification.”)
Another 2008 law which changes the foreclosure process is the California
Senate Bill 1137 (Perata). It requires foreclosing lenders take certain steps
to help, or attempt to help, homeowners who are in default on mortgages
that were originated between January 1, 2003 and December 31, 2007. At
least thirty days prior to filing a Notice of Default the lender or its agent
must attempt to contact the borrower by phone “in order to assess the
borrower’s financial situation and explore options for the borrower to avoid
foreclosure.” The borrower must be provided with “the toll-free telephone
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number made available by the HUD to find a HUD-certified housing
counseling agency.” See the article, “New California Law Addresses
Various Foreclosure Problems” for details.
Walking out
If you have little, no, or negative equity in the property, don’t really care
about and couldn’t do anything about it even if you did care, consider
walking away prior to eviction day. This will at least save you from the
embarrassment of a forced eviction. Here are your options:
The Mortgage Debt Relief Act of
2007 generally allows taxpayers
to exclude income from the
discharge of debt on their
principal residence. Debt reduced
through mortgage restructuring,
as well as mortgage debt forgiven
in connection with a foreclosure,
qualifies for the relief.
Offering a deed in lieu of foreclosure: Your bank may be willing to
let you off the hook for the money you owe by turning in your keys
and signing the deed to the property over to the bank. Make sure
you have legal representation if you choose this option so that the
bank can’t come after you later for any shortfall .
Gifting the house and your problems to an investor: You may be
able to deed the property over to an investor, who would be in a
better position to negotiate short sales with your lenders to make the
transaction profitable for himself or herself. Again, consult an
attorney before moving forward.
Walking out the door: Your credit is already going to be damaged
if your home is sold at a foreclosure auction, so why not just walk
away? Banks rarely pursue homeowners who simply abandon the
property.
Home: A personal residence of
one-to-four units.
As previously noted, California prohibits deficiency judgments if: 1) the
lender forecloses under a power-of-sale clause (e.g., through a trustee's
sale; aka: “private sale”), or 2) the borrower used the loan to purchase his
home (i.e., obtained a “purchase-money loan”). Exceptions are: 1) loans
gained by fraud, 2) FHA and VA loans (source). Lenders may seek
deficiency judgments on all other types of loans: cash-back, refinances, and
HELOCs being the primary examples.
Even when a lender is legally able to seek a deficiency judgment, this
foreclosure option is rarely pursued owing to practical reasons not the least
of which is that most defaulting home owners don’t have the resources to
pay a money judgment assuming the lender prevails in court. For an
excellent overview of the California foreclosure process, click this link.
Buying yourself some time
You can buy yourself some additional time in the property in various ways.
Here, I discuss the three most common options:
Hire a foreclosure attorney: Don’t settle for just any attorney.
Hire one who specializes in foreclosure law. By simply forcing the
bank and the bank’s attorneys to follow the letter of the law, your
attorney may be able to buy you several weeks, months, or even
years in the house. Just be sure you weigh the costs and benefits
so you don’t end up owing more money than before you hired the
attorney.
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File for bankruptcy: To some people, bankruptcy sounds like an
easy fix, but that is rarely the case. Bankruptcy is costly and often
fails to resolve anything. You buy yourself some time but often end
up owing more later. Do the math before you decide to file for
bankruptcy.
Stay without paying: Most states have a redemption period,
during which time you can buy back your property from whoever
purchased it at the auction {this is rarely possible in California since
nearly all foreclosures are non-judicial under a power-of-sale clause
which allows a trustee to sell the property in a private sale}.
Doing nothing
The absolute worst thing you can do upon receiving a foreclosure notice is
nothing. I recommend that you at least contact your lender. Better yet, try
everything: Place your house on the market, talk to a loan officer about
refinancing, discuss your situation with a real estate investor, and work on
tightening your financial belt so when you do finally get through this crisis,
you come out of it in a little better shape.
2.4.5.3
COURT ACTION WILL INCREASE MARKET EXPOSURE FOR
DISTRESSED PROPERTY SALES
Thanks to a recent act by the state Supreme Court there’s some good
news for sellers of distressed properties in California. The action had
nothing to do with foreclosure procedures, bankruptcy cram downs,
predatory lending, or any of the other mortgage crisis topics du jour.
Rather, its effect, by implication, is that sellers whose homes are in the
process of foreclosure will now have their property exposed to a larger pool
of buyers than they were previously able to. This should have the effect of
increasing the competition for their homes thereby increasing the price they
are liable to receive.
This effect of the California Supreme Court’s act is not apparent on its face;
for all the court did was to deny review of a Court of Appeal decision in the
case of Schweitzer v. Westminster Investments. A little history is in order.
Click here to see a YouTube
video of a Northern California
trustee’s sale.
The Schweitzer case centered on the bonding requirement that CC
§1695.17 places on representatives of investors who seek to purchase a
home that is in the process of foreclosure (i.e., a Notice of Default has been
filed, but the foreclosure sale has not yet taken place). Such investors are
known as “equity purchasers.”
California law places a number of requirements upon equity purchasers.
These requirements are designed to provide protection for homeowners
who are facing foreclosure. For example, the law requires that any contract
between an equity purchaser and a homeowner in foreclosure must provide
a right of rescission period for the homeowner before the contract can be
consummated.
The particular requirement of CC §1695.17 was that any representative of
an equity purchaser must possess (1) a valid California real estate license,
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and (2) a bond equal to twice the fair market value of the property. The
latter requirement posed a real problem for the simple reason that such
bonds have not been available in the state of California.
It’s fair to say that for many years little attention was paid to the bonding
requirement of §1695.17. It seemed an arcane requirement, a mere
technicality that probably had no real practical effect. Then along came the
Schweitzer v. Westminster Investments case. In that case a Superior Court
granted rescission of a sale to an equity purchaser “solely because
[Westminster] acted through a representative and its representative did not
have a bond specified in CC §1695.17…”
That ruling got the attention of many within the brokerage community. It
probably wouldn’t be a good thing to have brokered a sale that was later
undone because your agent had not complied with the law. Because the
bond required by the law was still unavailable, prudent brokers instructed
their agents not to represent equity purchase investors.
Not surprisingly, the Schweitzer case was appealed. Among others, CAR®
filed an amicus (friend of the court) brief. One of the points made in the
brief was that the bonding requirement had unintended negative
consequences for those homeowners who were trying to sell their
properties before foreclosure took place. The brief noted that there are
different kinds of equity purchase investors.
Some are the “pros.” These are the ones who make a business of tracking
notices of default, seeking to obtain properties at very low prices with very
favorable terms. In this regard, the stories of unscrupulous pros are legion.
But, even when the pros operate within the rules, they are certainly the
drivers of hard bargains.
The other kind of equity purchaser is what we might call the part-time or
amateur investor. These are people who don’t make a living doing these
kinds of transactions but who are simply trying to pick up a good
investment. Generally, such investors need the help of a representative, a
licensed agent who can do the research, locate the properties, and
structure the transactions.
The CAR® brief noted that, by imposing an impossible-to-fulfill bonding
requirement, the law worked to keep part-time investors effectively out of the
market by denying them the possibility of representation. It also precluded
equity investors from being represented by licensed individuals who
operated under the regulations of the DRE. As the brief quaintly put it, “only
the sharks are left in the pool.”
Only sharks left in the pool…
As reported here a few months ago, the Fourth Appellate District Court
overturned the Superior Court ruling. The appellate court held that the
bonding requirement was “void for vagueness under the due process clause
and may not be enforced.” While this was immediately received as good
news by a variety of parties, reactions were tempered when the appellate
decision was then appealed to the state Supreme Court.
Now, though, the Supreme Court has denied review. Hence, the appellate
ruling stands. CAR® has already informed its members that it will be
revising its equity-purchase sales agreements accordingly. Real estate
agents will be able to represent equity purchase investors without the cloud
of the bonding requirement hanging over them.
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2.4.5.4
DISCLOSURES FOR “REOS”
by Wayne Bell for Real Estate Bulletin, Summer 2008
Throughout California, residential properties continue to be lost through
foreclosure. The recording of a Notice of Default starts the foreclosure
process. Those houses that have completed the entire foreclosure process
– as opposed to those still in pre-foreclosure status – are, in the current real
estate market, usually taken back and “owned” by the lenders who held the
mortgages on the homes.
Post-Foreclosure Sales
Most lenders are eager to sell the properties (known as “Real Estate
Owned” or the more widely used “REOs”) that have reverted to them
following foreclosure. REOs usually represent lost money to the lenders
and the lenders typically have no interest in owning the houses. Almost
always, they just want to get these properties off of their books.
While the REOs have been repossessed and are now owned by the
lenders, the lenders did not occupy the properties and generally have no
knowledge or history of their true condition. Although it is usually unwise to
generalize, foreclosed homes as a class tend to be in worse condition
insofar as repairs and maintenance than those sold by private owners who
still occupy or recently occupied the property at the time of sale. The
lenders might or might not have any reports on the homes and the lenders
would like not to (if possible) expend any additional monies or to pay for any
inspections, home warranties, or any repairs. More often than not, lenders
want to sell the foreclosed homes in an “as is” condition.
What Disclosures Need to be Given Regarding REOs?
In June 2008, CAR® released two When residential real property of one to four dwelling units is sold or
identical forms, “REO Advisory”
transferred in California, CC §1102 et al. requires certain disclosures
and “REO Advisory (Listing).”
regarding the property. Foreclosure sales are specifically made exempt
Their purpose is to advise
from the statutory transfer disclosure requirements. That is why a Real
buyers/agents regarding the
exemptions/obligations that the
Estate Transfer Disclosure Statement (“TDS”) – which describes the
law provides for sellers who have condition of the property and in the usual case of a sale must be given to a
acquired property through
prospective buyer – does not need to be completed or provided with REO
foreclosure.
sales.
This means that buyers of REOs are provided less legally mandated
disclosure than buyers of homes sold by private owner-occupants. But the
exemption, which was arguably created because the lender did not occupy
and is under no affirmative obligation to inspect the property, begs the
question as to what disclosures need to be made by the lender, as the
owner-transferor, as well as the real estate licensee who acts as the agent
of the REO seller.
Most certainly, the lender-seller of an REO must disclose all known defects
and the adverse and material information it knows about the property. In
addition, there are other disclosures required for REO sales, such as those
pertaining to lead-based paint hazards, natural hazards (such as flood,
seismic, and fire), water heater bracing compliance, Megan’s Law and the
registered sex offender database, smoke detector compliance, and certain
others. CAR has published a Sales Disclosure Chart for REALTORS® that
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Available only to CAR® members
but, if you google it, you may find
a copy available somewhere on
the Web.
provides an instructive and useful list of the special disclosure requirements
for the sale(s) of REO properties, and it can be accessed through CAR® .
The DRE has a publication entitled “Disclosures in Real Property
Transactions” (6th ed. 2005), which is available for purchase from the
Department or can be downloaded without cost from the Department’s web
site, at www.dre.ca.gov (under “Publications”). The Department publication
covers common disclosures generally required in real estate transactions.
Real estate licensees who represent the seller and/or the buyer in the sale
or purchase of REOs must provide the proper agency relationship
disclosures and also have the legal obligation to conduct a diligent and
“reasonably competent” visual inspection of the properties and to disclose
to buyers all of the material facts revealed by the visual inspection
“materially affecting the value or desirability of the propert[ies] that an
investigation would reveal…” CC §2079(a). In addition, there may be other
disclosures that are necessary and appropriate based on the
circumstances of the particular property or transaction and/or the
knowledge of the parties.
Of course, prospective buyers of REOs really need to understand that the
home they are purchasing was previously owned, that it might have faults,
and that the buyers should undertake to have the home examined and
inspected. They would be well-advised (and perhaps should be so advised
by disclosure or otherwise) to get a home inspection(s) from a competent,
knowledgeable professional before buying. Inspection due diligence is
especially of critical importance in REO “as is” sales where the lender-seller
has no firsthand information about the true condition of the property. An
inspection(s) might uncover problems, defects, and other adverse
conditions and important information which would be material to the buyer’s
decision to purchase.
2.4.5.5
NEW CALIFORNIA LAW ADDRESSES VARIOUS FORECLOSURE
PROBLEMS
by Bob Hunt for Realty Times, November 24, 2008
During the recent California legislative session a number of bills have been
introduced that attempted to deal with various problems associated with the
enormous amount of foreclosures taking place in the state. Not all of those
bills have passed, of course, and some that did were vetoed by the
Governor. One that did survive and was signed into law is Senate Bill 1137
(Perata). It addressed problems experienced by three different groups:
homeowners in default, renters of homes that have gone into foreclosure,
and communities in which foreclosed properties are located.
The new law requires that foreclosing lenders take certain
steps to help, or attempt to help, homeowners who are in
default on mortgages that were originated between January 1,
2003 and December 31, 2007. At least thirty days prior to
filing a notice of default (NoD – the first step in the
California foreclosure process) the lender or its agent must
attempt to contact the borrower by phone “in order to assess
the borrower’s financial situation and explore options for the
borrower to avoid foreclosure.” The borrower must be
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Click here for the full NoD.
provided with “the toll-free telephone number made available
by the HUD to find a HUD-certified housing counseling
agency.”
An NoD may be filed if the lender is unable to contact the borrower despite
its due diligence in attempting to do so. Due diligence here means sending
a first-class letter that includes the toll-free HUD number and attempting
telephone contact at least three different times on different days and at
different times. If there is no response in two weeks a certified letter is to
be sent, return receipt requested, that provides “a means for the borrower
to contact it in a timely manner, including a toll-free telephone number that
will provide access to a live representative during business hours.”
These requirements do not apply if the borrower has already surrendered
the property, has filed bankruptcy, or has contacted with any entity “whose
primary business is advising people who have decided to leave their homes
on how to extend the foreclosure process … .”
In the event that the borrower’s billing or contact address is different from
that of the property, the lender is obliged to notify any residents (such as
renters) when a notice of sale is posted. The notice shall be posted on the
property and also sent by mail. It must be in English, Spanish, Chinese,
Tagalog, Vietnamese, and Korean (California’s major spoken languages).
It advises residents that the property is in the foreclosure process and may
be transferred as soon as within twenty days. It also tells them that the
new owner may give them a notice to vacate. The notice, however – and
this is a result of SB 1137 – must be for at least 60 days, not the usual 30.
Mosquito infested pool at an
abandoned home.
Finally, SB 1137 provides that the new owner of the foreclosed property
(whether it be the foreclosing lender or a successful bidder at the auction)
must maintain vacant residential property. Failure to maintain means
“failure to care for the exterior of the property, including, but not limited to,
permitting excessive foliage growth that diminishes the value of surrounding
properties, failing to take action to prevent trespassers or squatters from
remaining on the property, or failing to take action to prevent mosquito
larvae from growing in standing water or other conditions that create a
public nuisance.”
This law authorizes local jurisdictions to fine the new owner up to $1,000
per day – given proper notice and time to respond – for failure to maintain
property as specified.
SB 1137 was passed as an urgency statute and is in effect now. There is
not the typical wait until the beginning of the next year. It remains in effect
until January 1, 2013.
SB 1137 won’t cure all the ills brought on by California’s rash of
foreclosures, but it should be helpful to a lot of people.
Judging from what I see in my neighborhood, REO properties are not being
maintained (as of August 2010). A search of the Web and Google News
yield no reports of any enforcement actions regarding a lenders failure to
maintain the upkeep of their REO properties.
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2.4.5.6
FANNIE MAE ANNOUNCES NEW POLICY FOR RENTERS IN REO
PROPERTIES
On January 13, Fannie Mae released an announcement describing a new
policy that will allow qualified renters to remain in Fannie Mae-owned
foreclosure properties. Formally known as the National Real Estate Owned
Rental Policy, it is meant to address the difficulties faced by tenants who –
often through no fault of their own – face serious disruptions in their lives
because the owner of the property in which they live has been foreclosed
upon.
Said Michael Williams, chief operating officer of Fannie Mae, “This policy
will allow qualified renters to remain in Fannie Mae-owned properties
should they choose to do so, mitigate the disruption of personal lives that
foreclosures can cause, and help bring a measure of stability to
communities impacted by high foreclosure rates.”
The policy applies to renters who occupy the property at the time of
foreclosure or deed-in-lieu of foreclosure. It will not apply to the borrowers
who are losing the property nor to their immediate families. The type of
property occupied may be single-family homes, condos, co-ops,
manufactured housing, or one-to-four unit buildings. The only requirement
is that the property is a Fannie Mae REO and that it conforms to all
applicable local and state requirements for a rental property.
Key features of the new policy are as follows:
“Cash for Keys”: A deal which a
bank may make with the occupant
(homeowner or renter), in which
the occupant is given a cash
settlement in exchange for
vacating his or her foreclosed
property. CAR® has a new form
in support of this arrangement.
After the foreclosure is complete, renters will be offered the
opportunity to either accept an incentive payment to vacate the
property (“Cash for Keys” ) or they may sign a new month-tomonth rental agreement with Fannie Mae.
Fannie Mae will not require payment histories or credit checks.
Renters will be charged market rents. This may require a local rent
survey for comparison purposes. Fannie Mae will “review each
instance where the market rate may require a tenant to pay
additional rent and will work to reach an equitable solution.”
No security deposit will be required. On the other hand, the
announcement is silent on Fannie Mae’s possible obligations if an
unreturned security deposit had been paid to the foreclosed-upon
former owner.
The property will be for sale and may undergo repair or rehab work,
during the term of the tenancy. “If the property sells, the lease will
transfer to the new owner.”
The property will be managed by a real estate broker and/or a
property management company.
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Whether the new Fannie Mae policy will be a good thing is yet to be
determined. Having lost many, many millions of dollars {as of August 2010,
taxpayers have lent 150 billion to both Fannie and Freddie (source)}, Fannie
Mae has already demonstrated that it was not particularly good at its core
business. There is little reason to think that it will be good at the landlord
business either. Even with property management companies, someone has
to manage the property managers.
Already, one can see that the policy may not be particularly good for many
tenants. Suppose you had begun a one-year lease in September, and now,
in January, the property has been foreclosed upon. Fannie Mae offers you
a month-to-month tenancy while the property is for sale. You still might
have to move before school is out.
Nor does it look terribly attractive on the buyer side. A prospective owneroccupant doesn’t want a tenant in possession when he closes escrow. And
neither he nor an investor buyer can be very positive about taking a
property where the tenant occupant has paid no security deposit.
It’s a nice idea, but the new Fannie Mae policy is probably going to require
some refinement.
2.4.5.7
HOW MUCH DOES A FORECLOSURE COST
by Ralph Roberts for Realty Times, March 16, 2009
Plenty of people are concerned about the cost of bailing out Main Street –
the people who stand to lose their homes in the midst of the current
financial crisis. Many feel that it’s not the job of the federal government to
bail out homeowners who cannot afford their monthly mortgage payments.
After all, those people took out risky loans. They are the ones who signed
the loan documents. They are the irresponsible borrowers running this
country into the ground.
For a moment, let’s ignore the question of who’s at fault. There’s plenty of
blame to go around. For now, let’s consider what it costs when
homeowners are allowed to lose their homes to foreclosure and who ends
up with the bill.
According to a report by the Joint Economic Committee of Congress, the
average foreclosure cost amount to about $151,000, with several parties
picking up the tab:
Homeowner
$7,000
Lender
$50,000
Local government
$19,000
Impact on neighboring home values
$75,000
Estimated total cost of one foreclosure
$151,000
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It seems to me the figure for “Impact on neighboring home values” is too
high – it is nearly half the total. Granted that most REO properties are not
well maintained, their poor appearance can only depress neighboring home
values during the period they are lender owned.
This doesn’t even account for other potential costs, including the cost of
lost productivity, a reduction in a family’s purchase power, lost federal
income taxes, and the emotional and psychological costs of losing a home
and losing friends and neighbors.
Although neighboring home values usually take the biggest hit as a group,
the lender stands to lose the most as an individual party. The Mortgage
Bankers Association (MBA) released a policy report in May, 2008, in which
it supports the fact that lenders are often the biggest losers in foreclosure:
“While losses can vary widely, several independent studies find them to be
generally quite significant: over $50,000 per foreclosed home or as much
as 30 to 60% of the outstanding loan balance.”
Multiply these losses by the estimated 250,000 homeowners who are likely
to lose their homes to foreclosure every three months and we’re looking at
over $120 billion in losses annually.
Now, bailing out Main Street doesn’t seem like such a costly proposition. In
fact not bailing out Main Street could be the most costly option of all.
2.4.5.8
SAN DIEGO REAL ESTATE 2010 FORECAST: THE YEAR OF THE
STRATEGIC MORTGAGE DEFAULT
by Bob Schwartz for Realty Times, January 25, 2010
This is a refreshing departure from the rosy economic forecasts from
government and industry experts – these almost always predict “softlandings,” “near-term economic stabilization,” “imminent price floors,” and
the like. Mr. Schwartz’s forecast is deeply pessimistic and for well-stated
reasons – the Fed’s “quantitative easing” (i.e., printing of money and its
monetizing of the national debt) followed by the inevitable increases in
interest rates; means still further drops in home values. But, for the real
estate brokerage profession there is a silver lining: home sales will
increase as well-healed investors move their savings from commercial
paper to tangible assets.
It would be easy to write a 2010 real estate forecast by repeating the
industry line that “the new year will mark a turnaround for real estate
values; those who act fast will be able to get the best buys.” Real world
facts, at least in San Diego, seem to indicate otherwise.
San Diego’s real estate market will most likely have another down-turn in
the year 2010, and there are many reasons why. Many home loans are set
to adjust next year since the San Diego real estate market toped-out in the
summer of 2005. The saving grace is that interest rates are near all-time
lows and so, interest rate shock will not be a negative factor. The
downbeat with these mortgage adjustments will be the ‘reality check’ factor.
How many homeowners will suddenly wake up to the fact that their home is
now worth tens of thousands of dollars less than their mortgage balance?
Only the naive will believe that their San Diego home’s value will bounce
back anytime soon.
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A study by researchers at Northwestern University of Chicago observed
that as many as one in four defaults may be strategic. First American
CoreLogic, a real-estate information company, estimates that 5.3 million
U.S. households have mortgage balances at least 20% higher than their
homes’ value, and 2.2 million of those households are at least 50% under
water. The problem is most pronounced in Arizona, California, Florida,
Michigan and Nevada.
This homeowner awakening may be the impetus for 2010 to go down as
the year of the strategic mortgage default in San Diego.
Talking-heads who claim the U.S. housing market has “bottomed,” or even
that it will “bottom” in 2010, don’t have the slightest grasp of fundamental
economics. Government and the vast majority of media are using the old
tactic of trying to talk us out of this downturn. Any bit of positive news is
over-emphasized while the terrible, realistic conditions are hardly noted.
The government has spent trillions of dollars and has not made a significant
impact on the problem. Government saved Wall Street banks, at least for
now. Will government platitudes actually turn around our economy? The
administration thinks so. They are closing their eyes and wishing really,
really hard that it does. They also should remember to click their ruby-red
heels three times to insure success.
The best parallel to our current situation continues to be the Great
Depression. In 1930, we had a 50% stock rally and abundant “green
shoots” before the market turned down in a relentless decline. This time
the government intervention is much larger, but so too, is the credit bubble.
The “real unemployment rate”
includes those who are
underemployed and those who
have given up looking for work.
Many agree the real unemployment rate is 17.5%. How can the housing
market improve until unemployment dramatically improves?
Property values only go up if there is an increase in demand. That is NOT
happening. The birth rate of the US is just enough to sustain our
population, nothing more, and it would be negative without immigration.
Another major factor affecting San Diego real estate demand is that the
severity of our current home value decline seems to have broken the back
of the myth that you could not lose money purchasing residential property
in San Diego or California. Until the devastation to San Diego home values
fades from the collective consciousness, demand for housing will be a
fraction of what it was.
As of September 2010, the best
interest rate for 15-year
mortgages is 3.366%; a rate at or
near its historic low.
Those who invest in real estate and expect values to appreciate need to
face the fact that by mid-2010 there is a high probability we will be in a
rising interest rate environment which will boost costs on mortgage loans
substantially. We all know it is now much more difficult to qualify for a
mortgage even with some of the lowest interest rates in history. What will
happen when interest rates move up? Will the government again step in
with some type of subsidized interest rate/qualifying program (much like the
sub-prime debacle)?
On 10-1-08 I published: #1 EZ Fix to The U.S. Housing Market, where I
suggested an easy way to stabilize the real estate market. My idea was for
the government to grant investors who buy and hold homes for at least
three years, but no more than seven years, 100% exemption on any capital
gain they may realize. Well, perhaps because this was a low cost idea
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involving ‘investors’ it never gained any traction. But, I still believe it would
be a sure-fire fix to our housing doldrums.
Here in California the largest state tax rate just passed; there is talk of
additional state tax increases. That, coupled with our already high electric,
water, and gasoline taxes portends California homeowners’ disposal
income is headed for oblivion! Further combination with the
administration’s new health care costs and Cap & Trade’s dramatic impact
on utility costs, only the hope-and-change commissars will be able to afford
California detached homes. If not corrected, the California masses will be,
out of necessity forced to live in huge apartment complexes. The California
standard of living will take a huge hit but look on the bright side ... mass
apartment complexes will reduce commuting, contain urban sprawl and cut
down on carbon emissions! Perhaps, most importantly, the extra taxes will
insure the California public workers pension plans will continue to provide
lottery-sized benefits into the foreseeable future.
In an academic paper titled, “Underwater and Not Walking Away: Shame,
Fear and the Social Management of the Housing Crisis,” written by a law
school professor at the University of Arizona argues that those who are
underwater in their loans should just leave.
It is thought that by leaving homes that are way under water, it could
potentially save homeowners thousands and it won’t be long until they
recuperate financially. Defaulting “strategically” can entice more walkaways by buying all the major items they may need in the near future, such
as a car or even a house, right before they take a hike. As long as you stay
current with other mortgage lenders, one could potentially have a good
credit standing in two years after the walk-away.
In my 07-27-2009 post titled: San San Diego Homes – WHEN IT PAYS TO
LET THEM FORECLOSE!, I noted that: In the Northwestern University
study, among those without moral reservations, 63% of those homeowners
with a negative equity of $300,000 or more would let the property go into
foreclosure.
In my 09-22-2009 post titled: Foreclosures – Strategic Defaults Double, I
noted that some believe that strategic defaults are financially logical, legal,
and a defensive decision to make. Why throw good money after bad? No
more property maintenance, taxes, insurance, etc. With rent prices falling
and rental vacancies rising, it makes perfect sense to bail out and have
more disposable income at the end of the month. Survival is the name of
the game.
So, based on the strategic default statistics, there is a good likelihood that
2010 could go down as the year of the strategic mortgage default.
While the highly distressed markets like San Diego will continue to be
pressured by foreclosures and myriad other headwinds, the smaller more
conservative metros will benefit from the incredibly low inventory levels and
should start to see a rebound in new construction activity in the coming
year.
Real estate markets are all local. This is the one area with which I agree
with the National Association of REALTORS®; therefore, I can only venture
an opinion on the San Diego California residential real estate market. For
2010, San Diego housing will remain a risky deal that will again be
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dominated by government intervention. Until both the Federal and State
governments get out of the housing market, a real bottom will not occur,
thus San Diego housing values will continue to decline well into the next
year. The one exception to my forecast could be the low end of the San
Diego housing market. The low end properties have demonstrated a base
building through the second half of 2009. I expect this favorable trend to
continue into 2010.
Click here for an update from Mr.
Schwartz’s forecast as of August
24, 2010.
There are many elements that affect San Diego real estate values. For
years now I have ended my opinions for the following year’s San Diego
housing outlook with this statement: “I hope the market proves me wrong
and that my forecast ends up totally off-base.” Though I’m a realist, and
with that said, I personally would not bet against what I believe will be the
2010 outlook.
2.4.5.9
NEW FEDERAL LAW RE MORTGAGE RELIEF PROVIDERS
by Wayne Bell for Real Estate Bulletin, Spring 2011
The Federal Trade Commission (FTC) has issued a far-reaching rule with
nationwide effect that bans providers of “mortgage assistance relief
services,” which includes residential mortgage foreclosure rescue, loan
modification, short sale, and deed-in-lieu of foreclosure services, from
requesting or collecting fees or any other consideration from a homeowner
until the homeowner has executed a written agreement with the loan holder
or servicer which incorporates the offer of mortgage relief the provider
obtained from the loan holder or servicer. The complete text of the new
FTC rule, which is more restrictive than California law in a number of
respects, can be found at 16 Code of Federal Regulations, Part 322, or
here. Real estate licensees should review the rule in its entirety.
In addition to the restriction discussed above, the rule also mandates that
such mortgage assistance relief providers disclose to consumers what the
total cost of the services will be, that they have no connection to any
government program or agency, and that homeowners are free to reject
any offer from their lender or servicer with no requirement to pay a fee to
the relief provider. Moreover, it bars the mortgage relief operators from
providing false and misleading information, and from destructively advising
consumers to stop communicating with their home loan lenders or
servicers. The disclosure rules went into effect on December 29, 2010.
In a news release regarding the rule, the FTC stated that the rule was
issued “to protect distressed homeowners from mortgage relief scams that
have sprung up during the mortgage crisis. Bogus operations falsely claim
that, for a fee, they will negotiate with the homeowner’s mortgage lender or
servicer to obtain a loan modification, a short sale, or other relief from
foreclosure. Many of these operations pretend to be affiliated with the
government and government housing assistance programs.”
The broad and significant advance fee ban, which became effective on
January 31, 2011, includes a narrow and qualified carve out for attorneys.
If lawyers meet the following four conditions, they are generally exempt
from the rule:
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They are engaged in the practice of law, and mortgage assistance
relief is part of their practice.
They are licensed in the State where the consumer or the dwelling
is located.
They are complying with State laws and regulations governing the
“same type of conduct the [FTC] rule requires.”
They place any advance fees they collect in a client trust account
and comply with State laws and regulations covering such accounts.
This requires that client funds be kept separate from the lawyers’
personal and/or business funds until such time as the funds have
been earned.
It is important to note that the carve out for lawyers discussed above only
applies to the FTC rule.
In California, since the passage of Senate Bill 94, which became effective
on October 11, 2009, State law has prohibited any person, including real
estate licensees and attorneys, from demanding, claiming, charging,
collecting, or receiving an upfront fee from a borrower in connection with a
promise to modify the borrower’s residential loan or to do some other form
of mortgage loan forbearance. The California Department of Real Estate
has information about Senate Bill 94 and its broad advance fee ban, and
that information can be accessed here. Thus, the more comprehensive
advance fee ban applicable to lawyers with respect to loan modifications
and other forms of home loan forbearance under Senate Bill 94 is still in
effect, and the FTC rule’s limited attorney exception does not provide a
safe harbor under California law.
Stated otherwise, the FTC rule does not supplant the greater protections of
California law with respect to the services covered by Senate Bill 94.
Rather, it adds another (Federal) layer of enforcement and goes a step
farther than current State law in covering short sales and deed-in-lieu of
foreclosure services. The FTC has promised robust enforcement of the
new rule, and the FTC, federal prosecutors, and some State Attorney
Generals will be able to enforce the rule by issuing injunctions, obtaining
harsh civil penalties, and by seeking damages on behalf of victimized
consumers.
If you have questions regarding the FTC rule, you should contact the
Federal Trade Commission.
2.4.5.10
MORTGAGE LENDERS CAN’T ALWAYS OBTAIN DEFICIENCY
JUDGMENTS
by Bob Hunt for Realty Times, June 15, 2010
One of the major concerns facing the millions of homeowners who are
currently delinquent on their mortgage and “upside down” in value is that
they fear not only losing their homes but also being subsequently pursued
for a deficiency judgment.
Different states have different laws regarding foreclosures and deficiencies.
Page 200
Trustee sale at a court house.
Anyone who has the kind of concern noted above should verify those laws
in their own particular state.
In California, the threat of a deficiency judgment – which, technically, may
be real – is frequently, for practical purposes, not a serious one. In some
situations there is no threat at all. The discussion that follows here pertains
to California law.
In the context of this discussion, a deficiency judgment is a judgment that
may be entered by a court. Generally, it is the difference between the
foreclosure sale price (the successful bid amount) and the amount of debt
owed. In order to obtain a deficiency judgment, a lender must apply to the
court for the judgment within three months of a judicial foreclosure sale.
In California, a major exception to the deficiency judgment rules is that no
deficiency judgment is allowed when the loan is a purchase money loan for
owner-occupied residential property from one- to four-units. Simply put, if
the loan was made for the purchase of your home, no deficiency judgment
is allowed.
Another major exception to the deficiency judgment rules is that no
deficiency judgment can be obtained if the foreclosure is non-judicial. To
understand this, we must note that there are two kinds of foreclosure
available in California. One – the overwhelmingly most common – is a nonjudicial foreclosure, also known as a trustee sale {aka, “private sale”}. A
non-judicial foreclosure occurs when, pursuant to a deed of trust, the lender
notifies the trustee {usually a title company} that the borrower is delinquent.
The trustee files a public notice of default {and gives “constructive notice” to
all lienholders of record}. Then, in approximately three months , if the
There are several videos of actual delinquency has not been cured, the trustee publishes a notice of sale.
trustee sales on Youtube, here is Approximately three weeks after that, if there is still no cure of the default, a
a typical sale.
trustee sale occurs. (At the discretion of the lender, this sale can be
postponed.) This foreclosure sale is the “auction at the courthouse steps.”
There is no court action.
This article fails to mentions two recent California bills which have made the
foreclosure process far more cumbersome:
1.
Until January 1, 2013, SB 1137 changes the foreclosure
requirements on loans that were originated between January 1,
2003 and December 31, 2007. Specifically, this bill requires
lenders, prior to filing a notice of default, to make a good faith
attempt to contact borrowers to discuss their options.
2.
The California Foreclosure Prevention Act (identical bills ABX2 7
and SBX2 7) prohibits lenders and servicers from foreclosing for an
additional 90 days on specified residential loans unless they have
an approved comprehensive loan modification program. The
provisions of this act went into effect in June 2009 and will sunset
on January 1, 2011 unless otherwise extended by legislation.
See the article, “California: Land of Sunshine and a Year of Free Living,”
for details.
Page 201
In a non-judicial foreclosure, when a trustee sale occurs, there is no
deficiency judgment available. If the property sold for less than the loan
amount, that is the lender’s loss. There is no further recovery. (Two minor
exceptions to this are: 1) if the loan had been obtained by fraud or 2) if the
property had been intentionally damaged by the borrower.)
The other kind of foreclosure in California is a judicial foreclosure. This
involves filing a lawsuit, to which the borrower may respond. Rather than
taking the typical four to five months that a non-judicial foreclosure requires,
this may take a year or more. Moreover, being a lawsuit, it can be costly.
For reasons of time and money, then, lenders hardly ever file judicial
foreclosures. It might make sense to do so in the context of a large
commercial loan where a borrower might have significant assets worth
pursuing. But it is hard to imagine many circumstances where it would be
worthwhile to pursue a judicial foreclosure against a homeowner.
A non-purchase money loan is
also called a “non-recourse loan.”
If a homeowner’s loan is not a “purchase money” loan – perhaps it is a
subsequent “cash-out” refinance loan – then the borrower does have
personal liability for the loan. It would be possible for the lender to seek a
deficiency judgment. But to do so, the lender would first have to conduct a
judicial foreclosure and, as noted, that is very unlikely.
Finally, we note a slightly different but increasingly common situation where
a lender may pursue a borrower personally for liability on a loan secured by
real estate. This is the case of a “wiped out” junior lien. Many homeowners
have second mortgage loans, some even thirds. If these were loans
incurred in order to purchase owner-occupied property, then they are
For a complicated but clear
example of a foreclosure in which subject to the same rules discussed above. No deficiency judgment is
the second lien holder forecloses, available. But if the junior lien is not purchase money and if foreclosure by
click here.
the senior lien (the first mortgage) leaves the junior unpaid, then they may
pursue the borrower directly just like any other debt.
Deficiency judgments are certainly something for financially distressed
homeowners to be concerned about. But they are not as widely available
as is sometimes thought.
Consider the not uncommon situation where the homeowner has a first
made for purchase-money and a second made for a non-purchase money
loan (e.g., a cash-back or HELOC). Then if the first lienholder forecloses,
the second lienholder’s debt is legally converted from “secured” (by the
home) to “unsecured.” In this case, the second lienholder may seek a
money judgment against the borrower but, as with any unsecured creditor,
his debt may be entirely wiped out should the borrower declare bankruptcy
or simply decline to pay.
Alternatively, the second lienholder may “cure” the amount in arrears the
borrower owes the first lienholder (he will know of the default from the first
lienholder’s Notice of Default) and then he may seek the monies he paid to
the first lienholder from his borrower. If his borrower fails to reimburse the
second lienholder for the money the second lienholder paid to cure the first,
then the second lienholder may foreclose. This strategy, though, rarely
makes sense unless there is sufficient equity in the property to enable the
second lienholder to sell the property and then with the proceeds to collect
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the money owed to him after paying off the first. (This situation and others
are well explained in this article.)
2.4.6
MORTGAGE DISCLOSURES
2.4.6.1
WASHINGTON REPORT: GOOD FAITH ESTIMATE MORTGAGE
DISCLOSURES
by Kenneth R. Harney for Realty Times, November 30, 2009
HUD has a blunt message for home buyers, lenders, REALTORS®, and
anyone else involved in real estate. Despite what you may have heard to
the contrary, on January 1st {2010} the federal government expects
everyone to be using the new consumer-friendly Good Faith Estimate
(GFE) mortgage disclosures and the new HUD-1 settlement statement .
The only exception, HUD spokesman Brian Sullivan told Realty Times last
week, is if a mortgage application was made in 2009 and the transaction is
closed in 2010.
The issue here is important to consumers because the new GFE and HUD1 provide numerous protections the old forms did not.
Tops on the list: They make it extremely difficult for loan officers to “low
ball” the estimated fees and charges on the mortgage and then later hit
homebuyers with surprise increases at closing.
Under the old rules, if the estimated fees up front from the lender were
$2,000 but the total on the settlement sheet came to $3,000, the
homebuyer would have to come up with the difference. That was a huge
pain … and it was abusive.
But starting January 1st, the lender or broker will be subject to what are
known as “tolerance” limits for certain types of fees. Any charges over the
limits will have to be eaten by the lender or broker.
For example, if a loan officer tells you the origination and processing
charges will be $800, he or she won’t be allowed to charge you any more
than that at settlement. There will be zero tolerance for increases on these
fees.
Other types of charges, such as for title insurance and settlement services,
generally won’t be allowed to come in more than 10% above the upfront
estimate – unless you the borrower chooses the title company and it’s not
on the mortgage company’s list of recommended firms.
All consumers making loan applications on or after January 1st must receive
the new forms at application and at closing.
“It’s as simple as that,” said Sullivan.
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2.4.7
APPRAISALS
2.4.7.1
APPRAISALS ARE JUST A MOUSE-CLICK AWAY
by Phoebe Chongchua for Realty Times, April 9, 2007
The appraisal can be a part of the real estate process that is both time
consuming and anxiety building – as you wait to find out what your home is
worth, according to certified experts. While the emotional experience of the
latter can’t be completely removed, the first part can be aided significantly.
“We dispatch an appraiser from our appraiser network to drive by the home,
pull relevant comps based on that local market and actually create an
appraisal form for you and then it will be uploaded into our system. We will
email you and also send one to you in the mail,” says Damian Scott,
President of Eppraisal.com.
Eppraisal’s Home Page
It’s a newly-launched website that aims to go beyond those sites that only
tell you what your home might be worth. Eppraisal.com focuses on
streamlining the process of getting appraisals for your home as well as
connecting you to real estate professionals or certified appraisers for full
appraisals – all by just visiting a website and clicking your mouse.
Scott says that the drive-by appraisal is most often used when you are
trying to refinance, take a second mortgage on your home, or remove
private mortgage insurance.
Scott has spent several years in real estate technology building
applications for real estate investors which triggered the idea for his site but
he was beaten to the finish line.
Links: Zillow and another
similar service, Cyberforms.
“While we were building ours, Zillow launched theirs. So they stole our
thunder initially, but in the long run we have a strong game plan. The focus
is not about trying to remove real estate professionals. The goal is to try to
incorporate [real estate professionals] into the process but just make it a
more seamless process and actually integrate it online,” explains Scott.
However, he acknowledges that ultimately the growing World Wide Web
will not be the only resource needed in the real estate transaction.
“There’s only so far you can go online, at the end of the day you still need
to go offline and get everything completed,” says Scott.
That’s why, in the next several weeks, his site is expected to rollout the
ability to get a full appraisal through the site’s network of appraisers. Scott
says many people spend a lot of time trying to search for certified
appraisers through Google, other search engines, and perhaps lastly the
phonebook.
“Not too many people around my age actually use the yellow pages any
more. I have those big books and they sit in my garage; I stack things on
top of them. I usually go to the net to find stuff,” says Scott.
He believes a more efficient and effective approach is what some might
call, one-stop online shopping. A full appraisal, where the appraiser
actually schedules an appointment to view the inside of your home, is more
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likely what you’ll need if you are planning to sell your home or buy one.
Scott says his site will soon be able to offer visitors the opportunity to
purchase the full appraisal and then be connected with a certified appraiser
in the network for a scheduled meeting.
Right now the site offers a variety of resources, hoping to attract consumers
in the real estate market.
“You’ll see student-teacher ratios, class sizes, population density, and so
you have a lot of demographic information on a local area regarding
schools. And if you go on the main page, we have local residential areas
and if you click any one of those, we also have census information like
crime statistics, income information – just a lot of data that’s readily
available for consumers,” says Scott.
It’s another effort to link consumers with the best resources and
professionals in the industry because the real estate process is most
effective when there’s collaboration.
2.4.7.2
NEW CALIFORNIA LAW AIMS TO TAKE THE HEAT OFF OF
APPRAISERS WHILE PROTECTING CONSUMERS
by Phoebe Chongchua for Realty Times, October 15, 2007
SB 223 amends BPC §11323 and
Commercial Code §1090.5.
Earlier this month, Governor Schwarzenegger signed into law, SB 223 –
making it illegal to pressure appraisers to arrive at a predetermined property
value that’s been set by mortgage brokers or homeowners to ensure a sale
goes through. The new law also states that it makes it illegal for a licensed
appraiser to engage in “any appraisal activity in connection with the
purchase, sale, transfer, financing, or development of real property if his or
her compensation is dependent on or affected by the value conclusion
generated by the appraisal.”
“This law helps deter some of the individuals from putting pressure on
appraisers,” says Michael H. Evans, real estate appraiser, Evans Appraisal
Service and a Fellow with the American Society of Appraisers.
But Evans is careful to add that it’s only a start. “It’ll help. It’s not a cure all;
I can guarantee you that.”
The problem has been brewing for a long time and leaving appraisers and
homeowners vulnerable.
“Almost every order that would come through our fax machine would have
some type of order on it saying, ‘If it doesn’t come in at this price, call me.’
Or, ‘If this doesn’t make value, we don’t want the appraisal.’ We just send it
back to them saying, ‘Hey, we don’t work that way. We’re going to have to
give you the value that it is; we can’t change that and if you want us to work
under those circumstances, we can’t do the job for you.” And some of them
go away, they’ll try to find some who will,” explains Evans.
But Evans says some appraisers fall victim to the pressure.
“We have a lot of young appraisers … and they’re hungry. You have some
– not all – but just some unscrupulous lenders out there who are just
hunting for a value. So the lenders go through the phone book looking for a
young appraiser who maybe doesn’t have the experience or the clientele
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and will do something that maybe he or she shouldn’t do and lenders prey
on them,” says Evans.
Violations of the bill’s provisions
are grounds for disciplinary
action, license suspension, or
revocation by the appropriate
regulator and may also subject
the violator to a civil suit under the
Unfair Practices Act (BPC
§17200) (source).{It doesn’t
appear to me that consumers
have standing to sue under this
act.}
The law now makes violators subject to punishment of license suspension
or revocation with the potential of civil action .
Evans says the new law will make people think twice before they pressure
an appraiser for a predetermined value on a property {I’m not so sure}. It
will also make appraisers who are tempted to accept the illegal offer
recognize there are severe consequences.
As for homeowners, they too will stand to gain from this new law.
“Homebuyers need to protect themselves by checking the credentials of
everyone involved in the transaction and requesting that their assigned
appraiser be state licensed and accredited by a national professional
organization,” says Evans.
Verification of an appraiser’s credentials and his estimate should be a
responsibility of the buyer’s agent. The buyer’s agent has a fiduciary duty
to use his knowledge of local real estate values to protect his client from
overpaying.
I searched the Web August 2010 (nearly three years after this law went into
effect) and couldn’t find any information relating to lawsuits citing this law
let alone news of any appraiser having had their license suspended or
revoked as a consequence of having had violated this law. I suspect this
law is mere window dressing enacted to give (false) assurances to the
public.
He says that by selecting an accredited appraiser, homeowners will risk
less because “accredited appraisers have got more experience and more to
lose if they’re succumbing to that type of pressure. They’ve invested more
in their profession.”
Experts believe that inflated appraisals have significantly contributed to the
mortgage-meltdown crisis. For that reason, numerous industry and
consumer advocacy groups joined together to support the passage of the
bill including: the Appraisal Institute, the American Society of Appraisers,
the California Mortgage Bankers Association, the California Association of
Mortgage Brokers, and the Fair Lending Alliance, and the Greenlining
Institute.
For information about real estate appraisals, or to find an accredited
appraiser near you, call 1-800-ASA-VALU or visit appraisers.org.
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2.4.7.3
AVOIDING THE UNLAWFUL INFLUENCE OF APPRAISERS
Real Estate Bulletin, Spring 2009
There are many factors that led to inflated property values that ultimately
contributed towards the market conditions that we all are experiencing
today. One of those factors involved real estate appraisers who were not
objective in their appraisal work, but rather were unduly influenced to arrive
at specified values by those who hired them. Appraisers were influenced in
a variety of ways, ranging from subtle to overt, but the net effect was
uncontrolled market appreciation that could not be sustained.
Effective October 5, 2007, CC §1090.5 was enacted to address the problem
of the improper influence of real estate appraisers. It provided in part that
“No person with an interest in a real estate transaction involving an
appraisal shall improperly influence or attempt to improperly influence,
through coercion, extortion, or bribery, the development, reporting, result, or
review of a real estate appraisal sought in connection with a mortgage loan.”
To restrain influence upon appraisers, the law also provides that if a person
who violates the law is licensed under any state licensing law, and the
violation occurs within the course and scope of the person’s duties as a
licensee, the violation shall be deemed a violation of that state licensing law.
To help real estate licensees avoid any potential impropriety, the DRE,
working in conjunction with the Office of Real Estate Appraisers, the
Department of Corporations, and the Department of Financial Institutions,
developed the following list of practices which may constitute evidence of a
violation of California law and should be avoided when engaging the
services of a licensed real estate appraiser:
withholding or threatening to withhold timely payment or partial
payment for a completed appraisal report, regardless of whether a
sale or financing transaction closes;
withholding or threatening to withhold future business from an
appraiser, or demoting or terminating or threatening to demote or
terminate an appraiser;
expressly or impliedly promising future business, promotions, or
increased compensation for an appraiser;
conditioning the ordering of an appraisal report or the payment of an
appraisal fee or salary or bonus on the opinion, conclusion, or
valuation to be reached, or on a preliminary value estimate
requested from an appraiser;
requesting that an appraiser provide an estimated, predetermined,
or desired valuation in an appraisal report prior to the completion of
the appraisal report, or requesting that an appraiser provide
estimated values or comparable sales at any time prior to the
appraiser’s completion of an appraisal report;
providing to an appraiser an anticipated, estimated, encouraged, or
desired value for a subject property or a proposed or target amount
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to be loaned to the borrower, except that a copy of the sales
contract for purchase transactions may be provided;
requesting the removal of language related to observed physical,
functional or economic obsolescence, or adverse property
conditions noted in an appraisal report;
providing to an appraiser, appraisal company, appraisal
management company, or any entity or person related to the
appraiser, appraisal company, or appraisal management company,
stock or other financial or non-financial benefits;
allowing the removal of an appraiser from a list of qualified
appraisers, or the addition of an appraiser to an exclusionary list of
disapproved appraisers, used by any entity, without prior written
notice to such appraiser, which notice shall include written evidence
of the appraiser’s illegal conduct, a violation of the Uniform
Standards of Professional Appraisal Practice (USPAP) or state
licensing standards, substandard performance, improper or
unprofessional behavior, or other substantive reason for removal;
AVM is a name for a service that
can provide property valuations
using mathematical modeling
combined with a database.
ordering, obtaining, using, or paying for a second or subsequent
appraisal or automated valuation model (AVM) in connection with
a mortgage financing transaction unless:
(i)
there is a reasonable basis to believe that the initial
appraisal was flawed or tainted and such basis is clearly and
appropriately noted in the loan file, or
(ii)
such appraisal or AVM is done pursuant to written, preestablished bona fide pre- or post-funding appraisal review
or quality control process or underwriting guidelines, and so
long as the lender adheres to a policy of selecting the most
reliable appraisal, rather than the appraisal that states the
highest value; or any other act or practice that impairs or
attempts to impair an appraiser’s independence, objectivity,
or impartiality or violates law or regulation, including, but not
limited to, the Truth in Lending Act (TILA) and Regulation Z,
or the USPAP.
It should be noted that neither CC §1090.5 nor any other California code
section prohibits a person with an interest in a real estate transaction from
asking an appraiser to do any of the following:
(1)
consider additional, appropriate property information;
(2)
provide further detail, substantiation, or explanation for the
appraiser’s value conclusion; and/or
(3)
correct objective factual errors in an appraisal report.
While the above list is illustrative of acts that may be evidence of violations
of the prohibitions against undue influence contained in CC §1090.5, it is
not exhaustive. It is, however, intended to alert real estate licensees of
practices that could potentially lead to disciplinary action. In this regard,
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licensees are cautioned to avoid actions that could be considered improper
influence when working with real estate appraisers.
2.4.7.4
REALTORS SEEK TO MAKE ALL APPRAISALS PORTABLE
by Bob Hunt for Realty Times, August 10, 2010
Effective January 1, 2010, all FHA appraisals (with limited exceptions)
became portable. According to FHA Mortgagee Letter 2009-29, this was
"for the purpose of facilitating the loan process when a borrower switches
from one Federal Housing Administration (FHA) approved lender (first
lender) to another (second lender) and an appraisal was ordered by and
completed for the first lender." In such cases, "the first lender must, at the
borrower's request, transfer the case to the second lender." A second
appraisal could be ordered by the second lender only if (i) a material
deficiency in the first appraisal had been determined, or (ii) the first
appraiser was on the second lender's exclusionary list, or (iii) the failure of
the first lender to supply a copy in a timely manner might cause harm to the
borrower [e.g. by losing an interest rate lock]."
Many people in the real estate business believe that all appraisals, not just
those for FHA loans, should be portable. Thus it is that the California
Association of Realtors® has sponsored state legislation, Senate Bill 1000
(Correa), which would "require lenders to accept a 'portable' appraisal, with
specified limitations to all transactions, at the request of the borrower." This
would cover mortgages for owner-occupied dwellings.
The legislation closely resembles the FHA rules. The appraisal must be
done in accordance with the Uniform Standards of Professional Appraisal
Practice (USPAP). It adds that the new lender may require the borrower to
purchase a new appraisal if the first one is more than thirty days old as of
the date the second lender receives it. Also, the California legislation
provides that the new lender may obtain a new appraisal, provided that the
borrower is not required to pay for it.
Proponents of the bill argue that it is unfair to require borrowers to pay for a
new appraisal "when they have a perfectly good one in hand." Furthermore,
by removing the potential cost of a second appraisal, consumers would
then find it easier to continue shopping for better loan terms and interest
rates with other lenders while still moving forward with the first loan
application.
SB 1000 has attracted a coalition of opponents which includes the
California Mortgage Bankers Association, the California Land Title
Association, the Credit Union League, and the California Chamber of
Commerce.
The opposition points out that such legislation at the state level could cause
problems with respect to the secondary market. We noted recently that a
June 30 Fannie Mae lender made it clear that the choice of an appraiser is
the lender's responsibility; yet this legislation could force a lender to accept
work from someone with whom they have had no experience at all.
Moreover, that same Fannie Mae letter pointed out that lenders may need
to require even more stringent standards than those of USPAP.
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Furthermore, the opposition notes that a second lender is still free to order
another appraisal, and to build it into the overall costs of the loan, thus
eliminating whatever saving the consumer might have had.
Much of the debate over the California legislation may be rendered moot by
a preemption of the issue at the federal level. On July 21, President Obama
signed HR 4173, the Consumer Protection Act, into law. Unknown to many,
that bill contains a section dealing with appraisal portability. It can be found
at Section 1472 §129E. (h). There it states that the (newly-created) Bureau
of Consumer Financial Protection along with the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, and other agencies
"may jointly issue regulations that address the issue of appraisal report
portability, including regulations that ensure the portability of the appraisal
report between lenders for a consumer credit transaction secured by 1-4
unit single family residence that is the principal dwelling of the consumer …
."
This provision says that such regulations may be issued, not that they will
be. Nor does it say what the regulations will be.
We were all famously told that we would need to pass the massive health
care bill in order to find out what was in it. The Consumer Protection Act
appears to be similar. Moreover, just passing it was not sufficient. We really
won't know about appraisal portability until the regulators write the rules,
assuming they are going to write some.
2.4.8
TITLE INSURANCE AND ESCROWS
2.4.8.1
CALIFORNIA SITE ALLOWS TITLE INSURANCE PRICE
COMPARISONS
by Peter G. Miller for Realty Times, October 16, 2007
Let us now praise the great state of California for
setting an example which should elate consumers:
If you want to buy title insurance in California you
can now compare prices online. Instantly.
Anonymously. Just go to www.clta.titlewizard.com
, a site that has been set up by the California
Land Title Association.
If my mail is any measure of what’s to come, this
new site will not thrill the title insurance industry.
The CLTA site provides price comparisons, a
necessary and important bit of information for
consumers.
Screen shot made March 2009.
This is a radically different situation than that which
is found in other jurisdictions, states where
minimum title insurance prices are mandated by
state rules and realistic price competition is
essentially a myth. That’s right, in such jurisdictions you pay at least what
the state says and guess who benefits?
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Since title insurance prices in jurisdictions which have a non-compete
clause are similar, it doesn’t much matter which title company gets the
business. The result is that lots of premium dollars go to entice closing
agents to sell a policy but not to actual claims. Consumers, in effect, are
paying high prices to have policies sold to them.
“Title insurance differs from other types of insurance in key ways,” says the
General Accountability Office. “First, in most property and casualty lines,
losses incurred by the underwriter account for most of the premium. For
example, property-casualty insurers’ losses and loss adjustment expenses
accounted for approximately 73% of written premiums in 2005. In contrast,
losses and loss adjustment expenses incurred by title insurers as a whole
were approximately five percent of the total premiums written, while the
amount paid to or retained by agents (primarily for work related to title
searches and examinations and for commissions) was approximately 70
percent.”
In California, however, not only do prices vary but folks in Florida, New
Jersey, and other states might want to compare costs with some of their
West Coast cousins. You can do that now by going to the Title Wizard site.
For instance, I priced a policy for a $750,000 loan in Los Angeles ZIP code
90102 {this is near the heart of downtown Los Angeles, perhaps he meant
the famous 90210 zip code which is Beverly Hills?}. The site first asked if
the transaction was a sale, purchase, or refinance. This can be important
because in some cases borrowers may qualify for a “re-issue” rate if the
property was recently financed or sold.
Next, the site asked for the sale value of the property (I said $1,000,000)
and the loan amount ($750,000). The site then asked if the property is
residential or commercial and whether it’s a single-family home, duplex,
etc. A few nano-seconds later I had a lengthy list of policy prices and a
wide range of providers. The pricing for owners and lenders coverage
ranged from $746 to $899 – that’s a difference of more than $150 (20%).
Out of sheer curiosity, I also tried the system for ZIP code 95204, Stockton,
CA, an area with high levels of foreclosures. I got fewer provider choices,
but again a big price differential ranging from $748 to $872.
It’s important to say that price is not the only issue with title insurance
policies. You want to ask about coverage limits and what the policy
includes and does not include. That said, it surely helps to know the price
of the product and that prices from various sources differ.
CLTA: The California Land Title
Association is a non-profit trade
organization representing the
entire title industry. It develops
title forms and has a number of
services to offer its members. It
also lobbies the State to shape
legislation in its own interest.
“CLTA has answered the call to develop a high-tech solution in a first step
to infuse competition into the title insurance industry,” says California
Insurance Commissioner Steve Poizner. “Too often, consumers have to
rely on a middle man to select their title insurance. Now, consumers will be
empowered to compare prices and services online with the touch of a
button.”
GAO: The Government
Accountability Office evaluates
proposed legislation for the U.S.
“Insurance regulators in at least four states have concluded that consumers
are being overcharged for title insurance,” the GAO said in April, “and the
California insurance regulator has recommended rate rollbacks – an action
that some in the title industry have strongly criticized. Because virtually
Unfortunately, there’s more empowering to do:
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Congress.
everyone who buys a home or refinances a home mortgage in the United
States typically must purchase title insurance, the potential effects of such
practices are enormous.”
The California site is a major rebuke to those who want to hide title
insurance prices. The next issue, the key issue, is to ask why minimum
rates are set by any state and why title agents cannot offer discounts and
rebates to spur marketplace competition. In New Jersey, as one example,
a bill that would allow full and free competition has been introduced by state
senator Raymond Lesniak (D-Union). Open competition, of course, should
be welcome everywhere – as should Mr. Lesniak’s bill.
2.4.8.2
CALIFORNIA LEGISLATION TAKES AIM AT ERRANT TITLE REPS
by Bob Hunt for Realty Times, November 10 2008
We have noted before that the California Department of Insurance (DOI),
like its counterparts in many states, is concerned that consumers
unwittingly pay too much for title insurance. The cause, the Department
believes, is that typical consumers (buyers, sellers, refinancing
homeowners) have no knowledge of the title insurance market and they are
unaware of pricing differences between different companies. Most
purchasers of title insurance rely upon the recommendations of a real
estate agent. And those recommendations are frequently biased by the
fact that the agent (or even the agent’s entire office) may have been wined,
dined, or otherwise influenced by various forms of largesse distributed by
the representative of a title company.
California, again like many other states, has a variety of laws on the books
that make it illegal for title insurance business to be bought by means of
rebates, inducements, and perks. Unfortunately, the existence of these
laws has had little effect on practices in the field.
During California’s recently-concluded legislative session a little-noticed bill
was introduced that took aim at correcting this situation. (Actually, the bill
was inserted as a replacement into a bill on another topic.) The bill, SB 133
(Aanestad), addressed the problem on two fronts: (1) the class of persons
known as “title marketing representatives,” (2) making more clear what
behavior by title companies and their representatives is prohibited.
The senate’s legislative analyst put it this way: “Existing law provides no
mechanism for tracking, registering, licensing, or disciplining title marketing
representatives. Instead, title companies are left to police their own
employees, something they have traditionally done poorly. Furthermore,
although existing law allows DOI [Department of Insurance] to punish title
insurers, these punishments have little, if any, impact on the activities of the
title insurers’ employees.”
SB 133 requires that title marketing representatives obtain a “certificate of
registration” from the office of the Insurance Commissioner. The certificate
will be good for a three-year period. The bill requires that the Insurance
Commissioner be notified when a title marketing representative is either
hired or terminated. The hiring company must certify that the title
marketing representative will receive training on Insurance Code §12404
(see below) within sixty days of the hiring date. A title marketing
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representative may have his or her registration revoked for cause. Due
process provisions for hearings are spelled out. Finally, if registration is
revoked, the title marketing representative may not reapply for five years.
Insurance Code §12404 is where one can find the prohibitions against
giving rebates or inducements for the referral of title business. While the
section is clear about a whole variety of activities, it also contains a giant
loophole. Currently, §6(d) says “Reasonable expenditures for food,
beverages, entertainment, educational programs, and promotional items
constituting ordinary business expenses are deemed not to constitute an
inducement for the placement or referral of title business.” You can
imagine how much jawboning has gone on over the term “reasonable.”
That problem-causing section has been removed from the code. Left in its
place are rules that are much more clear and concise. “Expenditures for
food, beverages, and entertainment” are prohibited. Period. No fudge
factor standard of “reasonable” is present. Moreover, a long-sought
specific dollar amount is presented with respect to gifts. “Promotional items
with a permanently affixed company logo of [the title company] with a value
of not more than ten dollars ($10) each” is permissible. There can be no
giving of “a gift certificate, gift card, or other item that has a specific
monetary value on its face, or that may be exchanged for any other item
having a specific monetary value.”
SB 133 was signed into law by the Governor on September 25. Normally, it
would become effective January 1, 2009, although it seems unlikely that all
the details and implementing regulations will be ready by then. It was,
though, supported by the Department of Insurance, and it seems
reasonable to think that they will have the procedures worked out sooner
rather than later.
Here’s an interesting excerpt from a rebuttal from a blog written March 12,
2009:
AIR LEGISLATIVE ALERT! SB 133 RAISES BROKERAGE INDUSTRY
COSTS, ELIMINATES TITLE COMPANY SERVICES, SUPPORT
AIR member Michael C. Slinger, senior vice president in the Los Angeles
regional office of Chicago Title Company, reports that SB 133 (Aanestad),
which went into effect January 1, negatively impacts the brokerage
community by prohibiting title companies from providing a host of traditional
services to the real estate community free of charge. This includes
property profiles, copies of recorded documents, comps, and other day-today services.
Additionally, Slinger said the bill forbids title companies from sponsoring
real estate industry events, or entertaining real estate industry clients.
“Numerous real estate groups rely on the title industry for sponsorships and
services. SB 133 effectively does away with that.
“This piece of legislation, as written, is a detriment to the People of
California. The negative affects will be far reaching. I hope that we can all
work together to correct this,” Slinger said.
Page 213
2.5
RISK MANAGEMENT
2.5.1
INSURANCE
2.5.1.1
BUYER TIP: GET HOME WARRANTY FUNDED BY SELLER
by M. Anthony Carr for Realty Times, April 20, 2007
I was listening to a home warranty salesperson presentation about her
product the other day and was surprised to find out that in today’s market,
when sellers are more than willing to pay for nearly all the closing costs,
only about 20% of contracts actually have a home warranty in place.
There are a lot of things in real estate that aren’t rocket science: buy low,
sell high; low interest rates give you cheaper money; and letting someone
else give you a few hundred bucks to protect your house over the next 12
months will save you money up front and down the road.
Let’s think this through. You just spent thousands of dollars to get
into your new home. You were able to negotiate a lower price,
closing costs and a buy-down on the mortgage from the
homeowner, who at this point is more than willing to hand over
thousands of dollars to you to convince you to buy his house.
Then – against all the common sense that I can understand – you
don’t ask them to lay down $300-$500 to put up a home warranty
that’s going to protect all your appliances, heating/air conditioning,
plumbing, electrical, garage door opener, door bell, sump pump,
well pump, swimming pool or spa, or washer/dryer. I think you
get the picture.
The California Department of
Insurance regulates home warranty
companies. In the California
Insurance Code, they are called
“home protection companies” (see
Insurance Code §12740).
Keeping in mind that a home warranty is not an insurance policy, it may not
be regulated by the insurance commission in your state . Thus, the fine
print of the warranty is very important to the seller or buyer before signing
the bottom line. Most importantly is that it’s going to cover mechanical
problems in the house that your homeowners insurance may not cover,
such as what I listed above.
Even with a good home inspection verifying that everything in the house is
working, the warranty limits your liability in the future in case something
breaks down. Your liability is usually the deductible per incident of about
$100 (again, check the fine print of your warranty).
Some of the limitations of a warranty may include:
Pre-existing defects: For instance, if you buy the house and have
a home inspector tell you that there’s a crack in the heat exchange
and should be fixed – the home warranty’s most likely not going to
fix it when you move in just because you bought the policy. The
heat exchange must be in working order before the policy goes into
effect.
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Some items may not be covered: While electrical items will be
covered, the warranty may not cover accessory items such as a
house exhaust fan, attic fan, smoke alarms, and intercom or
speaker systems. In the electrical area what would be covered
would be your basic wiring around the house – your light switches,
main breaker or fuse panel, box receptacles and the like. (Again,
read the fine print.)
Additional systems. If you have zoned heating, the warranty may
only cover one heating system, not both. There may be a limit on
how many toilets it covers through the house (only three, not four).
More than one appliance type – the fridge in the kitchen’s covered,
not the one in the garage. Nevertheless, many of the warranties
I’ve seen allow for riders to cover such items.
If you decide to go with a home warranty, remember that having one in
place doesn’t mean you can quit taking care of the house. The warranty is
covering surprises to the homeowner, not homeowner neglect.
Finally, read the fine print of several warranties before laying out cash for
one. Compare the cost per year (but don’t necessarily go with the
cheapest); what is the deductible; what are the limitations on coverage
(some may have a low deductible but cap how much they’ll put out on
coverage); caps on replacement cost; etc.
Should you get a home warranty during your home purchase transaction?
Let’s put it this way. I’ve never heard about a homeowner upset for having
one in place, but I’ve heard many complain they didn’t have one when
something breaks.
By the way, remember the home warranty is not just for those in the middle
of a transaction. Any homeowner can put a warranty in place. For a
referral for a good home warranty ask your real estate professional.
2.5.1.2
WHAT YOUR HOMEOWNERS INSURANCE DOES, DOESN’T COVER
by Broderick Perkins for Realty Times, June 12, 2007
A standard homeowner’s insurance policy doesn’t cover what you think it
does – not flood or earthquake damage, not stolen or damaged vehicles on
your property, not a break in the water service or sewage line, and not
termites moving in nor pets stolen away.
Many homeowners are under the mistaken impression that a standard
homeowner’s policy provides more insurance protection than it does and
that could mean large unexpected out of pocket expenses – when you can
least afford them.
The National Association of Insurance Commissioners, an organization of
state insurance regulators, found that 33% of U.S. heads of household still
hold the false belief that flood damage is covered by a standard
homeowners’ policy – despite extensive post-Hurricane Katrina news
coverage of scores of homeowners with claims turned down because they
didn’t have the required flood insurance from the National Flood Insurance
Program .
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“Many homeowners learned the hard way that their insurance policies did
not provide flood protection,” said Walter Bell, NAIC President and Alabama
Insurance Commissioner. “As we enter the 2007 hurricane season, we
strongly encourage consumers in flood-prone areas to check whether they
are properly covered.”
That’s not all.
NAIC also found:
68% who think vehicles such as cars, boats and motorcycles stolen
from or damaged on their property are covered, could get run over
by unexpected costs.
51% who think damages from a break in the water line on their
property supplying water to their home are covered will be swamped
in bills which they, not the insurance company, will have to pay.
37% who think damages due to a break in the sewer line on their
property that connects to their municipal sewer system are covered
are making a really foul mistake.
30% believe damages from earthquakes, mold, termites or other
infestation are covered, could wind up crawling with bills.
22% who think pets stolen from or injured on their property are
covered, should get more dogged about the truth {better: “are
barking up the wrong tree”}.
Perhaps worse of all the NAIC survey revealed that 24% of
respondents indicated their policies insured their homes for the
actual cash value, while 64% said their policies covered the
replacement cost. Another 12% said they did not know which type
of coverage – actual cash value or replacement cost – they
purchased.
Actual cash value is the amount it would take to repair or replace damage
to a home and its contents after depreciation. Replacement cost coverage,
the better option, will cover the amount it would take to replace or rebuild a
home or repair damages with materials of similar kind and quality without
deducting for depreciation.
NAIC’s InsureUOnline website offers the following tips:
Add insurance coverage as you enhance the value of your home,
and acquire expensive possessions, such as furniture, computers,
stereos and televisions and other electronics. Keep in mind
computers and other high-end electronics may require special
coverage.
Alert your insurance company when making any major home
improvements that cost $5,000 or more. Update your homeowner’s
insurance policy to reflect the new enhancements and prevent being
underinsured.
California is one of the few states
that does not have a “social host
liability” law (Source). This
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Maintain your property by clearing clutter and other dangerous
conditions to reduce the potential for liability suits. In many states,
means you may get your adult
friends drunk at your home and if
one of them crashes on their way
home you can’t be held liable.
Umbrella Policy: Coverage for
losses above the limit of an
underlying policy or policies such
as homeowners and auto
insurance. While it applies to
losses over the dollar amount in
the underlying policies, terms of
coverage are sometimes broader
than those of underlying policies.
you could be held legally responsible for the actions of anyone who
drinks in your home and then has an accident in your house or after
leaving it . Your policy should protect you against lawsuits due to
these types of liability issues.
Backyard items, such as a trampoline, pool, hot tub, or spa may
require you to increase your liability coverage through an umbrella
policy .
As you acquire more valuables – jewelry, family heirlooms, antiques,
art – consider purchasing an additional “floater” or “rider” to your
policy to cover these special items. They’re typically not covered by
a basic homeowners or renters policy.
It’s a good idea to make an inventory of all of your personal
property, along with a photograph or video of each room. Also,
save your receipts for major items and keep them in a safe place
away from your house or apartment so you’ll have them if you need
to file a claim and substantiate value.
2.5.1.3
HOME WARRANTY MAY COME IN HANDY
by Phoebe Chongchua for Realty Times, November 14, 2008
You are about ready to close your real estate transaction on a home; did
you consider a home warranty?
A home warranty is not mandated
nor is it cited as an option on
CAR®’s Residential Purchase
Agreement.
“It is not mandatory in any state that you have to get one. But in some
states it’s mandatory that it is offered on a purchase agreement of the real
estate contract,” says David Sobel, VP of Sales, for Home Warranty of
America.
Depending on where you live, you may have heard about a residential
service plan or home warranty from your real estate agent. How important
are these warranties? What do you really get? Let’s explore.
Why a home warranty?
Sellers want peace of mind that buyers won’t be calling them after the sale
of their home with problems about items in the home breaking down and
expecting the sellers to pay to fix them.
Buyers want to know that the home they’re buying is going to be protected
and not cost them a lot of money once they move in. The home warranty
helps both sides achieve their goals.
Also, in these tough economic times, Sobel says sellers can take comfort in
knowing that the home warranty can help. “It does help sell homes,” says
Sobel. He says that when buyers are faced with a choice between two
similar type houses with a comparable price point, the house with a
warranty is usually preferred.
What’s covered by a home warranty?
The plans differ from company to company but, generally speaking, the
home warranty covers major mechanical systems and appliances such as
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furnaces and air conditioning, plumbing and electrical items, and
appliances.
Home warranty companies will
not cover pre-existing conditions.
A pre-existing condition is a
defect that is obvious or known
before the warranty becomes
effective.
“It’s a repair or replacement warranty,” says Sobel. When something
malfunctions, the homeowner calls the home warranty company . A
technician is sent to look at the problem. The homeowner pays a flat fee for
the service call. “Then the warranty company either repairs or replaces the
[warranty] covered item,” says Sobel.
When to buy a home warranty?
The best time to purchase a home warranty, according to Sobel, is during
the actual real estate transaction. This is because “not all companies offer
it later.” Sobel adds that what’s offered later is often not as good, “Those
prices [for the home warranty] after the transaction typically increase and
the coverage usually decreases,” says Sobel.
He says this is because if there is no real estate transaction then there is
no due diligence being done. “No inspection was done. The seller didn’t
disclose if things were working,” explains Sobel.
What does a home warranty cost? Sobel says they average is about $400
across the nation with a flat service fee ranging anywhere from $50 to $100
per call.
Who pays for it? This can vary from state to state, depending on market
conditions. “In today’s environment, the buyer has more leverage so we’re
seeing the seller pay for it more often,” says Sobel.
Know before you buy.
A few key steps can help you decide which company to use to purchase a
home warranty:
Make sure the company is licensed in the state that the home is in.
Verify that the company is real – sounds obvious, but lots of scams
occur when some consumers find the company online and then
don’t bother to confirm that the company is more than just a
website.
Call the company and ask for referrals. Find out what other
customers are saying about their experience with the company.
Don’t fall for gimmicks. “If a company is giving you all the coverage
that other companies are offering at a discounted rate of 50% off,
run as fast as you can – it’s too good to be true,” says Sobel. He
says all the national companies selling home warranties offer plans
that are within a 5-10% price range of each other.
If a company offers a gift card or incentive to buy the home
warranty, “that’s not a real company. It’ illegal to give incentives to
buy warranty.”
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2.5.2
RISK REDUCTION
2.5.2.1
BEWARE OF HIRING UNLICENSED CONTRACTORS!
A Google and a Google-News
search using “prosecution of
unlicensed contractors in
California” yielded no reports of
any prosecutions. I suspect this
is one more law without any
regular enforcement to give it
teeth.
Contracting without a license is a crime in California and hiring
unlicensed people for improvement projects is potentially risky and costly.
Unlicensed contractors expose consumers to significant financial harm if
injury, property damage, or project abandonment occurs.
The least expensive bid for improvements or corrections before a home is
sold or purchased may appeal to you or your client. But if that bid is not
from a licensed contractor and exceeds the $500 threshold, it is illegal.
Plus, unlicensed contractors are not likely to carry workers’ compensation
insurance, license bonds, or general liability insurance.
If a disagreement occurs with an unlicensed contractor, the Contractors
State License Board (CSLB) may not be able to help resolve a complaint;
the only remedy available to a property owner may be civil court. Criminal
courts may order a person convicted of contracting without a license to pay
restitution. However, a convicted unlicensed contractor’s restitution
payments may be based on the ability to pay. While a consumer may have
paid the full contract amount up front, the convicted unlicensed contractor
may only have to repay restitution in nominal amounts over an extended
period of time.
Real estate licensees are specifically addressed in BPC §7044.1 which
states, in part:
“. . .nothing in this section shall authorize a real estate licensee or a
property manager to act in the capacity of a contractor unless
licensed by the board.”
A real estate licensee found acting in the capacity of a contractor without a
{contractor’s} license could face administrative and/or criminal penalties. In
addition, a financially harmed consumer could sue for monetary damages.
BPC § 7031 allows a consumer to recover all compensation paid to an
unlicensed person in civil court and generally precludes an unlicensed
person from being able to sue for works of improvement that require a
contractor’s license.
By law, anyone who contracts for a construction project valued at $500 or
more for labor and materials must be licensed by CSLB. State-licensed
contractors generally have four years of verified journey-level experience in
their trade, have passed trade and contractor license law exams, and have
undergone professional background investigations. They post a license
bond and carry workers’ compensation insurance for employees (and
themselves if they are roofers). Contractors who have applied for or
changed their license since January 2005 must also pass a criminal
background check. The law requires contractors to include their license
number in all advertisements; unlicensed contractors are required to say
that they are not licensed in their advertisements.
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There is an exemption from licensure requirements for home improvement
jobs totaling less than $500 for labor and materials. This exemption does
not apply if the construction project is part of a larger operation and
contracts are made in amounts less than $500 to evade the law.
The Registrar of Contractors may issue citations to unlicensed contractors
that include civil penalties up to $15,000 or complaints may be referred to
local prosecutors for criminal filing. A second conviction for contracting
without a license carries a mandatory, 90-day jail sentence and a fine of
20% of the contract price or $4,500, whichever is greater.
Many problems can be avoided if consumers and their agents know the law
and their rights. It only takes a few minutes to research a contractor to
ensure he or she has a license in good standing with the state and that it
holds the required bond and insurance.
The law is specific regarding home improvement contracts, service and
repair contracts, and new home construction contracts. The maximum
down payment a home improvement contractor may request is $1,000 or
10%, whichever is less, unless the contractor has a blanket performance
and payment bond on file with CSLB. Always check their license record on
the CSLB Web site. You can look up contractors by their license number,
business name, or employee names.
Many local building departments routinely verify licensure before issuing
permits. If an owner-builder permit is pulled, city or county building
inspectors may verify that the work is actually being performed by the
owner, not an unlicensed contractor. CSLB often partners with local and
state agencies to conduct compliance checks. A homeowner who pulls an
owner-builder permit assumes full responsibility for all phases of the project
and its integrity. If an unlicensed contractor is hired to do the work, the
homeowner could be responsible for:
Registering with the state and federal government as an employer;
Withholding state and federal income taxes, federal Social Security
taxes, paying disability insurance, making employment
compensation contributions; and
Providing workers’ compensation insurance.
Verify a contractor’s license and its status by visiting the CSLB Web site or
by calling the automated toll-free line: (800) 321-CSLB (2752).
2.5.2.2
CHECKLIST MANIFESTO HAS RELEVANCE FOR REAL ESTATE
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Many real estate agents, brokers, and managers could profit from reading
the book, Checklist Manifesto , by Atul Gawande (Metropolitan Books,
209 pages). Gawande, a surgeon and already a best-selling author,
addresses a problem that is common throughout a myriad of human
endeavors ranging from surgery to flying to businesses and government.
The problem is this: “the volume and complexity of what we know has
exceeded our individual ability to deliver its benefits correctly, safely, or
reliably.” The solution, he argues, is frequently a very simple one. It is a
checklist.
Gawande notes that many problems are complicated and, though they can
sometimes “be broken down into a series of simple problems … there is no
straightforward recipe. Success frequently requires multiple people, often
multiple teams, and specialized expertise. Unanticipated difficulties are
frequent. Timing and coordination become serious concerns.” All this
should sound familiar to anyone who has spent some time in the real estate
business.
Problems of this sort require judgment and expertise. Checklists don’t
change that. What they do is to keep us from overlooking things that,
indeed, might be simple. “You want people to make sure to get the stupid
stuff right” so that room is left for “craft and judgment and the ability to
respond to unexpected difficulties that arise along the way.” A checklist is
not a set of step-by-step instructions. Rather, “they are quick and simple
tools aimed to buttress the skills of expert professionals.”
Depending on where and with whom you practice, the business of real
estate is a checklist-driven activity. In California, the standard eight-page
residential purchase agreement – frequently accompanied by various preprinted addenda – is, in great part, a checklist. It has its blank spaces to be
filled, to be sure, but much of it is constructed in such a way as to provide
agents and principals with a checklist of items that should not be forgotten.
Many of them require decisions: Who is going to pay the homeowner
association transfer fee? Will the buyer get occupancy on the day of
closing, or some days after? How many days does the buyer have to
obtain loan approval? The checklist style contract does not determine the
answers to such questions (although sometimes it provides a default
option) but it does insure that the questions get asked.
When a property goes under contract, that event then generates (or should
generate) more checklists: inspections to be ordered, disclosures to be
made, title report to be inspected, etc..
For many companies a transaction checklist may not be reviewed until after
closing, but before an agent receives his or her commission check.
Typically, this is too late. The barn door is shut. If a disclosure is not made
in a timely manner, obtaining it after closing may make a file checker feel
good, but it is certainly of no risk-management value.
In a standard real estate transaction it may make sense to have three or
more checklists, each to be reviewed at predetermined dates after the
execution of a contract and prior to closing.
The use of checklists in marketing activities is probably less common, but
that is not to say that it wouldn’t be useful. An outstanding agent I know
once told me that a seller told him that they had listed with a competitor,
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rather than him, because they were impressed with the fact that the
competitor would make a nice-looking flyer. Of course my friend routinely
makes listing flyers also. He just neglected to mention it. A checklist might
have helped.
Gawande notes that “We don’t like checklists. They can be painstaking.
They’re not much fun. But I don’t think the issue here is mere laziness … .
It somehow feels beneath us to use a checklist, an embarrassment.” He
then goes on to recount how Captain Chesley “Sully” Sullenberger, about as
close to a heroic figure as we get these days, insisted over and over again
that the “miracle on the Hudson” could only be attributed to a team of
people following procedures and doing what checklists had told them to do.
Not a bad model for the real estate business.
2.5.3
DISPUTE RESOLUTION
2.5.3.1
CALIFORNA COURT HOLDS THAT MEDIATION PROVISION “MEANS
WHAT IT SAYS”
by Bob Hunt for Realty Times, July 21, 2008
The standard residential purchase contract in California is produced by
CAR®. It contains two sections that are easy to overlook or to take as
“boilerplate,” but that can be very important if things go awry between the
parties. One of those sections deals with attorney fees providing that, in
the event of any proceeding between buyer and seller, the prevailing party
shall be entitled to attorney fees and costs from the non-prevailing party.
The attorney fee section contains an exception, however, and that
exception is spelled out in the portion of the contract referring to mediation.
There it is said that, if either party initiates an action “without first attempting
to resolve the matter through mediation, or refuses to mediate after a
request has been made, then that party shall not be entitled to recover
attorney fees…” [my emphasis].
It is important to remember that mediation is not the same as arbitration.
Arbitration results in a decision by an arbitrator that has the same effect as
a court decision. It is binding. In mediation, however, both parties try to
reach a mutually acceptable solution. If they can’t, then so be it, they may
then go on to court or arbitration. But mediation requires that they at least
try to work things out.
The mediation provision in the residential purchase contract should not be
taken lightly. This is the clear lesson of a recent decision (Lange v.
Schilling et al.) handed down by California’s Third Appellate District Court
of Appeal.
In 2003, Jay Lange, a real estate broker, purchased a lake house from
Dwight and Linda St. Peter. The sellers were represented by Roxanne
Schilling and Segerstrom Real Estate, Inc.). Subsequently, Lange
encountered what he felt were various construction defects as well as
feeling that misrepresentations had been made regarding the lake level.
Lange filed a complaint on March 15, 2004. At the time he did not know the
sellers’ whereabouts and was unable to serve them with the complaint. On
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May 11 he hired an investigator to locate the sellers and on May 27 the
investigator reported a mailing address at a private mail box facility in
Nevada. The complaint was sent to that address but no response was
received. A default against the sellers was entered on August 23.
In September, after contact had been made, Lange’s attorney wrote to the
sellers’ attorney that his client would then be willing to hold off the litigation
(i.e., the default had been entered but no judgment had yet been
requested) in order to mediate the matter if the sellers were willing.
Mediation did not take place and, ultimately, the issue went to trial. The
jury returned a mixed verdict resulting in a $13,475 judgment against the
sellers and real estate agents. In achieving that $13,475 judgment, Lange
had racked up slightly more than $113,000 in attorney fees {!}. (There’s a
lesson there, folks.) He filed a motion that the defendants should pay,
based on the contract’s attorney fee clause.
Recommendation: Buyer’s
agents should make it a condition
of the Purchase Agreement that
the sellers make their new
addresses known for five years.
The defendants contested his motion based on the fact that he had not
attempted to mediate prior to filing the complaint, as the contract’s mediation
provision requires. But the trial court ruled that Lange “offers reasonable
justification for failing to offer mediation prior to filing suit: He could not
locate [sellers].”
The court further found that Lange had “substantially
complied” with the mediation provision by his subsequent offer to mediate.
The court awarded $80,710 in fees, which reflected the amount incurred
after the offer to mediate.
The defendants appealed and the appellate court reversed the award of
attorney fees. Its ruling relied on the clear meaning of the contract’s
mediation provision. The court agreed with the defendants that “If the
[sellers] could be found and served with a lawsuit by mail, they could have
been sent a mediation demand by mail.” All that the plaintiff had to do was
attempt to mediate before he filed suit; and he didn’t. Quoting a related
case, the court noted that the mediation provision “means what it says and
will be enforced.” How refreshing! {☺}
2.5.4
DISCLOSURE AND CONTINGENCIES
2.5.4.1
REALTY REALITY: WHEN SELLERS LEAVE A MESS
What should be one of the happiest times for a homebuyer can leave a
sour taste.
Escrow is closed, the seller has moved out, and the buyer is ready to move
in, but when the buyer arrives he discovers that the seller has left behind a
dumpster load of unwanted junk. Half-empty paint cans, gardening
paraphernalia (including pesticides), broken picture frames, inoperative
vacuum cleaners, assorted broken tools litter the garage or yard.
At this point, more than one buyer’s real estate agent has rolled up his or
her sleeves and participated in the junk removal effort. It is one of the less
glamorous parts of the business.
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Such behavior by a seller is not only monumentally inconsiderate; it also
may be a breach of the sales agreement. In the standard residential
purchase contract published by the CAR®, §7.A. provides, “… (ii) the
Property, including pool, spa, landscaping and grounds, is to be maintained
in substantially the same condition as on the date of acceptance [of the
contract]; and (iii) all debris and personal property not included in the sale
shall be removed by Close of Escrow.” [my emphasis]
That’s what the contract says. What about enforcing it?
First of all, we note that one difficulty here is that the condition is usually not
discovered until it is too late. The same purchase contract gives the buyer
a right to have a “walk through” of the property five days (or some other
specified number) prior to the close of escrow. The purpose of the walk
through is to determine that the property has been maintained as required
and also to see that any agreed-upon repairs have been made. But,
typically, this inspection is done a few days prior to closing. You wouldn’t
want it to be done right before closing because it is wise to allow a few days
leeway just in case some repairs had not been satisfactorily completed.
Thus, when the walk through is performed, the buyer doesn’t see the
property in the condition in which it will be left. Quite likely, the sellers will
not even be fully packed by then.
Then, secondly, when the condition (debris left behind) is discovered,
usually the seller will have the money in his pocket and, even if he can be
found, will have little motivation to live up to his part of the bargain. We can
pretty well count on the fact that his conscience won’t move him given that
he left all the stuff in the first place.
What to do? Well, if this is an experience someone has already had, about
the only avenue open is Small Claims Court – seeking the cost of the
debris removal on the basis of the contract breach.
But, good luck, the seller may be across the continent by now. On the
prevention side, it really isn’t a bad idea to have a small amount – maybe
$500 – held back in escrow, much like a rental security deposit. This
makes sense anyway, in the typical scenario where the buyer might not
receive actual possession of the property until two or three days after the
closing. In that situation, the seller has now become a short-term renter
(even if no daily fee is charged), and it’s quite possibly he could
inadvertently cause damage during the move-out process.
But, getting a “security deposit” from a seller is no easy negotiating task.
Most sellers would take considerable offense at such a suggestion.
Moreover, holding such money is nothing that an escrow company will
relish either. They don’t want to get involved in disputes over its
disposition.
No one said this would be easy.
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I have another solution. Have the buyer rent a disposal bin for the seller’s
use the week prior to his move. Explain to the seller that he may use the
bin to discard items he doesn’t want and ask him to set aside those items
he thinks may be useful to his buyer; items such as house paint, gardening
equipment, and product guides. Then, assuming the buyer doesn’t fill the
bin, the buyer may use the bin to discard any items left by the seller which
he doesn’t want. The buyer may also use it to discard other unwanted
items such as paving stones, rocks, lawn decorations, and shelving.
2.5.4.2
HOUSING COUNSEL: NO DEPOSIT, NO CONTRACT
by Benny L. Kass for Realty Times, December 5, 2006
Question: We have been trying to sell our condominium unit for several
months and finally our real estate agent presented us with a contract.
Although the price was lower than we were hoping to get, we decided to
accept that offer.
In reliance on that transaction, we entered into a contract to buy another
property. Our buyer had a contingency for a home inspection which was
done to his satisfaction. He specifically advised our agent that he was
removing the contingency.
A few days later we learned from our agent that the earnest money deposit
was returned by the bank for “insufficient funds.” There is another person
who has now expressed interest in our condominium unit and has
presented us with an offer which is at a higher price.
What can we do?
Answer: Your agent must immediately advise the buyer about his
bounced check and give him five business days to make it good. The
agent should advise that buyer that if this is not done he will be in default
and that you will sell the property to the third party.
If that third party offer is acceptable, you should sign it, but make it clear
that this is a backup contract. You – or your agent – should advise the third
party of all of the facts since full disclosure will avoid any future litigation.
You should consider using this language:
BACK UP CONTRACT: This contract is a first back-up to a contract
dated ______. This contract shall become the primary contract
immediately upon delivery of notice from the Seller that the other
contract is void. The rights and obligations of the parties under the
primary contract are superior to the rights and obligations of this
back-up contract.
At the present time, the first contract is technically in breach. That contract
required the buyer to post good funds as the earnest money deposit and
obviously the funds are not there. However, it would be unfair for you to
unilaterally terminate that contract without providing that buyer the
opportunity to cure the default.
It may be that it was an honest mistake. It is also possible that the bank
made an error (it does happen once in a while). Or it may be that the buyer
just had cold feet and arranged to have no money in his checking account.
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But regardless of the reason you must advise that buyer of the problem and
give him the right to make his check good. Otherwise you could find
yourself in nasty litigation.
Let me pose a follow-up question: What if that buyer takes no action to
redeem the check but refuses to sign a release? Can you sell the unit to
the third party?
Here is where brokers and attorneys often differ. The real estate industry
takes the position that a release is mandatory. Lawyers will often allow the
sale depending on the facts and circumstances of each case.
If the first buyer has been given adequate notice and an opportunity to cure
and if the buyer has not filed a lawsuit seeking specific performance from
the court, your title remains free and clear (subject of course to any
mortgage you may have which will be paid off out of the settlement
proceeds).
In order for a buyer to put a “cloud” on your title, he not only has to file the
specific performance lawsuit but also has to file a lis pendens on the land
records against your condominium unit.
Lis pendens is a Latin word meaning “suit pending,” and when that
document is filed with the local Recorder of Deeds it puts the world on
notice that title to your property has been challenged.
Obviously, if the first buyer has not made good on the deposit check you
will no doubt win your case. Indeed, if you have to go to court, you should
counterclaim against that buyer for damages – i.e., the loss of that third
party contract, plus the moneys you have paid for your mortgage, real
estate taxes, and condominium fees since the lawsuit was first filed.
But litigation is time-consuming and expensive. If that buyer sues you for
specific performance he has to represent that he is “ready, willing, and
able” to buy your property. If that is really the case, your best option is to
agree to sell it to him even though his price was less than the third party
contract.
In the long run, settlement of legal disputes makes the most sense. My
definition of a settlement is simple: both sides walk away unhappy but
nevertheless walk away.
2.5.4.3
TRIVIAL IS IN THE EYE OF THE BEHOLDER
Actual Notice: Notice of some
fact to a person who has a right to
know and which the informer has
a legal duty to communicate.
Robert Bruss, the “Dear Abby of
Real Estate,” died in September
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“Persons who maintain walkways, whether public or private, are not required
to maintain them in an absolutely perfect condition. The duty of care
imposed on a property owner, even one with actual notice , does not
require the repair of minor defects.” These words from a California court
decision nicely sum up the essence of the trivial defect doctrine which helps
to guide California courts in how they handle the myriad of slip-and-fall
cases that come before them. But pity the poor California landlord who
must anticipate what a court might say about possible defects on his or her
premises. Are the defects trivial and obvious or might they be something for
which the landlord could be held liable?
26, 2007. He was a real estate
lawyer and coauthor of
Dearborn’s book, California Real
Estate Law.
Thanks to Harold Justman, successor editor to Robert Bruss’s California
Real Estate Law newsletter, for bringing to our attention a recent case
(Kasparian v. AvalonBay Communities) that shows what a slippery and
unpredictable issue this can be.
In October of 2004, Christine Kasparian, a resident at the AvalonBay
Apartments, was involved in a most unfortunate accident. An 80 year old,
who was using a cane at the time, “fell to the ground as she walked along
the brick paver walkway from her apartment en route to a trash receptacle.”
Her injuries were serious: a cervical fracture and broken teeth.
According to the court record, “Kasparian always followed the same path
from her apartment to reach the trash receptacle next to the elevator. As a
cautious person, Kasparian looked where she was walking. Prior to the
date of her fall, she had noticed the drains in the walkway and specifically
the drain in question. She did not recall ever having a problem with that
particular drain.” {She had “actual knowledge” of the drain.}
Approximately one year later, a lawsuit was filed on behalf of Kasparian
against the landlord charging negligence and premises liability. In
particular, the suit charged that the recessed drain where she fell was a
dangerous condition. The landlord moved for summary judgment
(essentially, dismissal) because “(1) the drain was installed .25 inch below
the pavement in compliance with industry standards; (2) the deviation of .25
inch on the pedestrian walkway constituted a trivial defect; and (3) the
contrast between the drain and the adjacent pavers and [Kasparian’s]
admitted awareness of the drain make the condition open and obvious.”
The trial court granted the motion, concluding “Landlord did not owe
Kasparian a duty because the evidence demonstrated the drain was a
‘trivial defect.’”
The trial court heard testimony from expert witnesses on both sides.
Unsurprisingly, they disagreed in their conclusions. Essentially, one said
the condition was no big deal, the other said it was very hazardous. Their
physical factual findings, though, were almost identical. Their
measurements as to how deeply the drain was recessed differed by only
1/16 of an inch. In making its ruling, the trial court relied in part on photos
submitted by the defense expert.
The summary judgment ruling was appealed in California’s Second
Appellate District. There, the court noted that the trivial defense doctrine
“permits a [trial] court to determine ‘triviality’ as a matter of law rather than
always submitting the issue to a jury [and] provides a check valve for the
elimination from the court system of unwarranted litigation … .” However,
while acknowledging that it was appropriate for the trial court to rely in part
on the pictures that were presented, the appellate court also maintained
that it was appropriate for it [the appellate court] to review those pictures.
The Appellate Court disagreed with the trial court’s conclusions. “Based on
the photographic evidence before the trial judge in this case, we find
reasonable minds could differ as to whether this defect was trivial or open
and obvious.” Hence, the summary judgment was reversed and the case
has been sent back for a jury trial.
So there you have it, landlords. You are not responsible for dealing with
trivial defects that are open and obvious. What a relief. Now all you have
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to do is figure out whether or not a court will agree that the defect in
question is trivial.
My trips to Mexico have given me an appreciation for personal injury
attorneys. We don’t realize just how safe public walkways and facilities are
owing to the fear of lawsuits for slip-and-fall injuries. In Mexico one finds
polished marble floors in bathrooms, uneven steps without hand rails,
missing man hole covers, deep holes in sidewalks, abrupt changes in
flooring levels, etc..
2.5.4.4
COURT DECISION RAISES QUESTIONS ABOUT “FREE LOOK”
PERIOD IN CALIFORNIA PURCHASE CONTRACT
The standard California residential real estate purchase contract, which is
produced by CAR®, contains a default seventeen-day inspection and
contingency period. This provision is not mandatory. The buyer and seller
can agree to change the length of this period or not to have it at all. The
provision is a default in the sense that it stands unless the parties
affirmatively decide to change it.
The period is often referred to, sometimes with a degree of cynicism, as a
“free look” period. The buyer’s “acceptance of the condition of, and any
other matter affecting the property” is a contingency of the purchase
agreement (§9.A.) and he is given this period of time to satisfy himself as to
the condition of the property and matters affecting it. By the end of the time
period, he is to remove the contingency or cancel the agreement.
(§14.B.(3)) If he cancels the agreement, “… Buyer and Seller agree to sign
mutual instructions to cancel the sale and escrow and release deposits to
the party entitled to the funds …” (§14.E.).
A recent decision from California’s Court of Appeal for the Third Appellate
District (Steiner v. Thexton) suggests that having such a free-look period in
a purchase contract may have serious implications that no one seems to
have previously thought of.
Thexton’s parcel was 12.29 acres.
Thexton wanted to retain his
home on 2.29 of these acres.
In September of 2003, Martin Steiner, buyer, and Paul Thexton, seller,
executed a document entitled “REAL ESTATE PURCHASE CONTRACT”
which had been drafted by Steiner, a real estate developer. Steiner wished
to purchase a 10-acre portion of Thexton’s property for development .
Thexton had previously been offered substantially more than Steiner was
willing to pay. However, that prospective buyer wanted Thexton to process
the lot split that would be necessary. This was something Thexton was
unwilling to do.
In the deal between Thexton and Steiner, Steiner was to process the
engineering and paperwork to accomplish the lot split. The contract
stipulated “Buyer will move expeditiously with the parcel split.” If this were
not completed within three years the contract would cancel. The contract
also said, “Buyer, at his sole option and expense, will conduct all necessary
investigations, engineering, architectural and economic feasibility studies
as outlined.” While all such work was to be paid for by the buyer, the
contract stipulated that, should the contract terminate, the seller would
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receive all reports and information that had been obtained. Finally, the
contract stipulated, “It is expressly understood that the Buyer may, at its
absolute and sole discretion during the period, elect not to continue in this
transaction and this purchase contract will become null and void.”
The buyer put $1,000 into escrow to be applied to the purchase price.
By August of the following year an application had been made to the county
for a tentative parcel map. By that time, according to their estimates, the
buyer had spent approximately $60,000. But then, in October of 2004,
Thexton {seller} ordered the escrow to be cancelled, saying he no longer
wanted to sell.
Specific Performance: The
performance of a legal contract as
specified by its terms.
Not surprisingly, the buyer sued for specific performance . The trial court
refused to grant performance. It reasoned that, “The contract is
unenforceable against Defendant Paul Thexton [the seller] because it is, in
effect, an option that is not supported by consideration.” It held that the
contract had to be construed as an option because the owner was bound to
sell at a certain price, yet the “buyer” was not obligated to buy. He could
walk away from the deal at any time. “The unilateral nature of this
agreement is the classic feature of an option … .”
Moreover, the court held that Thexton {seller}, the owner, had received no
consideration for this option. The $1,000 was not his to keep. It was to be
applied to the purchase price; but, if there were no purchase, it was to be
returned to the would-be buyer. And, as the court pointed out, an option
without consideration is not enforceable. Hence, the seller could back out.
The Court of Appeal upheld the trial court’s ruling.
Now, the contract at issue in this case was not a CAR® contract but a
number of attorneys and observers have expressed the opinion that its
similarities to the “free look” period in the CAR® contract are strong enough
that the ruling in this case could be applied to the standard residential
contracts. This would be a devastating result. The free look period, which
had seemed to be a good thing for a buyer, would also be a free-to-cancel
period for the seller. That might not mean much in today’s market, but in
other times it could be disastrous for buyers. No one would be comfortable
with it.
CAR® has to hope that the California Supreme Court will accept this case
for review, and that, if it does, the Supreme Court will either overturn the
appellate ruling or, at a minimum, that it will provide a way of distinguishing
this case from the standard residential contract. Otherwise, we can expect
to see some changes in the CAR® purchase contract.
The Supreme Court of California did accept Steiner’s appeal and published
their ruling on March 18, 2010. They agreed with the Court of Appeal that
the agreement between Steiner and Thexton was an option (not a contract)
but disagreed with the Court that, as an option, it was “revocable” since
there was no consideration from Steiner (consideration being an essential
element for an enforceable option). Therefore, they found for Steiner;
meaning that Steiner could sue Thexton {seller} to force him to sell his
property under the original terms of the option.
Page 229
The Court said that Thexton {seller} could have unilaterally revoked the
option to sell his property to Steiner had he done so before Steiner sought
the parcel split. Once Steiner invested his time and money in obtaining the
split, he provided the consideration required to make the option
enforceable.
2.5.4.5
WHAT EXACTLY IS MELLO-ROOS? CALIFORNIA HOME BUYING
INFORMATION
by Todd Foust and Charmaine Ngo for Realty Times, June 10, 2009
Many prospective homebuyers in California are becoming increasingly
aware of the term Mello-Roos when looking to purchase new and used
homes. For those that are unfamiliar, Mello-Roos is simply a special tax
assessed to homeowners in a community as repayment for bonds used to
fund the infrastructure within their community. To home buyers, MelloRoos often carries a negative connotation, one where the monthly payment
for a home will be significantly more than one in a non Mello-Roos
community. But is this a fair assessment? We will attempt to answer this
question in order to educate any potential homebuyers about Mello-Roos.
Advantages of a Mello-Roos District to Home Buyers
New schools, parks, recreation centers, etc can be built and funded
using the revenue generated from the Mello-Roos income.
More housing inventory will be created when undeveloped locations
are built up.
Generally speaking, low crime rates and highly desirable new
schools are common in Mello-Roos communities.
Disadvantages of a Mello-Roos District to Home Buyers
Cost of housing may be increased because of the tax, possibly
limiting the amount of prospective buyers when it comes time for
resale.
Maintenance of the improvements could be more costly than
anticipated.
Quick Mello-Roos Q & A
Q: Where Is Mello-Roos Most Commonly Found?
A: In Orange County, CA most cities with new construction will have at
least one community with Mello-Roos; however, the southern portion of
Orange County is where it is most prevalent. Likely cities might include:
Irvine, Mission Viejo, Aliso Viejo, Tustin, Laguna Hills, Rancho Santa
Margarita, Coto De Caza, and San Juan Capistrano.
Q: What Year Homes Have Mello-Roos?
A: Almost always, Mello-Roos is found in areas with newer neighborhoods
and subdivisions built between 1994 and the present.
Q: How Long Does Mello-Roos Typically Last?
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A: The length of the Mello-Roos tax varies from subdivision to subdivision.
Fifteen years from the original build date is about average. The payment
very rarely extends beyond 30 years or is shorter than seven years.
Q: How Much Is It Typically?
A: Depending on the year of construction, it can range anywhere from $25
to over $300 per month; the actual tax is usually collected annually or semiannually.
A Brief History of Mello-Roos
The term Mello-Roos was derived from the names of its co-authors,
Senator Henry Mello and Mike Roos. It is also generally termed as the
Community Facilities District Act (CFD). The CFD started when people in
California voted for Proposition 13 in 1978 to limit property taxation.
Therefore, new initiatives were considered to finance public constructions
and improvements. In 1982, the California State Legislature made MelloRoos legitimate.
After passing a community vote with two thirds in favor of becoming a
Mello-Roos district, bonds are issued to help fund the community
infrastructure. Normal services and infrastructure would include police
services, schools, roads, ambulance and fire protection services, utility
connection, sewer lines, and streetlights. Once Mello-Roos is established,
residents must repay the bonds in order to fund ongoing projects. A special
tax is assessed to the homeowners as the repayment method and levied
yearly. An ongoing lien is used to make sure that the taxes are safe and
secured.
The bottom line to the buyer of a home in a Mello-Roos community is that
they will have to pay this tax in order to repay the municipal bond. This
would be in contrast to a non Mello-Roos community where the
infrastructure and services would be paid for by the surrounding residents
or the actual builder.
Final Thoughts on Mello-Roos
Considering the pros and cons of living in a community with Mello-Roos is
very important for Orange County homebuyers. Although Mello-Roos
communities have many amenities that both established and newer Non
Mello-Roos communities may not have, a prudent homebuyer should weigh
these facts in determining if the amenities warrant the increased monthly
payment. Ultimately, homebuyers will need to decide if the attraction of a
newly built home is worth the extra expense in areas prone to having the
tax. If a California homebuyer is looking at homes built in the last 15 years,
they should at the very least be inquiring as whether or not Mello-Roos
exists in the community. It is the buyer’s choice whether Mello-Roos is
something they can live with and we truly hope this guide will make their
decision easier.
In addition to Mello-Roos, there are several other “benefit assessment laws”
such as the Landscaping and Lighting Act of 1972 and the Improvement
Act of 1911 (source). Like Mello-Roos, these laws require a super-majority
of the voters to approve the proposed assessment. If approved, the special
assessments are billed with the homeowner’s property tax statement and
are secured by liens on each home in the district until paid in full.
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In my neighborhood, in 2002 we approved a special assessment and bond
to acquire and protect open space in the Santa Monica Mountains. Voting
was by mail with ballots sent with a prospectus. The small number of
voters returning the ballots voted 68% to 32% in favor of the assessment
thus creating a lien on all homes in the assessed district. Each year the
assessment appears as a line item on my property tax statement.
2.5.4.6
PAST HOMEOWNER ASSOCIATION LAWSUIT MAY BE A MATERIAL
FACT
Suppose that, in the past, your HOA brought a lawsuit against the
developer claiming some kind of construction defect. It happens, of course,
all the time. Regardless of when the suit occurred, or what its outcome
might have been, is the fact of the suit something that needs to be
disclosed to a prospective buyer? A recent case from California’s Second
Appellate District (Calemine v. Samuelson) gives us some guidance.
In 1983, the seller, Walter Samuelson, and his wife became the original
owners of a condominium unit in the Jared Court development. The lower
level of the three-story condominium consisted of a garage and “bonus
room” that Mr. Samuelson used as an office. Subsequent to the
Samuelsons’ purchase there were intermittent incidents of water intrusion
and flooding in that lower level. Similar water intrusion was experienced in
other units.
In 1986 the Jared Court HOA brought a lawsuit against the developer
alleging design and construction defects. Later, the HOA hired Westar
Flooring to repair and waterproof the affected areas. After that work was
done, Samuelson did not experience any further water intrusion problems
in the bonus room portion of the lower level. However, there were
continued problems in other areas of Jared Court. So the HOA sued
Westar. A consultant estimated the cost of needed waterproofing repairs to
be somewhat more than $1 million. The lawsuit was settled in 1998, with
the association receiving $410,000 after payment of attorney fees.
Another company, CHI, was hired to make further repairs. CHI completed
its work in 1998 but cautioned the HOA that they had only done one phase
of the work that was needed. Further work was needed, said CHI, and they
could not guarantee that there would not be further dampness issues in the
garage/storage areas. Samuelson was aware of CHI’s caveat, inasmuch
as he had been a board member of the HOA from 1993-2001, and he was
the “point man” in the dealings with CHI.
After the work CHI completed in 1998, Samuelson “did not observe any
further flooding or water intrusion into the garage area of the condominium,
though occasionally damp spots would appear on the garage floor during
periods of heavy rain.”
Later, Samuelson undertook to sell the unit. An escrow with Larry and
Camille Calemine closed in July of 2002. During the negotiations and sale
Samuelson made disclosure of the water problems in a variety of ways. He
noted on the Transfer Disclosure Statement that he was aware of “flooding,
drainage, or grading problems” and he added the notation “heavy rains
Page 232
below ground walls & slab.” His agent wrote “water damage noted in
garage” and he urged the buyers to obtain a physical inspection. The
inspector also noted signs of water intrusion and recommended the buyers
make further investigations to determine if repairs had been made. A
termite control company also noted moisture damage as well as the fact
that other contractors in the past had installed additional concrete and
drainage.
The buyers discussed the issue with Samuelson. He told them of the past
problems, of the repairs that were made, and said, “Haven’t had a problem
since. Problem solved.” He did not mention the lawsuits.
In January 2005, two and one-half years after the Calemines moved in, the
garage flooded. At that time they first learned of the lawsuits against the
developer and the first repair company (Westar). Flooding recurred in
March of 2005 and in January and April of 2006.
Naturally, a lawsuit was filed. Among other things, it alleged that
Samuelson had breached his duty to make full and complete disclosure.
The trial court found that Samuelson had made sufficient disclosure of the
defects and that there was “no triable issue of material fact regarding a
misrepresentation or failure to disclose as to water intrusion.” Granting
summary judgment, it dismissed the case. The Calemines appealed,
arguing that, while Samuelson had made adequate disclosure regarding
the water intrusion itself, he should have disclosed the prior lawsuits
because they, too, were material facts.
The appellate court observed that a seller’s disclosure duty is “limited to
material facts; once the essential facts are disclosed, a seller is not under a
duty to provide details that would merely serve to elaborate on disclosed
facts.” Generally, whether the undisclosed matter was of sufficient
materiality to have affected the value of desirability of the property is a
question of fact.
In this case, the appellate court said that disclosure of the lawsuits did not
fall under the category of mere “elaboration” which would not have been
required. It said that “the existence of the two lawsuits was the very type of
material information that a potential buyer could find seriously affected both
the desirability and the value of the property.” It sent the case back for trial.
Now, there is some good news for sellers in all this. For one thing, the
court certainly did not say that a seller has the affirmative duty to find out
whether his HOA had ever filed such a suit. If you don’t know, you don’t
have to go looking. Secondly, the court made clear that there was no duty
to disclose the details of the lawsuits. “Disclosure of the litigation would
have enabled appellants [Calemine] to examine the details of those actions
…” Given knowledge of the suits, it becomes the buyer’s burden to find out
the details.
Bottom line, if you know of any lawsuits – past as well as pending – you
had better disclose them.
2.5.4.7
GOLF COURSE DISCLOSURES
Real Estate Bulletin, Spring 2010
Page 233
Residents of homes located adjacent to or near a golf course may enjoy the
benefit of the enhanced value of their residences as well as favorable
views. However, the proximity of a golf course can also produce negative
impacts on adjacent homes which may result in disputes. This article will
address some of the issues that a developer or a real estate agent may
wish to disclose to purchasers in a project affected by a golf course.
These disclosures may apply whether the golf course is privately owned,
controlled by the developer, or is part of the HOA’s common area. If
applicable, the disclosures may be made in a Transfer Disclosure
Statement, Subdivision Public Report, and if a more detailed disclosure that
provides an explanation unique to the property, a separate document is
appropriate. Some suggestions for disclosures may include:
Stray golf balls – Any resident near a golf course may be affected by errant
golf balls , resulting in personal injury or destruction to property. Golfers
may attempt to trespass on adjacent property to retrieve golf balls even
though the project restrictions may expressly prohibit such retrieval.
She has been living alongside a
golf course and constantly has
golf balls flying onto her property.
(source)
Noise and lighting – The noise of lawn mowers and utility vehicles may
create disturbances to homeowners. Maintenance operations may occur in
the early morning hours. Residents living near the clubhouse may be
affected by extra lighting, noise, and traffic.
Pesticides and fertilizer use – A golf course may be heavily fertilized, as well
as subjected to other chemicals during certain periods of the year.
Irrigation system – Golf course sprinkler systems may cause water
overspray upon adjacent property and structures. Also the irrigation system
of a golf course may use reclaimed and retreated wastewater.
Golf carts – Certain lots may be affected more than others by the use of
golf carts. Lots adjacent to a tee or putting green may be subject to noise
disturbances and loss of privacy.
Access to golf course from residences – It is likely that most residences will
not have direct access from their lots to the golf course. The project
restrictions may disclaim any right of access or other easements from a
resident’s lot onto the golf course.
View obstruction – Residents living near a golf course may have their views
over the golf course impacted by maturing trees and landscaping or by
changes to the course’s configuration.
2.5.5
CIVIL LITIGATION
2.5.5.1
COURT REJECTS EXPERT MOLD TESTIMONY
by Bob Hunt for Realty Times, November 10, 2009
More often than is widely acknowledged, courts come up with good and
sensible rulings. When that happens, we do well to acknowledge them. In
the case of Dee v. PCS Property Management, California’s Second
Appellate District Court of Appeal affirmed the good ruling of a trial judge.
Inasmuch as the case had to do with claims regarding mold, it is of more
than a little interest to a variety of parties involved with real estate.
Page 234
The plaintiff, Darcee Dee, lived in a Los Angeles apartment from January
18, 2001 until June 1 of the same year. The property was managed by
PCS Property Management, L.L.C. When she moved into the apartment,
Ms. Dee noticed stains on the carpet and around the doorframe. Shortly
thereafter she began to experience various health effects “including
dizziness, fatigue, diarrhea, vomiting, bloody nose, migraines, itchiness,
redness on her feet and hands, confusion, chills, depression, hair loss,
stomach, back, head and neck aches, and the absence of menstruation.”
She also had problems with “breathing, tightness in her chest, excessive
heartburn, burning skin, food sensitivities, hives, and eye infections.”
After several meetings between Ms. Dee and PCS employees, testing was
done by Scope Laboratories on May 14, 2001. The test found Stachybotrys
, a type of mold capable of producing mycotoxins. Ms. Dee moved out on
June 1. Further tests by another company confirmed the presence of other
types of mold as well. A lawsuit was filed.
Strachybotrys in a Petri Dish
As is common in these kinds of cases, the plaintiff had experts to testify as
to her condition(s) and how they were caused by the mold that had been
allowed to grow in and near her apartment. But the defense filed motions to
exclude both test results and the testimony regarding the cause(s) of her
ailments.
A full rehash of the testimony, arguments, and legal principles would be
beyond the capacity of the space allotted here. But the basic facts are
these: “Mold is a fungus which is essentially everywhere. Almost every
breath we take contains mold spores.” (That the appellate court’s
discussion began with this quote might have given a pretty good hint at the
direction in which it was going.) Molds themselves – even toxic molds –
don’t cause illness and reactions. Reactions are caused by mycotoxins
which, under certain conditions, may be produced by the molds.
The presence of mycotoxins was not detected by the tests, only the
presence of molds. That mycotoxins were present was inferred from the
results of specialized blood and other tests which were alleged to show that
Ms. Dee had been exposed to mycotoxins. However, the court noted that
“the only laboratory in the world that does this testing is [the doctor’s]. The
work is not generally accepted in the relevant medical community as being
capable of identifying exposure to mycotoxins.” Because of that, the test
results did not meet the legal requirements for admissibility as evidence.
Further, the court excluded the testimony of the physicians who attributed
the plaintiff’s various ailments to exposure to mycotoxins caused by mold.
Lacking “sufficient evidence of a causal connection” between Ms. Dee’s
problems and exposure to mycotoxins, the trial judge opined that “what I
heard was in the main speculation.” The appellate court agreed, observing
that “an expert’s opinion that something could be true if certain assumed
facts are true, without any foundation for concluding those assumed facts
exist … does not provide any assistance to the jury.”
The ultimate result: Not only did the jury trial find on behalf of the
defendants but also the plaintiff was ordered to pay their court costs –
slightly north of $330,000. The appellate court affirmed the trial court’s
decision.
Page 235
I certainly do not make light of the very real suffering that can be caused by
exposure to mold-produced mycotoxins. But it’s nice to know that courts
and juries won’t be overwhelmed by whatever so-called “experts” may have
to say.
2.5.5.2
SHORT SALE TACTICS MAY BRING ON LEGAL LIABILITIES FOR
AGENTS
by Bob Hunt for Realty Times, July 6, 2010
Real estate agents know that short sales are likely to be time-consuming
and frustrating. What many don’t know is that short sales carry high risks
of legal liability for agents. This message was delivered on a variety of
occasions at the recent meetings of the directors of CAR® held in
Sacramento, California. It was discussed by CAR® attorneys at a member
legal forum; it was discussed in a meeting of attorneys who represent
brokerages and REALTOR® associations, and it was discussed in
presentations by the Real Estate Commissioner.
One area of short sales that is fraught with liability is in the use of
negotiators. In California, short sale negotiators must possess a real estate
license and are subject to a variety of regulations. Moreover, a negotiator’s
agency relation to the principals is frequently unclear and undisclosed.
Undisclosed dual agency is a particular problem.
At the CAR® meetings special emphasis was directed to the unfortunately
common practice of short-sale listing agents deliberately setting an
artificially low listing price and/or submitting low offers for bank approval
while discouraging or ignoring higher ones. Sometimes this practice occurs
simply in the context of the agent trying to get a sale as quickly as possible.
At other times the practice is part of a strategy to enable the buyer to “flip”
the property.
How can one justify the agent not trying to achieve a higher price? An
agent, a flipper, or a short-sale seminar instructor may say something like
this: “Look, the seller’s not going to get any money out of the transaction
anyway. So he or she really doesn’t care what the price is. They just want
to be done with it, and the sooner the better. The lower price is really in the
seller’s interest, because it resolves their problem sooner.”
The Mortgage Debt Relief Act of
2007 generally allows taxpayers
to exclude income from the
discharge of debt on their
principal residence. Debt reduced
through mortgage restructuring,
as well as mortgage debt forgiven
in connection with a foreclosure,
qualifies for the relief.
Well, that rationale would have its point if it were true, but too often it isn’t.
That is because, in many cases, the purchase price does make a difference
to the short-sale seller. To explain this, we begin by noting that, while there
are some situations where the forgiven debt in a short sale may not be
taxable, in many cases – likely most – it is. Typically, then, the short-sale
seller will be faced with one of two unpleasant possibilities: (a) the unpaid
debt will be forgiven by the lender and the amount will then be treated as
taxable income, or (b) the lender will allow the sale to go through, but will
This provision applies to debt
reserve the right to pursue the seller for the unpaid debt amount {the lender
forgiven in calendar years 2007
through 2012. Up to $2 million of can not get a judgment for any deficiency if the lender financed the
forgiven debt is eligible for this
borrower’s home}.
exclusion ($1 million if married
filing separately). (Source)
Page 236
In short, generally, the purchase price does make a difference to the shortsale seller, because the higher the price the lower the amount of either
taxable income or unforgiven debt. The agent who ignores or conceals this
fact is inviting a future legal action that will allow him to participate in the
seller’s financial problems. In California, he may have an opportunity to
explain his behavior to the DRE as well.
Additionally, if the above scenario also includes a deliberate attempt by the
agent to influence the BPO (Broker Price Opinion) to come in significantly
lower than fair market value, then a federal charge of bank fraud could be
added to the list of liabilities.
Many agents have learned legally dubious short sale strategies at seminars
and through books and tapes. It is an unfortunate, albeit understandable,
fact that on occasion classes giving such advice take place at REALTOR®
association facilities. It is common for the sponsors of these classes to
assure everyone that their programs have all been approved by the DRE,
legions of attorneys, HUD, and maybe even the White House. Of course
they lie; and how is the person responsible for scheduling classes
supposed to know? That is why a very strong piece of advice coming out
of the CAR® meetings was that REALTOR® associations should be sure that
classes dealing with short sale issues should first be vetted by the
association’s legal counsel.
2.5.6
CONTRACTS
2.5.6.1
LEASE-OPTION SHOULD SPECIFY TERMS OF THE SALE
by Bob Hunt for Realty Times, January 25, 2008
Lease-options are back in vogue. And that is just fine as long as the
optionor (owner) and the optionee (tenant) take care to be clear about
exactly what they intend with the option. “I’ll rent your house now and I get
a chance to buy it later on,” isn’t quite enough.
This subject has been addressed here before but it is important enough to
warrant further attention. Anyone who doesn’t think so should pay attention
to a recent case from California’s Fourth Appellate District (Sunil Patel v.
Morris Liebermensch et al.).
Patel: Tenant/Optionee
Liebermensh: Landlord/Optionor
In July of 2003, Sunil Patel and his wife rented a condominium from Morris
Liebermensch. The parties also agreed that Patel would have an option to
buy the unit. Liebermensch drew up a document that said, “Through the
end of the year 2003, the selling price is $290,000. The selling price
increases by 3% through the end of the year 2004 and cancels with
expiration of your occupancy. Should the option to buy be exercised,
$1,200.00 [the amount of the security deposit] shall be refunded to you.”
In July of 2004, Patel notified Liebermensch of his desire to exercise the
option at a price of $298,700 according to the terms to which they had
agreed. Liebermensch responded by drafting a purchase agreement
requiring that a 10% deposit would be placed in a specified escrow
company, that the sale would be “as is,” and that the escrow period would
be 90 to 120 days. The lengthy escrow was needed so that Liebermensch
would have time to accomplish a tax-deferred exchange.
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Patel countered to some of the terms proposed. After the “as is” provision,
he added language that would enable him to cancel “if not fully satisfied.”
He further indicated that if the escrow were to be more than 30 days, the
deposit would only be $5,000. Also, if the escrow had to be more than 30
days, Liebermensch was to bear all escrow expenses.
Liebermensch did not accept Patel’s changes. Negotiations ensued, but
eventually broke down. They could not come to an agreement on the
terms. In November of 2004, Patel filed a lawsuit seeking specific
performance.
A jury found (a) that the two had entered into an option agreement giving
Patel the right to purchase the property, and (b) that the terms of the option
contract were “sufficiently clear to enable the parties to carry out the
objective of the contract.” The trial court then ordered that the contract be
performed with escrow closing no later than 60 days. Liebermensch
appealed.
The appellate court noted that, “To be enforceable, an option contract must
contain all the material terms that would be contained in the ultimate
contract of sale … . These essential contract terms include (1) the parties,
(2) the term of the option, (3) the identity of the property and (4) the price
and method of payment. In addition, any other terms that are intended to
be included within the bilateral purchase contract … must be included
within the terms of the option.” [my emphasis] The idea is, when the
option is exercised, there should be nothing further to negotiate about.
Now, the court also acknowledged that sometimes terms such as the time
of payment might be left out but the contract could still be enforced
“because the law implies a reasonable time.” However, it went on to
emphasize that, if there is uncertainty about some term of a contract and
“the uncertainty relates to a matter that is so important to the contract that
the court cannot determine what the parties intended,” then courts will
refuse to enforce the uncertain agreement.
In the Patel case, there was never any agreement about the time of
payment (length of escrow), and, for the parties, that was a crucial issue.
They never had reached a complete agreement; hence the option contract
could not be enforced. The appellate court reversed the judgment of the
trial court.
There’s a moral to this story, one that we have heard before. If you are
going to create an option to buy, it is a good idea to draft a completed
purchase agreement (though undated and unsigned) as an exhibit that will
clearly specify what the terms of the potential sale will be.
2.5.6.2
NON-REFUNDABLE DEPOSIT CAN’T ALWAYS BE KEPT
It is not unusual for sellers of real estate to want the buyer’s deposit to be
non-refundable. Banks selling REO properties routinely insist that deposits
be non-refundable. If an attorney is representing the owner in a sale of real
estate, you can pretty well count on an insistence that any deposits be nonrefundable.
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In California, though, characterizing a deposit as “non-refundable” does not
necessarily make it so. This is the lesson of a recent California Appellate
decision (Kuish v. Smith, 4th Appellate District) and it is something of which
agents and their clients should be aware.
In December of 2005, Mr. Kuish made an offer to buy the Smiths’ Laguna
Beach home. Nine counteroffers later the parties reached an agreement
on a purchase price of $14 million. Included in the agreement was a
requirement that the buyer make two “non-refundable” deposits: one at the
opening of escrow and to be released “upon approval of contingencies on
or before February 12.” The second deposit was to remain in escrow.
Escrow was to close on or before July 28.
Over the next few weeks there were escrow amendments regarding both
the deposit amounts and the closing date. The results of those
modifications were that the deposit amounts would total $620,000: the first
one being for $420,000 and the second $200,000. Escrow was extended
to August 10 and then again until September 15. Both deposits were made
and, by agreement, $400,000 was released, with the remaining $220,000
staying in the escrow account. Subsequently, the buyer had a change of
heart and on Sept. 18 requested that escrow be cancelled. Cancellation
instructions were signed by both parties on October 17.
The sellers then sold the property to a backup offer for a price of $15 million
($1 million more than the cancelled transaction). They closed on
November 16. The sellers refused to return any of the deposit money or to
allow escrow to release any to the first buyer, Mr. Kuish. Naturally, Mr.
Kuish sued.
The trial court ruled in favor of the sellers. The court concluded that it was
the buyer who had breached the contract and that the seller’s retention of
the money did not constitute an unreasonable forfeiture. The trial court
said that “both parties were ‘big boys,’” that is, sophisticated business
people [who] understood all the ramifications of their actions in freely
negotiating to make the deposits non-refundable. Mr. Kuish appealed.
The appellate court reversed the decision of the trial court and ordered that
the deposits be returned. First the appellate court looked to CC §3307
which lays out the basis for determining damages when an agreement to
purchase real estate has been breached. “The seller’s main measure of
damages is essentially the difference between the contract price and the
Exemplary Damages: are often
property’s value at the time of breach.” Hence, in a rising market, as this
called punitive damages, these
one obviously was, there were no damages to the seller. Moreover, the
are damages requested and/or
awarded in a lawsuit when the
court also noted that CC §3294 expresses “the policy of the law against the
defendant's willful acts were
allowance of exemplary damages for breach of contract regardless of the
malicious, violent, oppressive,
nature of the breach”. “Any provision by which money or property would be
fraudulent, wanton, or grossly
forfeited without regard to the actual damage suffered would be an
reckless.
unenforceable penalty.”
The court observed that the parties could have agreed to a liquidated
damages clause, but they did not. A liquidated damages clause is a ‘preagreement’ that stipulates that a breach will result in a certain amount of
damages. Such clauses, with certain limitations, are perfectly acceptable in
California real estate purchase agreements but they must be signed
separately by both parties. Neither the Smiths nor Kuish chose to do so.
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As a result, the Smiths were only entitled to actual damages, and there
were none.
The California Real Estate Purchase Agreement contains a pre-printed
liquidated damages clause which buyer and seller may sign if they agree.
If sellers want the deposit to be “non-refundable,” that is what they should
look to.
2.5.6.3
CALIFORNIA REALTORS INTRODUCE NEW PURCHASE CONTRACT
Here’s a link to the new RPA.
On April 28, 2010 the CAR® will release its newest version of the
Residential Purchase Agreement (RPA) . The RPA has no “official” status
in California but it is unquestionably the most widely used contract in
residential real estate transactions throughout the state. It is used by nonREALTOR® agents as well as by those who are CAR® members.
Not every real estate agent will welcome the appearance of a new standard
contract. Change is so painful. But there really is not a lot to be worried
about. Even though there has not been a significant modification to the
CAR® purchase agreement since 2002, this latest version is not radically
different from the one that is currently in use.
Changes to CAR® purchase contracts do not come out of the blue. The
association’s Standard Forms Advisory Committee solicits member
comments and suggestions on an on-going basis throughout each year.
More than 1,000 member inputs helped to shape this latest version.
Some changes reflect changing market conditions; others may come about
as a result of events and trends in the legal arena; still others seek to
address areas that have been the subject of disputes about interpretation.
And of course there will always be that category of “A Good Idea that No
One had Thought of Before.”
As an example of the latter, we note that the new contract contains an
agency disclosure and confirmation of agency paragraph at the very outset
of the agreement. For years, the agency confirmation had been pretty well
buried (paragraph 27, pg. 7). Someone said, “Wouldn’t it make more sense
to address that issue up front?” Of course, it does.
One of the more significant changes to the RPA is, in effect, an
endorsement of an emerging market practice. It deals with the treatment of
the buyer’s “earnest money” deposit. Until recent years, it has pretty much
been assumed that an agent writing an offer would collect a deposit check
from the prospective purchaser. Among other things, in California, this then
triggered a series of trust accounting measures. More recently, though –
and partly as a result of purchasers making multiple offers on short sales –
buyers have been saying, “I’ll write a check when – if – I have an accepted
offer.” In the new RPA the first and default option (others may be chosen)
is that the buyer will deliver the funds directly to escrow after there has
been an acceptance.
Sometimes modifications are made to the standard purchase contract in
the hope that they will make things better and that they will alter practices
for the good. In the new contract, the provision related to the removal of
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contingencies or cancellation adds the clause that such actions must be
“exercised in good faith.” Now, as it stands, common law requires of all
contracts an implicit covenant of “good faith and fair dealing.” Will the
addition of explicit – albeit vague – language result in better performance
by principals? Maybe; maybe not. But it doesn’t hurt to try.
One of the delightful additions to the new RPA is a Table of Contents cover.
It will provide significant assistance to those who need to navigate their way
through the (still) eight-page, single-spaced document.
As is always the case, many of the changes made to the RPA will never be
noticed by most agents or principals. But that’s ok. The provisions will be
there when they find out they need them.
2.5.6.4
HOW SHALL WE COUNT THE DAYS?
by Bob Hunt for Realty Times, May 4, 2010
“What a difference a day makes. ... 24 little hours.” Unless you employ a
different convention for counting days, in which case a day may seem to
take somewhat longer than twenty-four hours.
How days are to be counted can be of considerable importance when it
comes to contracts and agreements – oral or written – that contain
provisions related to periods of time. Such provisions are common in real
estate contracts.
Suppose you tell me at noon time Monday, “Pay me back within two days
or face the consequences.” Does that mean that my knees have only until
noontime Wednesday? Or would I be OK until 5 PM Wednesday, the end
of the business day? Or might I have until 11:59 PM on Wednesday?
These things can make a big difference.
The newly-released Purchase Agreement produced by CAR® contains
some important changes in the treatment of time-sensitive provisions.
Because the CAR® contract is the standard throughout the state, it
behooves California agents and brokers to become familiar with the
changes. Moreover, agents from other states can benefit from considering
these issues because, wherever one does business, such matters can be
important. Regardless of how they are resolved, they need to be resolved.
The first change we note is that notices requiring the other party to perform
some act are now to be phrased in days rather than 24-hour periods. For
example, “You have 2 days from receipt of this notice to remove your loan
approval contingency,” rather than, “You have 48 hours … .” Among other
things, this change brings these time periods into conformity with other
time-related provisions of the contract (e.g. “Seller has 7 days after
acceptance to disclose to Buyer…”)
From that change we move on to the matter of what shall count as a “day”.
Many contracts, for example, will stipulate that “days” means “business
days.” The California Purchase Agreement is somewhat more detailed, to
say the least. “‘Days’ means calendar days. However, after Acceptance
the last Day for performance of any act required by the Agreement
(including Close of Escrow) shall not include any Saturday, Sunday, or
legal holiday and shall instead be the next Day.” To put it another way, the
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contract wants performance to be required only on what are normally
considered to be business days.
Then there is the matter of counting days. Again, the contract is clear, if
not wholly intuitive. “‘Days After’ means the specified number of calendar
days after the occurrence of the event specified, not counting the calendar
date on which the specified event occurs, and ending at 11:59 PM on the
final day.” In particular, we don’t begin counting until the next day.
Back to our earlier example: If I have to pay you back two days after you
make your demand at noon Monday, then – if we are using the CAR®
definitions – I have until 11:59 PM on Wednesday to come up with the
money.
But what if you make your two-day demand at noon on Thursday? We
begin counting on Friday. The 2nd day is Saturday, but performance isn’t
required on a Saturday or on Sunday. Assuming Monday is not a holiday, I
must pay you back no later than 11:59 PM on Monday. That’s 107 hours
and 59 minutes after the two-day demand was made. Good for me and my
knees, but maybe not what you had in mind.
The CAR® method of defining and counting days isn’t perfect – whatever
that would mean – but it is clear. Maybe some other method is preferable.
The point is: it is important for agents and principals to have some clear
agreement on these matters.
2.5.7
AGENCY AND ETHICS
2.5.7.1
MUST AGENTS PROVIDE TRANSLATED DOCUMENTS?
The population of California on
April 1, 2000 was 34 million;
therefore, 35% of Californians’
mother tongue is not English
(source).
CC §1632 was enacted in 1976 to increase consumer information and
protections for California’s sizeable and growing non-English speaking
population. The law requires certain documents to be translated. The
statute was amended effective July 1, 2004 to include a number of other
languages. The Assembly Bill that implemented the change cited data from
the United States Census of 2000 that more than 12 million Californians
speak a language other than English in the home and approximately 4.3
million speak an Asian dialect or language other than Spanish. The top five
languages other than English spoken by Californians that were cited were
Spanish, Chinese, Tagalog, Vietnamese, and Korean. The four Asian
dialects were added to the provisions of §1632 to provide the same
protections for those consumers.
CC §1632(b) states, in part, that any person engaged in a trade or business
who negotiates primarily in Spanish, Chinese, Tagalog, Vietnamese, or
Korean; whether done orally or in writing, shall deliver a translation of the
contract or agreement to the consumer prior to the execution of the contract
or agreement. This applies whether the negotiation occurs orally or in
writing. The translation must include every term and condition in that
contract or agreement.
CC §1632 does not require real
transfer agreements to be in any
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For real estate licensees, this Civil Code section applies to leases,
subleases, rental contracts or agreements, other terms of tenancy contracts
of the five foreign languages.
or agreements; real estate loans primarily for personal, family or household
purposes subject to BPC §10240 et. al; and reverse mortgages .
§1632(c) states the requirement is met in a real estate loan transaction by
delivering a translation of the Mortgage Loan Disclosure Statement to the
borrowers. Mortgage Loan Disclosure Statements are available in Spanish
(RE882A/RE883A), Chinese (RE882E/RE883E), Tagalog (RE882B/RE883B), Vietnamese
(RE882C/RE883C) and Korean (RE 882D/RE883D) on the DRE website.
CAR® offers these forms.
For rental or lease transactions negotiated primarily in one of the languages,
the broker or salesperson must provide the contract or agreement translated
into these languages . §1632(d) also requires that a notice be provided to
the tenant or lessee in the language used to negotiate the lease, sublease,
or rental contract or agreement and at the time and place it was executed.
The broker must abide by these requirements if the broker or salesperson
negotiated the transactions in non-English language, or provided the
translations. The broker or salesperson will not be required to provide the
documents in the non-English language if the negotiation was completed
through an interpreter provided by the consumer. This interpreter must be
18 years or older, understand English and the other language well {that
seems like a good idea ☺}, and must not be employed by or made
available through the broker or the broker’s agent.
Failure to comply with these provisions may allow the aggrieved person to
rescind the contract or agreement in a specified manner. Therefore, it is
important all brokers be aware that if they hire non-English speaking
brokers or salespersons to negotiate real estate mortgage loans in
Spanish, Chinese, Tagalog, Vietnamese, or Korean; then he or she would
be required to provide the Mortgage Loan Disclosure Statement to the
borrower in the language in which the loan was negotiated.
If a broker hires brokers or salespersons to negotiate rental or lease
agreements primarily in Spanish, Chinese, Tagalog, Vietnamese, or
Korean; then he or she must make certain the tenants or lessees are
provided with a copy of the rental or lease contracts or agreements which
have been translated into the languages in which they were negotiated.
Brokers and salespeople who provide these specified real estate services
and/or mortgage loan services to non-English speaking consumers should
carefully review and have a complete understanding of CC §1632.
CAR® offers a variety of multilingual resources to REALTORS® at CAR®’s site
(www.car.org). These resources, which are available in Chinese, Korean,
and Spanish, include: 1) Buyer’s and Seller’s Guide to California’s
Residential Purchase Agreement, 2) Arbitration for the Consumer, 3)
Mediation for the Consumer, 4) Liquidated Damages and Deposit
Forfeitures, and 5) Legal Q&As.
2.5.7.2
AGENTS HAVE OBLIGATIONS TO HONOR CLIENT CONFIDENCES
Often people tell their real estate agents things that they don’t want others
to know. These confidences may range from a price that a seller is willing
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to take to the fact that the principal has recently lost his job or that his wife
has contracted a serious illness.
What are the agent’s obligations in this regard? When we ask such a
question we can be asking about legal obligations or ethical obligations. In
this case, ethical obligations are both clearer and more stringent than those
that are spelled out in the law. Moreover, NAR®’s Code of Ethics spells out
obligations for its members in real estate-related situations.
First, it is relevant to ask, “What is confidential information?” In California,
you won’t find this defined or spelled out in the Civil Code. Although there
may be specific laws, both state and federal, that contain restrictions on
giving out someone’s social security number or medical records, there are
no general statutes dealing with the subject. At best, one can look for
precedent-setting cases and try to make inferences.
Suppose you tell me that you and your wife have filed for divorce and you
don’t want anyone to know about it. In one sense, it would seem too late
for that; the toothpaste is already out of the tube. The court filing is a
matter of public record; how can the information be confidential? In reality,
though, we know that the public record is accessible; it doesn’t mean that
many people have knowledge of what’s in it.
For the most part, information is confidential or to be treated as confidential
if the client says it is. When a seller tells his agent that he recently lost his
job, that doesn’t mean that no one knows of the fact. The people at the
former workplace know. Rather, if he wants the information to be
confidential, it means that he doesn’t want it to go beyond the people who
already know or who might come to know by virtue of their particular role.
At least he doesn’t want people to learn of it through his agent; he (the
seller) can still tell anyone he wants. But the agent can’t.
Agents have both a legal and an ethical duty to promote their clients’
interests. Presumably, releasing information that the client wants kept
confidential would be contrary to this duty. Most commonly, this has to do
with a concern that possession of the information might give someone else
a bargaining advantage but there could be other reasons as well.
How long does the duty to maintain confidentiality last? Normally, agency
obligations end when the agency is either terminated or its purpose is
accomplished. If I represent a seller, my agency obligations end when
escrow closes. (Although it may be good business practice and common
courtesy to continue to serve those interests for some period of time.)
However, for REALTORS® – those who are members of the national, state,
and local REALTOR® associations – that obligation extends somewhat
longer. Standard of Practice 1-9 of the REALTOR® Code says in part that
the obligation to preserve confidential information provided by their clients
“… continues after termination of agency relationships or any non-agency
relationships recognized by law.”
There is an important exception to the general principles we have
discussed that is spelled out in the REALTOR® Code of Ethics: “Information
concerning latent material defects is not considered confidential information
under the Code of Ethics.”
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In general, information is to be treated as confidential if the principal says
so. But there are limits. The principal can’t make an agent be party to a
cover-up just by insisting that something is confidential. For example, a
seller might say, “In a heavy rain the backyard floods and sometimes leaks
into the family room but I don’t want anyone to know. Keep this information
confidential.” No.
REALTORS® have an obligation to honor a principal’s confidences. But they
have other obligations too. Sometimes those will override the duty to
maintain confidentiality.
2.5.7.3
CONTRACT CLAUSES DON’T VOID BROKER RESPONSIBILITY
Many standard real estate contracts contain exculpatory clauses – clauses
that are designed to relieve a broker or agent from responsibility for one
thing or another. Typically, such sections or clauses may aim to (a) take
responsibility away from the broker for any claims or representations made
about the property, and to (b) place responsibility on the buyer to
investigate and/or verify for himself matters relating to the size, condition,
and suitability of the property to be purchased.
Do these sections work? Would they prevent a buyer from later
successfully bringing an action against a broker because he, the buyer, had
relied on false information or claims provided by the broker? Not in
California’s Fourth Appellate District they wouldn’t. The recent case of
Manderville v. PCG&S Group, Inc. is instructive in this regard.
The action arose out of the sale of a parcel of land located in the city of El
Cajon. The Mandervilles, along with their daughter and son-in-law, sought
to purchase a property on which they could both build homes. Their agent
found a multiple listing service advertisement (the term used by the court)
whose description stated in part, “All useable 2.62 acres county states 1
acre min. lot size could be split.”
You guessed it. After the close of escrow the Mandervilles hired a civil
engineer to process the application for a lot split only to learn that the
property could not be split and that it was zoned for only one dwelling unit.
Deposition testimony showed that the Mandervilles’ agent had called the
listing agent to verify that the lot could be split. There were differences in
their respective testimonies. However, the listing agent did acknowledge
that his source of information was only someone “from the County” whom
he could not identify and to whom he had spoken over the phone.
RR-1: Is a residential zone set
aside for homes outside the city.
Testimony also showed that the buyers had reviewed a disclosure package
that they received from the listing agent which showed that the property was
zoned “RR-1” and the minimum lot size was one acre. It also showed
that the property in question had a special general plan designator (one
which turned out to imply that it was “impact sensitive” and that only one
dwelling unit per four acres was permitted there.)
The trial court granted summary judgment on behalf of the defendants,
essentially dismissing the case. The defense argument rested primarily on
language in the CAR® standard form contract that had been used in the
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sale. Paragraph 7 of that contract stated that “... buyers had the ‘right’ to
conduct inspections and investigations” and they were strongly advised “to
investigate the condition and suitability of all aspects of the property, as
well as all matters affecting the value or desirability of the property,
including ordinances affecting the future development and zoning of the
property.” That paragraph also indicated that “Buyers and Sellers were
aware that Brokers did not guarantee and in no way assumed responsibility
for the ‘condition’ of the property.”
On appeal, though, the summary judgment was rejected and the case sent
back for trial. The appellate court held “that neither the exculpatory clauses
in the CAR® form agreement, nor Buyers’ alleged lack of due diligence …
bars Buyers’ cause of action against Brokers for intentional
misrepresentation … .”
Whether or not there was intentional misrepresentation depends on, among
other things, two issues: (1) did the defendant know that the representation
was false when the defendant made it or did the defendant make the
representation recklessly and without regard for its truth, and (2) did the
plaintiff reasonably rely on the defendant’s representation? Both of those
issues are matters of fact which the appellate court said needed to be tried.
The court made two main points. The first is that the buyers did not have a
contractual duty to make a thorough and complete investigation. They only
had the right to do so. So it may have been reasonable for them to rely on
the listing agent’s representation.
CC §1668 reads “All contracts
which have for their object,
directly or indirectly, to exempt
any one from responsibility for his
own fraud, or willful injury to the
person or property of another, or
violation of law, whether willful or
negligent, are against the policy of
the law.”
Secondly, CC §1668 , as well as a number of cited cases, establishes that
“a party to a contract is precluded … from contracting away his or her
liability for fraud or deceit.”
2.5.7.4
AGENCY RELATIONSHIPS NEED TO BE CLEAR
Suppose that the listing agent had committed fraud (I am not saying he did),
he couldn’t then depend on an exculpatory clause in the contract to relieve
him of responsibility for that act. The court is not going to put up with that
idea.
Sometimes people expect more of a real estate agent than they ought to.
This is not just a comment about agents’ abilities; it also has to do with their
allegiances. It is an issue of agency.
There are two common instances where misperceptions may occur. One is
where an unrepresented buyer engages an agent of the seller. The other is
when an unrepresented seller is approached by an agent of a buyer.
Typically, the former might occur when a buyer comes into an open house.
He or she shows an interest in the property; discusses it with the listing
agent who is holding the open house; and then writes up an offer with that
agent. The buyer might even confide in the agent that he or she would be
willing to go higher, but prefers to try for a lower price. This all might take
place with the buyer assuming that the agent was working on his behalf as
well as that of the seller. But, in fact, it might be the case that the agent
was representing the seller exclusively.
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Conversely, there is the not-uncommon situation of an agent, who
represents a buyer, bringing an offer to a For Sale by Owner. The offer
might include a provision – agreeable to the seller – that the agent will
receive a commission from the proceeds of the sale. In this situation, the
seller – especially because he has agreed to a commission – might think
that the agent will be looking out for his interests. Not necessarily so.
At this point many readers may be protesting, “That couldn’t happen here,
in our state, because we have laws requiring the disclosure of agency
relationships.” A point well taken, to be sure. Although it might be
something like saying, “No one would drive 80 miles per hour in this state,
because we have a speed limit lower than that.” Consider the following
from REALTOR®Magazine Online:
Despite nearly two decades of effort to clarify agency laws at the
state level, agency issues continue to create risk for sales
practitioners.
According to the NAR® 2009 Legal Scan, agency issues … are
among the biggest sources of legal disputes involving real estate
professionals and are expected to become more prevalent in the
courts in the next two years.
The report also cited problems with disclosure of agency
relationship. Practitioners are supposed to disclose agency
relationships at their first substantive contact with customers, but the
disclosure is ‘often overlooked and not sufficiently explained to
prospects,’ one respondent said.
At the statutory level, states continue to heavily regulate agency
relationships. The Legal Scan identifies 144 agency-related
statutes enacted in the last two years, by far the highest number
among all legal topics and about the same number as in the 2007
report. That suggests a persistent level of uncertainty about
requirements.
California, which has agency disclosure laws such as those mentioned in
the Legal Scan, allows for dual agency (which must, of course, be
disclosed to all parties). But not everyone wants to be a dual agent. Thus
it is that the CAR® produces two forms for possible use: one is the Buyer
Non-Agency Agreement; the other is the Seller Non-Agency Agreement.
The Buyer version contains the following language:
Listing Broker does NOT represent Buyer and Listing Broker will
NOT be Buyer’s agent during any negotiation or transaction that
results between Buyer and Seller regarding the Property. All acts of
Listing Broker, even those that assist Buyer in entering into a
transaction or performing or completing any of Buyer’s contractual
or legal obligations, are for the benefit of Seller exclusively. Any
information that Buyer reveals to Listing Broker may be conveyed to
Seller.
The Seller Non-Agency Agreement contains similar language, only with the
shoe on the other foot, so to speak.
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The importance of such forms was illustrated recently in the case of Miller
v. London Properties heard in the Fifth Appellate District of California’s
Court of Appeal. The Millers had sought to purchase a business listed by
Agent Donna Pride of London Properties. Pride told the Millers that she
was willing to assist them in a non-agency capacity by filling out a standard
form purchase agreement. But she emphasized that she was the exclusive
agent of the seller. She gave them all the required agency disclosure
forms, and she even had them sign a company-generated form similar to
the CAR® Buyer Non-Agency Agreement.
Later, when things went sour, the Millers sued Pride and London
Properties. Among other things, they alleged breach of fiduciary duty
because Pride had not advised them of the significance of the wording in a
covenant not to compete. The trial court concluded that there was no
agency relationship and therefore no fiduciary duty.
The appellate court upheld the trial court’s decision. Moreover, it was
unmoved by the Miller’s argument that the subsequent conduct of the
parties was sufficient to create an agency relationship, notwithstanding the
disclosure forms. (On a couple of occasions Pride had acted as an
intermediary between the Millers and the Seller.)
The Miller v. London Properties opinion is unpublished and therefore does
not stand as a precedent. Nonetheless, it is refreshing to see a court
uphold a broker’s clearly-stated rejection of an agency relationship.
2.6
HOME OWNERSHIP
2.6.1
HOME IMPROVEMENT AND MAINTENANCE
2.6.1.1
REAL DEAL: FAUX WOOD FLOORING
by Broderick Perkins for Realty Times, July 19, 2006
Here’s a report that could floor you.
If you want your floor to keep a showroom-new look for as long as possible,
buy the phony stuff.
Some brands of plastic laminates, vinyl and linoleum last twice as long as
real, solid hardwood before they begin to show wear.
Of course, you can’t sand or refinish most simulated wood products and
vinyl and linoleum with wood grain patterns still sound so 1970’s kitschy,
but some of those laminates can really give you more bang for your buck.
Not only do they last longer, they also cost less.
Speeding up the effects of foot traffic, pebble scratching, plate dropping,
juice splattering, and solar searing to test the endurance of more than 30
varieties of flooring, trusted independent tester and grader of consumer
goods and services, Consumer Reports top-rated a plastic laminate flooring
product.
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Plastic laminates ($4 to $8 per square foot, installed) are the fastestgrowing alternatives to wood, because the wood image beneath a clear
protective layer, over dense fiberboard just sounds chintzy. Among other
wood floor products, it most looks like the real thing, it’s easier to install than
real wood and it requires the same general level of care.
On the other hand, because it’s designed in planks that simulate a group of
boards, replacing worn or damaged sections isn’t as easy as with real
wood. What’s more, the laminate’s image of wood grain is striking but the
repetitive pattern is a dead giveaway it’s not the real thing.
Consumer Reports also found:
Water stains on real wood floor.
Solid wood ($7 to $12 per square foot, installed) shines with its
natural warmth. It can be sanded and refinished again and again.
On the down side, it can discolor and wear quickly and dent
(especially softer woods), it’s harder to install and you typically must
only install real wood floors in dry areas.
Another variety of faux wood flooring didn’t fare as well. At $5 to
$10 per square foot installed, engineered-wood flooring – wood
veneer over plywood – showed wear, especially abrasive wear, far
sooner than solid wood. Some brands can be sanded once, but
that’s it.
Bamboo Flooring
Those looking for “green” floors – “green”, as in “renewable
materials” – often choose bamboo , but if it’s installed where
there’s lots of natural light expect it to darken quickly.
Durability varied widely with linoleum ($4 to $9 per square foot,
installed) products, a concoction of linseed oil and wood. Two
tested brands warded off dents and sunlight well, but scratches
easily marred one and wear wore down the other.
Linoleum Flooring
Tile Flooring
Another product from the natural category, tile ($8 to $15 per
square foot, installed) tends to resist wear, moisture, scratches,
dents, and stains. But dropped cups and dishes frequently don’t
survive the hard, cold surface. Installation is relatively more difficult
for a professional look.
Vinyl (at $3 to $7 per square foot, installed) is a plastic product
that can be designed to simulate stone, tile and grout, and oak.
Some come with a cushy-to-the-step feel. The best resists wear and
scratches better than standard quality vinyl but even two high-priced
models easily suffered scratches and stains.
A sample of different vinyl tiles.
Along with recommendations and information on proper installation, which
are available online and off only to subscribers and those who purchase the
magazine’s August edition, the report also offers more details on flooring
types which anyone can peruse.
2.6.1.2
WHO SAYS CONCRETE HAS TO BE UGLY AND BORING?
by Phoebe Chongchua for Realty Times, August 21, 2006
Page 249
It may not sound like the most decorative alternative but concrete is
becoming a popular choice for homeowners hoping to cut costs while still
enjoying pleasing landscape. It is not, though, just any ordinary concrete
that’s being poured. Decorative/concrete overlay, concrete stamping, and
acid staining are alternatives to the use of natural stones.
While the concept isn’t new, it is increasingly becoming more popular due to
the expensive cost of real stone. The look of concrete stamping, decorative
overlay, and acid staining can mirror stone so convincingly that you might
not know one of these alternative methods of décor was used. However, if
you have visited a theme park then it’s likely that you have seen and walked
on concrete stamping or decorative overlay and acid staining, perhaps,
thinking it was real stone.
Stamped Concrete
These alternative methods transform utilitarian bland concrete into a work of
art . The methods are used frequently in large public places and also in
homes as a way to perk up otherwise drab concrete by adding texture and
color.
The Style & Advantage
There are numerous patterns and colors that can be used to make concrete
look like cobblestone, ceramic tile, a wooden boardwalk, brick, flagstone,
and more.
“It’s less expensive. It’s more flexible … it can flex with the temperature as
the concrete is flexing. Oftentimes with stone it is going to flex at a different
rate than the grout and then you end up having little hairline cracks around
your stone and over a period of time water will get in there and then it will
start to delaminate the stones,” says Ken Tyson, licensed contractor and
president of Tyson’s Inc. His company in Hawaii installs decorative overlay
as well as does concrete leveling and repairs.
Concrete Overlay
Concrete overlay is used on existing concrete to make it look new and
fresh. Tyson says, “We’re just putting down a quarter inch, sometimes even
less, of a polymer-modified concrete.”
Concrete Overlay
To create the effect, a template is used. The concrete is first cleaned with a
pressure washer. The area is then inspected. Hairline cracks can be filled
with the overlay, but sizable cracks should be repaired first. A base coat is
applied along with adhesive-backed paper stencils, “then we would trowel
on or spray on, whichever technique we wanted to achieve a stone-like
finish, we would do that over the top of the stencils in multiple colors, giving
you random colors just as you would have with real stone.”
After the area dries the stencils are removed, revealing grout lines and a
faux-stone finish.
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Decorative Concrete
Stamped or decorative concrete can also be used when the new concrete
is being poured to create the same effect as the concrete overlay.
Decorative Concrete
“The [gray] concrete is formed and poured like a normal concrete slab would
be,” says Tyson. There are several techniques says Tyson. He describes
one version. A color hardener powder is applied to the gray concrete using
a trowel to make the surface even harder and to transform the grey concrete
to a desirable color. The concrete cannot be stamped until it is set because
the concrete will need to be walked on in order to stamp it. Concrete
patterns are stamped using various stamp mats selected by the
homeowner.
“The stamp mats are in a variety of sizes from 2 by 2 and 60 by 60 and
those will have the imprint of the particular pattern that [the homeowner]
has chosen.” says Tyson.
The next stage of the process utilizes a colored-powered release agent that
is applied to the wet concrete so that when the stamp mat is used the
patterns on the mat drive the color into the wet concrete without sticking to
the mat. The next day the stamped colored concrete should be sealed.
Acid Staining
Acid staining is yet another appealing look that is often combined with
concrete stamping. It isn’t painting of the new or existing concrete slab,
instead it is an actual coloring process. The color is the result of a reaction
that occurs when the solution (which consists of water, acid, and inorganic
salts) is combined with the minerals that are already present in the concrete.
While this décor style is intriguing, a word of caution. Each slab of concrete
can provoke a different outcome, so there can be great variations in
coloration patterns.
With alternatives like these, concrete never has to be boring.
2.6.1.3
NEW TANKLESS HOT WATER HEATERS
by Stuart Lieberman for Realty Times, March 1, 2007
Hot water heaters don’t last forever. Ten years is about when you have to
consider replacing them. In 15 years, a replacement is generally past due.
The good news is that there are newer hot water heater technologies to
consider. The newer technologies are often more efficient, cheaper to
operate, and better for the environment.
First, let’s consider my favorite: the tankless heaters. They are better for
the environment because they heat water only upon demand. There is no
waste with this technology. And because they don’t store hot water
awaiting use, tankless heaters save the energy needed to maintain stored
water at the desirable temperature.
Tankless heaters only heat water upon demand. When the tap is turned
on, water is heated in the unit and then delivered to the user.
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I just got a tankless heater and I love it – I never have to take a cold shower
anymore. But there is a small downside. It some times takes a full minute
before the faucet issues hot water.
They are either gas or electric powered. Traditionally, but perhaps less so
today, gas has been a cheaper choice. And gas seems to heat the water
more efficiently.
What’s the downside? Capacity. Because the tankless unit is producing
heated water only on demand, there is a limit to the amount of water that
can be produced per minute.
Modern units seem to range between two to five gallons per minute. Which
is great for a small household but may cause a problem for a larger
household with a presumably higher demand.
Capacity limits become more critical when two applications occur at the
same time. For example, there may be a capacity problem if one person
washes dishes while someone else is taking a shower.
Tankless Water Heater
A suggested solution is to install more than one tankless water heater to
supply the entire house. Or, you can install a tankless heater to support
particular uses – such as one for your washing machine, another for your
shower, etc.
This last option might be optimal because the heaters can be sized per
application and because capacity issues disappear.
Of course more units mean more upfront costs. Not to mention more
maintenance costs.
Also, there is a potential problem concerning pilot lights for gas powered
tankless systems. The gas required to maintain a pilot light may eat away
at the energy savings by going tankless in the first place. Some units have
pilot ignitions that solve this problem.
There are two other technologies that you should also consider when
purchasing a water heater. Tankless coil technology is powered by the
heater used to make your house warm. It is most efficient during the
months that you use your home furnace on a regular basis.
Likewise, indirect water heaters are also powered by your home’s heating
furnace but rely on a tank. These systems are usually sold as integrated
appliances but retrofits are available.
The Internet has many government sources which will help you examine
your options. When choosing your system keep in mind the kinds of things
you always need to keep in mind – your own use needs, the reputation of
the manufacturer, the dealer and the installer, and warranty issues.
Referrals from people you know and trust are always a good idea. One
thing that is for sure – these aren’t your father’s hot water heaters anymore.
2.6.1.4
WHEN HOUSES REACH THE BIG FIVE-O
by Steve Rodriguez for Realty Times, August 13, 2007
An older home is a wonderful thing. But alongside the charm and character
that comes with age and maturity you may also find a host of conditions not
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found in houses of modern construction, such as inadequate wiring,
cracked foundations, clogged pipes, and deteriorating roofs.
Older homes should not be avoided but they do require careful inspection
because building codes were much different 50 years ago than they are
today and some homes may have been built without careful review by
municipal officials.
It takes a trained eye to spot the special problems of older homes,
especially those that have undergone renovations and remodeling. Homes
dating as far back as 1900 are still standing but the construction materials
are reaching their natural lifespan and you can be sure neither the
materials used nor the methods employed are consistent with current
standards.
A professional home inspection for older homes is a good idea. Some
problems just waiting to happen are not obvious without expert probing.
Where additions or major renovations have occurred, it’s important to
determine if the foundation is capable of carrying the additional load.
Over the decades various remodeling efforts or upgrades such as new
bathrooms or kitchens will have masked underlying problems. For
instance, a spiffy new sink connected to a pipe that is decades-old is
susceptible to blockage just a few feet beyond its gleaming surface. Let’s
look at some common problem areas:
Check the Basement
These were called cellars when the home was built and they were not
meant to be lived in. The concept of a recreation room was unheard of and
television hadn’t even been invented!
The basement may have a solid feel thanks to a modern cosmetic finish but
who knows what lurks behind the paneling? Faults and failures here can
mean expensive repairs or higher insurance rates.
Decades of exposure to poor drainage or lack of damp-proofing can cause
serious deterioration. I turn my nose on when I walk downstairs.
When a room has been damp for many years, there is usually a musty odor
that lets you know, even in mid-summer.
Check the Roof
The roof structure is also a potential problem after half a
century of cold winters and hot summers, no matter how
many times it has been re-shingled. Chimney deterioration
is common, the flashing materials may have rusted, the
wood fascia {the board the gutter hangs off} may have
rotted beneath those repeated layers of paint, or the roofline
itself may be sagging.
Check the Ceiling Insulation
Ceiling insulation is also a common problem in older homes. Over the
decades residents may have tried to cut heating costs by applying new
insulation right on top of combustible materials such as sawdust, shredded
paper, or wood shavings. Lack of ventilation is also a problem because in
decades past the importance of proper air flow was not appreciated.
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Heating Systems
Hot air and hot water heating systems that rely on gravity and low pressure
steam heating systems are still quite common. Not only are they costly to
operate, their components are often at or beyond their life expectancy.
Amp Service: The amount of
current that can be drawn before
the home’s circuit breaker trips.
Most modern homes have 200
amp service.
Electrical System
The electrical system offers a special challenge since few older homes have
sufficient electrical outlets for today’s high-tech families. Many still have 60
amp service and some still have ungrounded knob and tube wiring, which is
a shock and fire hazard.
Plumbing
Plumbing is a further concern because cast iron drainage pipes rust,
galvanized steel water lines corrode, and vent pipes get plugged up over
the years. It’s not uncommon in older homes to find copper pipes in
exposed areas connected to galvanized pipes behind the walls.
So there you have it. The need-to-know information that will give you the
knowledge and confidence you need to expertly tackle the complex issues
that come along with the character and charm of these rewarding homes.
Now go get ’em!
2.6.1.5
WHAT DO I NEED TO KNOW ABOUT THE PLUMBING?
by Brett Kayzar for Realty Times, March 20, 2008
As a home inspector I am often asked, “What do I need to know about the
plumbing?” The answer can be rather long and rather complex, but in the
simplest of terms, the plumbing of a home consists of two major parts:
Supply System – the plumbing that brings fresh water into the
home, a connection of sealed pipe sections and valves under
pressure, which are intended to bring a continuous flow upon
demand.
Drainage System – the plumbing that safely removes used water
and waste products from within the home through a series of vented
pipe sections which flow downward to allow discharge via gravity.
Well, that is about as simple as the explanation gets, water in,
and waste out. But there is much more to the story, such as the
types of piping used, “are the pipes made of plastic, copper, or
galvanized steel?”
And, “what types of connectors are used; brass fittings,
soldered connectors, or adhesive materials?” And then, “what
other types of fixtures or accessories are found within the
system; are there well pumps, storage tanks, pressure
regulators, treatment systems, water heaters, and so on?”
And, “what types of traps or clean-outs are provided for the
toilets, sinks, and tub/showers?” Wow, so many things to cover
and so many locations for possible leaks. After all, plumbing
systems in good service are those that deliver the inbound
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A typical home plumbing system.
Corrosion on Galvanized Pipe
potable water upon demand and then take the contaminated
waste water outbound and without any leakage along the way!
Let’s talk about the supply piping first. Prior to the early 1960’s, most
homes built in the last century used inbound water pipes made of
galvanized steel, galvanizing being a process of coating raw steel pipes
through a corrosion resistant chemical process. Galvanizing worked well
but typically this coating material began to breakdown over time which then
left the steel piping exposed to water which in turn began the process of
decay .
Usually galvanized piping had a life expectancy of approximately 40 years,
maybe a bit longer depending upon their use, maintenance, or original
installation methods. If the home you are purchasing has galvanized
piping, it may be getting up in age and therefore this system may need to
be replaced at some future point in time. Signs of corrosion or visible signs
of rust detected during an inspection may suggest that the system has
areas of decay, and that further evaluation may be advised.
The Uniform Plumbing Code is
a model code developed by the
International Association of
Plumbing and Mechanical
Officials to govern the installation
and inspection of plumbing
systems.
Some other older supply systems to watch out for are various forms of
flexible plastics. Only a few types of plastic piping are recommended for
use within supply systems by the International Residential Code and the
Uniform Plumbing Code , and these uses are very specific in nature. If
you have any plastic supply piping, this should be given special attention as
these are not common and some plastic systems have been prone to have
problems. Expert advice should be sought under these conditions.
The International Residential Code creates minimum regulations for oneand two-family dwellings of three stories or less. It is a product of the
International Code Council, a membership association dedicated to building
safety, fire prevention, and energy efficiency. Most U.S. cities, counties,
and states have adopted this code.
Copper Plumbing Copper Pipe
Fittings
Now fast forward in time just a bit. After the 1960’s construction methods
began using copper piping almost exclusively. With the exception of some
weaker versions of the first copper pipes (there are various grades K,L,M),
extruded copper plumbing has become the gold standard. Almost all
supply piping installed today in residential construction is made of copper.
This type of material is largely resistant to corrosion from water, is easier to
install and/or repair than steel products, and in most cases copper has
become the most cost effective material overall.
This dielectric fitting didn’t provide enough separation
between the copper and steel pipes resulting in corrosion.
The only concerns with copper piping are with respect to its
softer material which is subject to puncture if struck, by a
nail for example, or it may rupture if bent by accident or not
supported properly. Copper piping is also subject to
galvanic oxidization if connected to galvanized steel piping
. Meaning that if a steel connector or section of
galvanized steel pipe is attached to a copper pipe, a
corrosive reaction develops slowly, usually at the point
where the two sections meet.
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And remember, corrosion then ultimately leads to decay and leakage. If
you have copper piping, keep the entire system made of copper and all will
be fine (brass fittings may also be used with copper piping as an alternative
material). There are special dielectric connectors that may also be used if
a steel pipe is to be connected to a copper pipe.
Okay, we are getting a bit beyond the simple explanations we promised.
Just remember:
copper = good, this is the most common material used today
galvanized steel = fine, but regular inspection advised due to older
materials
plastic = okay, but for specific uses only in supply systems
Now before we leave the supply piping discussion we need to revisit “what
does corrosion on piping really mean?” Corrosion is a process whereby
external materials or very small amounts of water are making their way to
the surface. Put another way, this could mean that the threads or
connections where two sections of piping come together are not completely
sealed tight and therefore tiny amounts of water can get through any small
gaps, thus making their way to the outside of the connection. Remember
these supply water pipes are under pressure, so any weakness will give
water a place to escape.
Now in this example of threaded piping, if the threads are not damaged,
cleaning them with a wire brush and then adding Teflon-tape or other piping
compounds to the threads might be all that is required to stop further
corrosion or leakage. Repairs are not always this simple, but the point here
is that corrosion is the first indication that something is not right, so any
mention of corrosion on pipes/connectors or fixtures should be taken
seriously as this is the plumbing systems “early warning” that repairs are
needed. Left unattended, corrosion becomes a leak, and although this
process may take months or weeks before a leak appears, it WILL lead to a
leak at some point in time. So like most things, the sooner the problem is
addressed the better!
Clay Tile Pipe
Cast Iron Drain Line
Now let us talk about the waste or outbound drainage plumbing systems.
Before the 1960’s most residential applications were of clay tiles or cast
iron piping (and a few less common uses of lead, brass, etc.). Clay tiles
didn’t last very long, only 25-40 years typically, so any clay piping still in use
would be suspect to cracks and leakage. Cast iron on the other hand could
last up to 80-100 years by some estimates, but also noting that there have
been reports of cast piping failures as early as 40-60 years of use.
Since most of a home’s waste plumbing may be buried under a floor/slab or
within the soil, it is hard to really know the true condition of the entire waste
system. That being said, an inspection of the visible sections is a great
place to start and this visual inspection can provide an indication of how the
rest of the system may be functioning. Additionally, in the case of
concealed areas within the soil for example, visual inspections for wet areas
can also be an indication of an active leak.
Or if the water flow out from toilets/tub/showers appears to be slower than
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A plumbing contractors license is
required in California for projects
that exceed $500 (details).
usual, this could be an indication of a break or blockages within the waste
lines. If problems such as these are evident, further evaluation by a
licensed plumber might be recommended, whereby these professionals
could send a camera scope through the waste lines to visually inspect then
from the inside out. As previously stated, the aim of any initial inspection is
to detect possible warning signs, to give a general assessment, and then to
recommend next steps accordingly.
If we look beyond early waste systems of clay tiles and cast iron, we move
to today’s almost exclusive use of ABS plastic piping (AcrylonitrileButadiene-Styrene schedule 40, typically black in color). Okay, that was a
mouthful, but one word to remember: “Plastics.”
Plastic Piping
Unlike supply systems, for waste systems the use of plastics has appeared
to have been a huge success! ABS plastic is smooth (unlike the sand-paper
texture of cast iron) so clogs due to paper getting caught inside the waste
lines have been drastically reduced. Plastic is also rigid {did he mean
“pliant?”}, meaning that unlike clay pipes that crack if struck or squeezed by
tree roots, plastic piping is more likely to withstand these external forces.
And did we mention that installing or repairing ABS plastic waste lines is
much easier and less costly than the other materials?
Now no discussion of waste systems would be complete without a brief
mention of the many connections and fixtures used. Remember that every
connecting point is an opportunity for leaks. Every toilet, sink, shower, and
water-using appliance should be thoroughly checked. This starts with a
visual inspection to determine if the parts were assembled properly. Then
further assessments are taken to look for corrosion, stains, and leaks …
these steps all begin the process of “early warning” and detection! And
then of course, running water through the system can be a final measure of
the waste system’s current condition.
Curly fixing leaks.
A standard inspection process may look at literally hundreds of connection
points in an average home. And in addition to determining the types of
materials installed, the inspection process will try to weed-out any potential
problem areas. Remember, no matter what type of system you have, the
key is to keep a watch out for the signs of corrosion or leakage! Plumbing
system problems can be serious and costly concerns but the home
inspection can help make the process of detection and analysis a little less
of a concern.
And that completes today’s course of Plumbing 101.
2.6.1.6
ROOFING PROJECTS REQUIRE DUE DILIGENCE
by Phoebe Chongchua for Realty Times, April 11, 2008
As the weather improves, homeowners start to tackle a major home
improvement project: fixing or replacing their roof. Often this is a job that
homeowners delay doing because it can be a pricey, tedious process.
“Some consumers are on top of it and start looking at new roofs well before
the life span of their current roof runs out,” says Steven James, VP
Business Development for Eagle Ridge Construction & Roofing.
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But that’s not typical. Generally a problem such as a leak prompts
homeowners to finally get around to checking out what’s going on atop their
home. Part of the reason homeowners procrastinate is because finding the
right contractor for the job is a difficult process.
“Year after year, the Better Business Bureau consistently ranks roofing
contractors as one of the top 20 most-complained-about businesses,” says
James.
In fact, in 2006, the latest statistics currently available reveal that the Better
Business Bureau received 8,089 complaints against roofing contractors
nationwide. “Out of 2,900 business categories, roofing contractors ranked
16th on the list of the most-complained-about businesses,” says James.
But don’t let that scare you into putting off your roofing job. Instead, use
these helpful tips to select the best contractor for the job. At the top of the
tip list, don’t let price drive the deal.
Cheaper generally means compromise. “There’s always going to be a
lower price and usually the lower price reflects a shortcoming in the
contractors insurance level because there are different insurance levels
that they can have,” says James. For instance, James says that general
liability insurance isn’t required by the state so some contractors don’t carry
it. That can pose a real risk to the homeowner because if something goes
wrong, the homeowner can end up being liable for any damage during the
course of the job.
He adds that “workers’ compensation is required by the state by all
contractors but some contractors use [Employee Leasing Plans] (which is
kind of a way of getting around getting workers’ comp insurance because
the person who you lease the employees from is responsible for that), so
you need to be cautious about the insurance that a contractor carries.”
Compare apples to apples. “Generally a contractor will push a name-brand
shingle,” says James. But he says contractors may try to cut corners in
other less obvious ways. James says that various less visible products that
contractors use can be inferior, generic, or even second-hand materials.
Make sure you compare apples to apples when deciding which contractor
to use and be certain to inquire about all of the materials that are being
used in your roofing project.
Find out how long a contractor has been in business. It’s commonly known
that most new businesses, regardless of the industry, fail within the first
three to five years. “However, contractors and roofers generally fail at an
even higher rate, so you have to consider that the warranty that you get
from the contractor will only be as good as the contractors if they’re still
around. If they’re not still around, obviously the warranty is worthless,”
explains James.
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Use a certified expert. “Most of the name-brand shingles will certify
contractors to install shingles according to their own specifications,” says
James. James adds that consumers should look for contractors who are
certified by the shingle companies as “opposed to contractors who do use
the name brand but are not necessarily certified by the manufacturer to
install the shingle.” An additional benefit to using certified contractors is that
they are often able to offer extended warranties that are backed by the
manufacturer.
“Check your timing for your roofing project. Delays are common but a lot of
people don’t realize, especially during the winter months, that they’re
related to the weather. Any time you have even a chance of rain that
means it’s really risky to try to put a roof on and that’s one thing consumers
should be aware of,” says James. He says often consumers see that it’s
currently sunny out and so they wonder why their roof isn’t getting done. It
could mean that the roofing company realizes that even a 20 percent
chance of light showers could ruin the roofing project so the company is
putting it off until better, safer weather conditions are predicted. “There are
horror stories where there is a low chance of rain and so the roof is taken
off and then the rain comes in and the house gets destroyed,” says James.
Search for a contractor who is a member of industry trade associations.
The National Roofing Contractors Association is one industry group that
helps to educate and keep contractors informed about industry standards
and changes. “The contractor receives unbiased product knowledge from
the association as opposed to just receiving sales-type material from the
manufacturer. So it’s a second source of information about products and
[it's coming from] a more neutral source,” says James. The associations
also provide ongoing safety training material for contractors as well as
information to keep contractors informed about changing rules and
regulations for construction.
Consider the use of solar shingles
(Wiki’s article on same.)
2.6.1.7
Remember, what’s atop your home protects all that’s beneath it, so making
sure you do your due diligence to hire the right contractor for the job can be
the difference between a tedious or smoothly-run and completed roofing
project.
WHAT’S HOT & WHAT’S NOT IN BATHROOM REDESIGN
by Peter L. Mosca for Realty Times, July 14, 2008
While real estate markets are cyclical, features a potential home buyer
looks for in her home almost always seems to start in the bathroom,
according to NAR®’s annual Cost vs. Value Report, published each year in
conjunction with Remodeling magazine. In fact, in NAR®’s 2007 report, it
showed an upscale bathroom remodel recouped 93.2% of the costs and a
bathroom addition: midrange at 86.4%; an upscale remodel 85.8%.
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“Knowing what’s in and what’s out in bathroom design is important for
homeowners deciding just where to spend their makeover dollars,”
explained celebrity interior designer Will Smith . “I suggest they look at
four key areas: the mirror, paint, hardware, and lighting. Each can be easily
and inexpensively updated to provide a new, modern look for the bathroom.”
Smith, who is known for creating high-end looks for less, shares his tips for
making over a bathroom on a budget – without sacrificing style:
Will Smith
Bathroom Mirror
What’s Out: Unframed mirrors are a thing of the past.
What’s In: A frame completes the mirror and gives a bathroom a finished,
updated look. A good tip for selecting a frame is to think about what you’d
frame a piece of artwork in for the room. The mirror is the focal point in the
bathroom and can make a real statement with the right frame.
Paint
What’s Out: Paint is never out. It is a tried and true way to make a big
impact with little cost. Colors do change though: you’ll want to stay away
from mauves and pinks.
What’s In: Create a spa-like setting with paints in beige and pale tones.
Some popular colors are chocolate, aqua, olive, and golds. When choosing
color, remember the more contrast, the more “POP.”
Hardware
What’s Out: Mismatched hardware gives the room an uncoordinated feel.
Brass finishes also add to a dated look.
What’s In: Choose brushed nickel, pewter, antique, or oil-rubbed bronze
finishes that coordinate with the lighting and fixtures, bath bars, knobs,
pulls, switches and receptacle covers. These quick fixes pull the room
together with one modern, cohesive look.
Lighting
What’s Out: Take down that bright Hollywood lighting that casts a harsh
light.
What’s In: Go with a fixture that adds beauty and soft lighting with shades
or sconces. They can run above your mirror or flank it on each side. And
remember, these accent your room’s greatest focal point so be sure to
select a style that is right for you and makes a statement in the room.
“You don’t need to do a full scale renovation to get the look of an updated
bath,” added Smith. “Some strategic and cost-effective changes can go a
long way to giving you the look you desire.”
2.6.1.8
LOVE THE HOUSE, HATE THE TRAFFIC NOISE – THERE IS HOPE!
by Phoebe Chongchua for Realty Times, July 18, 2008
Page 260
Depending on the location, whether you’re shopping for a new home or
trying to sell your current residence, one of the biggest challenges is trying
to reduce street noise.
Tony Sola, founder of Acoustics.com cautions homeowners and buyers
about too high expectations when it comes to reducing traffic noise.
“Too many times I have seen homeowners try to do something about the
noise by adding another layer of drywall, or something to the wall itself. It’s
not minimal return, it’s zero return. Unless you control the weak point, that
does nothing,” says Sola.
Sola says there are some cases where the wall might be the weak point but
he says usually that’s just one percent of the time. Generally the windows
are the weakest noise link.
So, if you’ve fallen in love with a home that’s perfect for you but butting up a
little close to a busy road, there are options to help make the traffic less
noticeable.
Starting with the interior of the house, the first area to listen closely to are
the windows. They can tend to let in a significant amount of noise.
“The sound almost always goes through the window and doing anything at
all to the walls will be pointless until you have fixed the noise that comes
through the window,” says Sola.
Windows have a Sound Transmission Class (STC) rating. The higher the
rating the less outside noise you should hear inside the home. A typical
single-pane window only has a 22-25 STC rating whereas a dual-pane
window might have an STC rating of 27-32. There are also specialty
windows with even higher STC ratings available.
Choosing the right STC rating depends on what you’re planning to do.
“If you’re looking at an STC 30 window versus an STC 33 window, you’re
not going to notice a huge difference in that but it might be worth it to you, if
they’re about the same price. But if you’re looking at replacing windows
and you’re planning to go from an STC 30 to an STC 33, that’s a lot of work
to get virtually little improvement. If you can get a five or six decibel
difference, then that can start to make a noticeable change,” explains Sola.
Keeping sound from coming into your home is usually only part of the
solution. Many people want to enjoy a traffic-noise-free backyard. This can
be a little more complicated but not impossible.
“One of the first things you would look at is the barrier. If you’ve got a view
wall or wrought iron fence that’s not going to block anything, or if you have
large oleander bushes, that might block the view but it doesn’t block the
sound at all,” says Sola.
Instead he says a solid wall that doesn’t have gaps in it will help a little.
“Auto noise comes from the tires. So to control auto noise the wall will work
pretty well because the source is really low – it’s at ground level but truck
noise – the medium trucks or the semi truck – comes from about eight feet
off the ground, so even if you build a six, seven, or eight-foot wall, that
won’t help much,” says Sola.
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However, if you couple a barrier wall with a noise-masking system such as a
water feature then you can virtually wash away the traffic sounds.
“A water feature, if done right, can work very well,” says Sola.
“You wouldn’t want a water feature that’s just trickling water. You would
want something more substantial that does have a noise level to it and more
of a broad band noise,” says Sola.
He says the problem with water features is they tend to be very localized.
Sola says he’s been to some homes where the homeowner placed one
water feature in the backyard and it drowned out the traffic noise in that one
area of the yard but the street noise could be heard from other parts of the
backyard. He says that’s when a couple of fountains might need to be used.
Getting creative is the key. Working with a sound acoustic expert and
landscaper can result in a beautifully designed outdoor area that doesn’t
reveal any sign of the chaotic hustle and bustle of the nearby road.
2.6.1.9
POP OFF POPCORN CEILINGS
by Phoebe Chongchua for Realty Times, July 25th 2008
Popcorn and a good movie, popcorn while sitting alongside a campfire, and
popcorn on a Christmas tree are very appetizing but, these days, popcorn
ceilings aren’t.
“It’s dingy, if it’s not painted it fades and it can get stained easily and
especially if you have any water damage, it can start flaking off; it attracts
cobwebs, dirt, and soot, and it’s just one of the ugliest things I’ve ever seen,”
says Jim McCue owner of Professional Drywall Services.
Popcorn Ceiling
If you’re preparing your home to sell and it has popcorn ceilings – the mark
of an older home – you’d be wise to consider getting an estimate to have it
removed before putting your home on the market.
“I think doing the popcorn removal is one of the best improvements you can
do to an older home,” says McCue.
“The preparation is key because so many people think that it’s going to be
this totally dirty, filthy, dusty, messy project that’s going to last three
weeks,” says McCue.
But he says that’s not the case. “With plastic down and plastic on the walls
and protecting any furniture, it’s really not that messy and dirty,” says
McCue. He adds that the project debris can be contained to a particular
area while the ceiling is being worked on.
Pro-Lab sells an Asbestos Test
Kit for about $11 (info).
Page 262
McCue recommends that an expert popcorn-removal company do the job
because even though it doesn’t seem like it would be that difficult to scrape
the popcorn from the ceiling, it can be more challenging than it looks. Also,
it’s important to find out if your ceiling contains asbestos (a fibrous mineral
that poses health risks such as cancer and respiratory problems and was
used in textured ceiling coatings until it was banned in the late 1970s).
However, asbestos is even found in some home ceilings as late as 1986
because materials were left in storage. You can have your ceiling tested to
see if it contains asbestos ; check the Internet or the yellow pages for
asbestos consulting and testing. If your ceiling contains asbestos it’s not
just the removal process that is risky but you will also have to make sure
that the hazardous debris from the ceiling is disposed of properly.
If your ceiling doesn’t contain asbestos, the project is less risky for your
health but you should still carefully consider the great undertaking before
you get too far into it.
To give you an idea, here is a look at what’s involved with pulling the
popcorn off the ceiling.
Removal of a popcorn ceiling that has been painted is more difficult than if
there is no paint on it because unpainted ceilings are wet down and
scraped clean whereas a painted ceiling is a bit resistant.
1.
Remove furniture and completely cover the area to keep the debris
confined to a specific area.
2.
Wet the popcorn ceiling with a small water sprayer. The key to
removal is to keep the ceiling wet.
3.
Carefully scrape away the popcorn without damaging the drywall
underneath.
4.
Use drywall compound to touch up any areas that need it.
5.
Apply your selected texture by hand.
6.
Prime and paint the ceiling after the texture is fully dry. And then, of
course, clean up!
It doesn’t sound too bad but McCue says just be sure to know what you’re
getting into before you give it a try.
“I see it all the time, the weekend warrior goes out and buys his little plastic
drywall knives and his plastic pans, and a little five-gallon bucket of
compound or something. He has good intentions to go out and try to do
what we do,” says McCue. But he says the project is fairly complicated and
do-it-yourselfers can find they make an even bigger mess.
“A lot of times I will have to cut out what a homeowner has done. So they
have not only wasted a weekend or two but also money, time, and
everything else but now I may have to cut out the area because I can’t fix it
properly,” explains McCue.
Whether you do the work yourself or find a company to get the task done,
saving popcorn for the movies and not your ceilings will give your older
home a trendier feel.
2.6.1.10
HAVE AN ECO-FRIENDLY HOME? MAKE SURE BUYERS KNOW IT
by Phoebe Chongchua for Realty Times, March 12, 2010
Listing agents often overlook selling points they do not personally value.
By doing so, they limit the market for their properties.
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For example, I live a five-minute walk from hiking trails into the near-pristine
wilds of the Santa Monica Mountains – a feature so important to me that if I
were to loose access to it I would move. And yet, never have I seen an
agent’s ad for a nearby property which promoted this benefit.
In tight real estate markets one sure thing is that sellers have to highlight
the finest qualities of their homes. Yet, sometimes the very benefits buyers
might be interested in are overlooked.
Sometimes sellers forget to mention important upgrades and other times
the listing services used make it difficult for buyers to search for green
properties. While statistics show that buyers won’t necessarily chose an
eco-friendly home over a standard one simply because it’s green, they can
be influenced to purchase the former if the home will save them money.
There are a few areas of a home that can really help save money, but the
sources of the savings are hidden in the walls and roof. “Insulation is
relatively inexpensive for the return on investment. You will save the most
money by doing a lot of insulation in your house,” says Steven Mark Design
Consultant at Marrokal Design & Remodeling.
The San Diego-based remodeling company uses green materials like
recycled blue jeans that are turned into insulation as well as special
roofing to help lower the energy costs by allowing heating and air
conditioning systems to work less to keep the home comfortable.
Recycled Blue Jean Insulation
“On our roof sheathing we’re using a special plywood that has a little layer
of metal in it that reflects the UV rays before they go into your attic,” says
Mark. He says by using this special radiant barrier plywood the attic will be
considerably cooler. “The attic is going to be 20 or 30 degrees cooler in the
summertime which then means the insulation and air conditioner and
everything else you need to get your living space to a comfortable
temperature is now reduced,” says Mark.
Of course, buyers should be told about all those energy-saving appliances
that you might have installed over the years. For instance, say there are
two decades-old homes on the market but the first houses old appliances
and the second features new energy-saving appliances. The upgrades in
the second home are a distinct advantage that should be made very clear
to buyers. While this seems obvious, sometimes sellers neglect to mention
all the perks.
Remember, the things that aren’t always visible can save a surprising
amount. Tankless water heaters, for example, are becoming more in
demand. That’s probably because you can have as much as 30% savings
of a normal utility bill using a tankless water heater according to Dennis
Hargraves of El Cajon Heating & Plumbing Supply. Additionally,
consumers can get big rebates.
“Tankless water heaters … they can get up to 60% of their installation and
cost of the heater it could be up to $1,500 in rebates or tax credits,” says
Hargraves.
Special water-saving shower fixtures and low-flush toilets can also be
enticing to buyers. If you haven’t already installed them, consider replacing
an old toilet with a more efficient one. Also, don’t worry about the low-flush
not being effective, Hargraves says the functionality has greatly improved;
no need for double flushing. Plus, there’s incentive to install them.
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“There are vouchers available so a customer can receive up to $50 to $100
per toilet by going to the 1.28 {liter} flushes versus the others,” says
Hargraves.
It’s a good idea to keep a three-ring binder to help you remember all the
upgrades and eco-friendly additions when it comes time to sell your home.
Be sure to include the sales receipts, product warranties, operating
instructions, and any other pertinent notes into the binder. Don’t forget to
review the material in your binder so that you’re prepared to highlight your
green improvements when you meet with your real estate agent.
2.6.1.11
TIPS FOR A SUCCESSFUL GARAGE SALE
by Carla Hill for Realty Times, June 21, 2010
IDEA: Listing agents should consider helping your client conduct a garage
sale while simultaneously holding an open house. Possible advantages
are: 1) improved chances of attracting potential buyers, 2) removal of
clutter from the house, 3) opportunity to meet the neighbors and prospect
for additional listings, 4) access to the owner without him occupying the
home, 5) learning about the neighborhood's selling points from the
neighbors.
Whether you are jump-starting a move, decluttering for a showing, or
looking to make some extra cash, a garage sale can be a great way for a
homeowner to declutter. Here are some helpful tips to make your next
garage sale a success.
1.
Plan Ahead: Some cities require that you have a permit or a
license to hold a garage sale. These may be free or they may cost
a small fee. After you’ve gotten a permit, be sure to give yourself
plenty of time to organize in preparation for the event. It can take
more time than you’d expect to select items, price them, and then
move them to your sale area.
2.
Group Effort: Ask neighbors in your community if they’d be
interested in having a sale the same day! This can be quit a draw to
the garage sale crowd. Can’t get the neighbors interested? Ask if
any friends or family want to bring items over to have a combined
sale. Simply use different colored price stickers to keep the profits
separate. A block or “multi-family” sale is a great way to draw a
crowd.
3.
Advertise: There are a ton of great and free places to advertise
your sale. Most of these are online. Be sure to mention in your add
the following items: the neighborhood or area of town you are
located in, especially if in a big city; your address; the date and run
time; some of the items you are offering (appliances, women’s
clothing, baby items, etc.). On the day of the sale be sure your
home is easy to find. Use signs and balloons to direct traffic off of
main roadways.
4.
Price Items: When you price items, keep in mind that you are
marketing to a customer that wants a deal. Be realistic about what
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an item is worth. Pricing items ahead of time can speed up the
buying process.
5.
Set Up Shop: Arrange items by type. Put furniture together,
glassware on a table, and have clothes hanging. Also provide
access to an electrical outlet for customers who want to turn on
appliances and electronics to verify their condition.
6.
Plenty of Change: Visit the bank the day before the sale to have
lots of change. There will be buyers who use twenties and will use
of lots of your smaller bills. Stock up on ones, fives, tens, and lots
of small change.
7.
Take Care: If you have extra newspapers and plastic bags on
hand, then keep them by your cash desk during the sale. Use the
newspaper to wrap breakables. And use the plastic bags to help
customer get small items conveniently to their car.
8.
Eagle Eye: Be sure to keep an eye on your cash box! Never leave
the box unattended.
9.
Salvation Army: There will be items that don’t sell. To expedite
your clutter, look up local donation centers ahead of time to find out
about donation pickup and drop-offs.
10.
Free box: For items that need {to be} cleansed, but you aren’t
worried about making any money on, consider setting up a free box.
You’ll be surprised what other people will consider “treasure!”
11.
Emily Post Touches: If morning weather is chilly, consider having
small cups of coffee for sale. In summertime, have the kids set up a
cookie and lemonade stand!
12.
Have fun: A garage sale can be a stressful event, but if you stay
committed to making it a positive and fun experience, it will be just
that.
Good luck with your sale!
2.6.1.12
RENOVATION PROJECTS FOR OLDER HOUSING MUST FOLLOW
EPA RULES
by Bob Hunt for Real Estate, June 29, 2010
Buyers, owners, and managers of older housing (pre 1978) need to be
aware of recently-effective Environmental Protection Agency (EPA) rules
regarding renovation projects in such units. In 2008 the EPA adopted the
Lead-Based Paint Renovation, Repair and Painting Program Rule. Certain
requirements of that rule became effective April 22, 2010. In addressing
these requirements we will consider first: (1) What kinds of properties are
covered?, (2) What persons must comply with the rules?, and (3) What
kinds of activities are covered?
1.
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The rules apply to residential houses, apartments, and childoccupied facilities such as schools and day-care centers that were
built prior to 1978. Excluded are housing built after 1978, housing
for the elderly or disabled as long as children do not reside there,
and “zero-bedroom” dwellings such as studio apartments or
dormitories.
2.
Contractors, property managers, and others who perform
renovations for compensation are required to comply with the EPA
rules. So, for example, a homeowner working on his or her own
home would not be included. On the other hand, an owner of a
rental unit working on the rental unit would be required to comply
with the regulations. This is because, “the receipt of rent payments
or salaries derived from rent payments [as in property management
operations] is considered compensation under EPA’s lead program.”
3.
In general, any activity that disturbs paint in pre-1978 housing and
child-occupied facilities is included. This could include remodeling
and repair/maintenance work, electrical, plumbing, painting,
carpentry, or window replacement. Exempted would be “minor
repair and maintenance activities that disturb six square feet or less
of paint per room inside, or 20 square feet or less on the exterior…”
Note that “minor maintenance” activities do not include window
replacement.
The requirements of the rules cover three areas: (a) education and
notification, (b) training and certification, and (c) work practices:
Here’s a link to that 11-page
document.
(a)
Prior to commencing renovation work, the EPA’s pamphlet,
“Renovate Right: Important Lead Hazard Information for Families”
must be distributed to occupants of the property or, in the case of
child-occupied facilities, to the owner of the building or to an adult
representative of the facility. Informational signs must be posted
describing the nature, location, and dates of the renovation.
(b)
Firms that perform applicable renovation must be certified and
renovators must be trained. A certified firm’s workers must be
certified renovators or have been trained by certified renovators.
Certified firms must maintain records – for at least three years -- in
accordance with the rules. Individual renovators must successfully
complete an eight-hour training course by an accredited provider in
order to become certified.
(c)
Work practices to be followed include rules for both interior and
exterior renovation. Generally, they address measures to contain
dust and debris and to provide for its proper disposal. Also, certain
methods of paint and surface removal are prohibited. The workpractice rules also address clean-up measures and record keeping.
As noted above, home owners doing their own work do not have to follow
the rules for those who perform renovation for compensation. Additionally,
a homeowner may contract with a renovator and, in writing, waive the
requirements that the renovator comply with EPA rules, provided that no
child under six resides at the property and there is no pregnant woman
there.
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In addition to exceptions for homeowners, there are also exceptions for
work that has to be done as a result of emergency conditions. An
emergency renovation would be work “done in response to a sudden,
unexpected event which, if not immediately attended to, presents a safety
or public health hazard or threatens property with significant damage.”
Other than that, though, there is little wiggle room with regard to the EPA
rules. Violations can incur penalties up to $32,500 per day {!}, per violation.
Probably not something anyone wants to fool around with.
2.6.2
HOME SAFETY
2.6.2.1
DON’T LET YOUR HOME PIPE IN A FIRE HAZARD
by Phoebe Chungchua for Realty Times, October 24, 2008
Here’s a question for you? What type of pipe carries gas into your home?
This isn’t Trivial Pursuit; it’s actually an important question that many
homeowners and interested buyers can’t answer. But they ought to know
for safety reasons.
“This is an education issue,” says Angie Hicks, founder of Angie’s List. Her
company provides consumer ratings on local service contractors.
“We did an Angie’s List poll when we started to look into this issue and [we
found that] 44% of our members admitted that they don’t know what kind of
gas lines are coming into their house,” says Hicks.
Why is this so important? According to Angie’s List, the fire department in
Fishers, Indiana – one of the fastest-growing communities in the nation with
the majority of its homes new – estimates that half of its reported lightningrelated fires result from breached corrugated stainless steel tubing (CSST)
. These types of pipes have become very popular in the last twenty years.
CSST
According to ToolBase Services, since 1989 more than 150 million feet of
CSST for gas distribution have been installed in residential, commercial, and
industrial structures. The product’s usage has been increased in the last
several years. ABC News reports that an estimated 2 million homes that
these types of pipes in them.
Angie’s List writes that, “The cause of CSST-related fires has been
attributed to either a lack of, or inadequate, bonding and grounding, which
has resulted in arcing damage to the tubing. That may lead to a puncture in
the CSST wall, causing gas leakage.”
The very thing that makes the product popular also causes it to be more
dangerous especially when not properly installed. CSST is thin and
therefore electrical energy tends to linger longer. That energy seeks to
escape through the easiest path such as by blowing out a hole in the gas
tube and igniting a fire.
Hicks witnessed this in her Indiana neighborhood. A nearby house burned
down because of this type of incident. “The lightning when it struck the
house penetrated that line and caused a gas fire,” says Hicks.
CSST is more common in homes that have been built or remodeled since
1988. “About half of the new homes built each year contain it,” says Hicks.
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However, just because a home has CSST doesn’t necessarily mean that
there will be problems. The key is to know what type of pipes are used and
if they’ve been installed correctly.
Grounded Properly: Means that
should a current pass through the
pipe, the current will be diverted
harmlessly to the “ground.”
“You should have your home inspected and check to see that the lines are
grounded properly ; that is the key here. It’s not that you can’t have a
CSST line. In fact, the American National Standards Institute regulates
these lines – having them is fine, it’s just ensuring that they’re grounded
properly,” explains Hicks.
She says, “You need to have someone who is licensed and certified in
handling CSST installation. The interesting thing is that industry standards
changed in early 2007 in regards to handling CSST. After a class action
lawsuit was settled, now only licensed electricians and plumbers certified in
CSST are supposed to bond and ground the product,” says Hicks.
“You need someone experienced to handle this,” cautions Hicks.
Makers of CSST say the product is safe when it is properly installed.
2.6.2.2
WHAT IS A GFCI ELECTRICAL OUTLET?
by Brett Kayzar for Realty Times, September 22, 2009
As a home inspector I am often asked, “What is a GFCI Electrical Outlet?”
Let us start with the name, GFCI stands for Ground Fault Circuit
Interrupter. Now that answered all of your questions, right?
“Ground Fault” means that this type of receptacle, or outlet as they are more
commonly known, can detect if electrical current escapes from the intended
flow.
GFCI Outlets.
“Circuit Interrupter” means that this type of electrical outlet will trigger an
automatic shutoff or reset switch within the circuit flow to protect you from
any escaping electricity.
Simply put the GFCI electrical outlet’s primary design is to provide
additional protection from improper electrical flows which could shock or
harm a person near the area around the outlet.
To better explain the principles behind how the GFCI works, let’s take a
step back to explain the general principles of your homes’ electrical system.
Much like your plumbing system, the electrical system brings in a “flow” or
current of electricity into a location such as a light fixture to illuminate a bulb
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or to an outlet whereby the electricity can be channeled into use to run an
attached device like a kitchen toaster or bathroom hairdryer. Then any
unused electricity “flows” back out safely from the light fixture or electrical
outlet back into the electrical system of your home. Electricity flows into
each location and then any unused electricity flows back out, all in a
continuous distribution process.
Incoming Power – the homes’ electrical service uses primary supply wires,
often called the “hot wires”, to route the power current from the electrical
meter through the panel’s circuit breakers and then out to its intended
locations for use through a series of wires, switches, and outlets.
Returning Current – again through the adjoining primary supply wires,
often called the “neutral wires”, all unused electricity is routed back to the
breaker panel and ultimately back out into the originating electrical
transformer and power grid from which it came.
Grounding System – since the early 1960’s, most residential home
electrical systems began adding a third wire called the “ground wire” as an
additional or secondary neutral wire . This third wire works in conjunction
with the neutral wire to make sure that all electrical currents stay routed
within its fixture or device. The ground wire/system also routes electrical
current back to the panel box should the neutral wire fail to carry the entire
flow.
Slot/wire configuration for
standard outlet.
Click here for YouTube video
explaining how GFCI works and
how to test that it is working.
What is the GFCI’s roll in the electrical system? If the electrical system is
working properly the GFCI reset switch remains “on” or in the open position
indefinitely. It is only when the GFCI outlet detects a loss of current,
meaning electricity has found an alternate path, say through to your wet
hands while using that hairdryer in the bathroom, then the GFCI switches
“off” in a matter of milliseconds to shutoff the flow of electricity.
GFCI designs vary slightly but most GFCI switches and outlets use a series
of sensors to continually monitor the magnetic fields generated when
electrical current is flowing in and out and as long as the magnetic fields
are equal or balanced at the in-flow verses out-flow, then the GFCI allows
the flow to continue. If the magnetic field becomes unbalanced, that is
when the outlet triggers the shutoff or reset of its internal safety switch.
Some GFCI systems also measure for current loss detection which also
then triggers the need for a reset. The aim of the GFCI is to manage this
reset locally at the area of use such as near the bathroom sink for example;
so that once the problem has been corrected the person can quickly reset
the GFCI outlet/switch and resume activities. Build codes and standards
vary among municipalities, but generally all exterior receptacles/outlets,
pool & spa equipment, garage or basement outlets, bathroom outlets, wet
bars and kitchen counter outlets should be connected to a GFCI. At a
minimum, any outlet or switch within 5-feet of a water source should
provide for GFCI protection. Note that older homes may not have GFCIs
installed, but most electrical systems can be upgraded to add them as a
retrofit and they are strongly recommended for added safety.
A standard home inspection process will typically look to see that GFCI
outlets have been installed and most inspectors will test the GFCI outlets to
ensure they “trip or reset” properly. A simple hand-held electrical circuit
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tester can indicate whether or not an outlet is wired correctly and most
testers can safely trigger a reset function, thus indicating a protected circuit.
As always, home owner safety is one of the home inspector’s primary goals
and checking for the safe operation of electrical outlets for GFCI protection
is one of the services home inspections provide!
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3
APPENDIX
3.1
AUTHOR BIOS
3.1.1
BELL, KAY
Kay Bell excels in translating difficult subject matter into lively, readable
copy. Her specialty is personal finance, with a keen eye on taxes. Her
passion is in helping people attain a better understanding of how to make,
save, and wisely spend their money.
She created the tax component for Bankrate.com and has served as editor
and primary writer for that site for the last 10 years. She blends tax and
other personal finance topics in her monthly AustinWoman magazine
column, “Worth.”
She is a regular contributor of articles to various online business (NFIB,
Business.com) and investment company (T. Rowe Price) sites. A collection
of her tax articles is included in the book, The Gambler’s Guide to Taxes
(Kensington Press). And in between projects, she offers tax and personal
finance advice via two blogs, Don’t Mess With Taxes and Eye on the IRS.
Kay Bell, 3613 Josh Lane, Austin, TX; Phone 512-484-6915.
3.1.2
BELL, WAYNE
Wayne Bell
Chief Counsel and Assistant Commissioner
California Department of Real Estate, Sacramento
Mr. Bell is Chief Counsel and Assistant Commissioner, Legal Policy &
Recovery, California Department of Real Estate. Mr. Bell acts as advisor to
the Commissioner and is a member of the Commissioner’s executive
committee. Prior to his appointment at DRE in 2006, Mr. Bell previously
worked for the Office of the General Counsel of California Housing Finance
Agency (CalHFA).
3.1.3
BLOCK, JULIAN
Julian Block is an attorney and author based in Larchmont, N.Y. He has
been cited as “a leading tax professional” (New York Times), “an
accomplished writer on taxes” (Wall Street Journal) and “an authority on tax
planning” (Financial Planning Magazine). This article is excerpted from The
Home Seller’s Guide To Tax Savings. Law professor James Edward Maule
of Villanova University praised the book as “An easy-to-read and wellorganized explanation of the tax rules. Home sellers would be well advised
to buy this book.” To order it, go to julianblocktaxexpert.com.
Page 272
3.1.4
CARR, ANTHONY
Mr. Carr is an award-winning real estate broker in Northern Virginia and authored
“Real Estate Investing Made Simple: A Commonsense Approach to Building
Wealth.” He also contributed to Donald Trump’s book, “The Best Real Estate
Advice I Ever Received,” and is an active trainer and coach of top producers in the
Washington DC market. As a sought-after expert on real estate, Mr. Carr has been
featured on CNN, various broadcast outlets and was the former real estate editor for
The Washington Times. He accepts questions at his blog.
3.1.5
CHONGCHUA, PHOEBE
Phoebe Chongchua is an award-winning journalist, an author, customer
service trainer/speaker, and founder of Setting the Service Standard, a
customer service training and consulting program offered by Live Fit
Enterprises (LFE) based in San Diego, California. She is the publisher of
Live Fit Magazine, an online publication that features information on real
estate/finance, physical fitness, travel, and philanthropy. Her company,
LFE, specializes in media services including marketing, PR, writing,
commercials, corporate videos, customer service training, and keynotes &
seminars. Visit her magazine website: www.LiveFitMagazine.com.
Phoebe’s articles, feature stories, and columns appear in various
publications including The Coast News, Del Mar Village Voice, Rancho
Santa Fe Review, and Today’s Local News in San Diego, as well as
numerous Internet sites. She holds a California real estate license. Phoebe
worked for KGTV/10News in San Diego as a newscaster, reporter and
community affairs specialist for more than a decade. Phoebe’s writing is
also featured in Donald Trump’s book: The Best Real Estate Advice I Ever
Received and The Complete Idiot’s Guide to Buying Foreclosures. She is
the author of If the Trash Stinks, TAKE IT OUT! 14 Worriless Principles for
Your Success.
Contact Phoebe at (858) 259-3646 or [email protected]. Visit
LiveFitMagazine.com for more information.
3.1.6
DAVI, JEFF
Commissioner of the California Department of Real Estate
On October 6, 2004, Governor Arnold Schwarzenegger appointed Jeff Davi
as Real Estate Commissioner for the State of California. As Commissioner,
Mr. Davi oversees the licensing and regulation of over 543,000 real estate
licensees and is responsible for a staff of approximately 342.
Commissioner Davi, of Monterey, California, is a real estate broker with
many years of experience in the real estate field. Prior to being appointed,
he managed a family-owned residential and commercial real estate firm in
the Monterey area. He has significant experience in real estate sales,
leasing, management and financing.
Commissioner Davi previously served as a Director for CAR® and President
of the Monterey County Association of REALTORS®. He also served as
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president of the Economic Development Corporation of Monterey County,
was co-founder of the Affordable Housing Steering Council of Monterey
County and was on the founding board of directors of the Monterey County
Visitor and Convention Bureau.
Commissioner Davi is also involved in several non-profits mostly involving
children and youth, ranging from children’s youth activities and health,
juvenile assistance programs to help teens avoid breaking the law and being
recruited by gangs, to a statewide foster and adoption service agency that
originated in Monterey County.
Commissioner Davi is married with five children and a graduate of Saint
Mary's College in Moraga.
3.1.7
EVANS, BLANCH
Blanche Evans is a renowned author of five real estate books. Her newest,
Bubbles, Booms and Busts: Make Money In Any Real Estate Market,
McGraw-Hill, was rave-reviewed by The New York Times. She was also
selected from hundreds of real estate experts to contribute to Donald
Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100
Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on
page 68.
In 2006, Blanche was selected among scores of candidates to author two
consumer real estate guidebooks for NAR®: The NAR® Guide to Home
Buying, and The NAR® Guide to Home Selling, Wiley & Sons. She is
currently planning two new books for NAR® and its members.
3.1.8
FIALK, DAVID
David Fialk is broker-owner of Choice Realty Co., Iselin, New Jersey.
Licensed since 1971, David has earned the designations of CRB, CRS,
ABR, GRI and e-Pro Certified Internet Professional.
David can be reached at 732-283-2100, [email protected],
www.DavidFialk.com or www.ChoiceRealty.com.
3.1.9
FLETCHER, DAVID
David Fletcher has been a Florida real estate condominium and new homes
broker for 30 years with more than $3 billion in new construction sales. In
2008, Keller Williams Realty International named him a “Lifetime Achiever.”
Along the way he has chaired the Florida Homebuilders Association Sales
and Marketing Council, trained thousands of general agents and on-site
agents to work together, and was a featured speaker at the National
Association of REALTORS®.
Recently he founded New Homes Niche, a builder-certified co-broker
training system “to meet the growing trend we see in short sale buyers
moving to new homes for a lot of reasons.”
Page 274
Call David at 407 234 2349, Email , and visit his website.
3.1.10
GOREMAN, GARY
Gary Gorman is a retired CPA who has taught national tax classes for both
Arthur Andersen & Co. and for Price Waterhouse & Co. and numerous
undergraduate tax classes at Oregon State University. Since 1994 he has
educated realtors, investors, CPAs and attorneys throughout the United
States and Mexico on the intricacies of 1031 Exchanges. As the author of
the best selling 1031 book Exchanging Up! and a co-author with Rich
Dad/Poor Dad and Donald Trump, Gary is considered one of the Nation’s
leading 1031 Experts.
Gary is the owner and managing partner of the national firm, 1031
Exchange Experts, LLC, which headquarters is located in Denver, Colorado,
and offices in Arizona, Connecticut, Florida, Hawaii, and Texas. His firm is
commited to securely holding client funds in separate, segregated accounts
which clients can monitor through our affiliate banks’ website. As a
Qualified Intermediary, Gary has been involved in more than 30,000 1031
Exchange transactions since 1994. Contact him at [email protected],
visit his website at expert1031.com, or call 866-694-0204.
3.1.11
HARNEY, KENNETH
Kenneth R. Harney writes an award-winning, nationally-syndicated column
on housing and real estate from Washington, D.C. He is also managing
director of the National Real Estate Development Center, a professional
education company. He is a past member of the Federal Reserve Board’s
Consumer Advisory Council, a committee that by federal statute reviews all
Fed actions on home mortgage, consumer credit, and banking industry
regulation.
He served as a member of the U.S. Department of Housing and Urban
Development’s Working Group on Computerized Loan Origination (CLO)
systems, and is a member of the Editorial Board of the Fannie Mae
Foundation’s journal, Housing Policy Debate. He is the author of two books
on mortgage finance and real estate.
3.1.12
HILL, CARLA
Carla Hill, M.A., works on the Realty Times staff as Managing Editor for our
online publication. She also is producer for the real estate news channel,
seen daily on RealtyTimes.com and on video newsletters nationwide. She
currently works out of the Realty Times corporate office and studio in
Dallas, TX.
Page 275
3.1.13
HUNT, BOB
Bob Hunt is a director of the National Association of REALTORS® and is
author of the recently published book, Real Estate the Ethical Way. A
graduate of Princeton with a master’s degree from UCLA in philosophy,
Hunt has served as a U.S. Marine, REALTOR® association president in South
Orange County, and director of the California Association of REALTORS®,
and is an award-winning REALTOR®. Contact Bob at [email protected].
3.1.14
KASS, BENNY
Author of the weekly Housing Counsel column with The Washington Post for
nearly 30 years, Benny Kass is the senior partner with the Washington, DC
law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate
legal areas as commercial and residential financing, closings, foreclosures
and workouts.
Mr. Kass is a Charter Member of the College of Community Association
Attorneys and has written extensively about community association issues.
In addition, he is a life member of the National Conference of
Commissioners on Uniform State Laws. In this capacity, he has been
involved in the development of almost all of the Commission’s real estate
laws, including the Uniform Common Interest Ownership Act which has
been adopted in many states.
3.1.15
KAYZAR, BRETT
Brett Kayzar, CCI; is a Certified California Real Estate Inspection
Association (CREIA) Inspector and an active member of the American
Society of Home Inspectors (ASHI). He is also certified by the Inspection
Training Associates (ITA) and the Examination Board of Professional Home
Inspectors (EBPHI).
Brett Kayzar is the principal of Quick and Reliable Home Inspections, LLC;
and he brings 26-years of practical construction experience as a project
manager and Licensed General Contractor with the California State License
Board (CSLB). Brett also possesses an MBA from Pepperdine University
and a BS degree from Arizona State University.
In addition to being an active Home Inspector, Brett has also provided
consulting services for home construction and design and he will be a
featured expert in the upcoming book Health Sustainability and the Built
Environment, written by: DAK Kopec and published by Fairchild Books.
Page 276
3.1.16
KENNEDY, DIANE
Diane Kennedy, the nation’s pre-eminent tax strategist, is owner of Diane
Kennedy & Associates, a leading tax strategy and accounting firm and
founder of Tax Loopholes. She is the author of The Wall Street Journal and
Business Week bestsellers, Loopholes of the Rich and Real Estate Loopholes,
and co-author of The Insider’s Guide to Real Estate Investing Loopholes, The
Insider’s Guide to Making Money in Real Estate, and Tax Loopholes for eBay
Sellers.
3.1.17
KOUREMETIS, DENA
A veteran of the real estate and homebuilding industries since 1986, Dena
Kouremetis first joined Realty Times as a new homes writer in 1998. Since
then she has authored four books, written consumer columns on new
homes issues for websites and newspapers all across the country,
contributed to builder trade magazines, appeared as a guest expert on
several radio shows and even created a ten-chapter podcast for
LendingTree.com’s homebuilder website, iNest.com, now available on
iTunes, entitled Uncharted Waters; Navigating the Purchase of a New
Production Home.
Kouremetis recently joined her local Folsom, CA Coldwell Banker office as a
broker associate while continuing to write for the real estate industry. For
the past three years she has been training real estate agents for both the
resale and new homes industries, putting her experience, research
expertise, and gift of expression to work to help others entering the
business.
3.1.18
LIEBERMAN, STUART
Stuart Lieberman, Esq. writes about environmental issues. He was a New
Jersey Deputy Attorney General assigned to the State Department of
Environmental Protection from 1986 to 1990. Currently he is a shareholder
in the environmental law firm of Lieberman & Blecher, P.C., located in
Princeton, New Jersey.
Stuart can be reached at [email protected].
3.1.19
MANTOR, GEORGE
George W. Mantor is known as “The Real Estate Professor” for his wealth
building formula, Lx2+(U²)xTFP=$∞.
A proponent of educating consumers on using homeownership as an
opportunity to build an estate, he has set out on a crusade to educate small
real estate investors, fellow practitioners, seniors, and high school and
college students about the risk-free benefits of planned real estate
ownership.
Page 277
His consumer education efforts include a long-running radio program,
Mobile Information Center, monthly workshop series, public appearances,
informative website and frequent articles.
During a career that has spanned nearly three decades, he has amassed
experience in new home and resale residential real estate, resort marketing
and commercial and investment property. He is currently the founder and
president of The Associates Financial Group, an independent, locallyowned, full service real estate and mortgage brokerage, dedicated to
creating long-term relationships with clients.
Prior to starting his own firm in 1992, he had been Director of Training and
Customer Service for Great Western Real Estate. In addition he has served
on virtually every real estate committee, including a term as a Director of the
California Association of REALTORS®. He is the creator of the Personal Best
System, a business and life planning process and the Red Zone Time
Planning System for Business Professionals.
In addition to Realty Times, his articles have recently appeared in Real
Estate Finance, National Real Estate Investor, The Real Estate
Professional, Broker Agent News, and RIS Media Power Broker Network
Report.
He is available for speaking and customized training. His website is
www.myafg.com and he can be reached at [email protected]
3.1.20
MILLER, PETER
Peter G. Miller, also known as OurBroker®, is the author of six real estate
books – including The Common-Sense Mortgage – and is the original creator
and host of America Online's Real Estate Center.
Peter’s weekly columns appear in more than 100 newspapers nationwide,
he is also published in a variety of other media outlets and he is a frequent
speaker at national events and conventions.
Peter welcomes your questions, comments, and news releases via e-mail at
[email protected].
3.1.21
MOSCA, PETER
Peter L. Mosca is president and founder of BAK Communications, Inc. He
has over 22 years of communications and media consulting experience,
serving a variety of nonprofit organizations, including the CCIM Institute and
the REALTOR® Association on all three levels – national, state and local. He
is the Spokesperson Trainer for the CCIM’s Jay Levine Academy and trains
hundreds of residential REALTORS® nationwide to be effective industry
spokespeople. He is consistently ranked as “excellent” by about 90% of
those who attend his presentations.
While his principal consulting focuses are public speaking and media
relations development and content delivery and management, Peter is also
the host of the Voice America Network’s weekly radio program, “Income
Property Investment Talk,” a one-hour program that brings the powerhouses
Page 278
of commercial and residential real estate to property investors every
Wednesday at 11 a.m. EST.
Peter is married 17 years to his wife Barbara. They have two children:
Ashley, 15 and Kelli, 12. Hence, the name BAK Communications, Inc.
3.1.22
NASH, MARK
Mark Nash is a Chicago-based residential real estate author, broker and
columnist. Mark’s analysis, tips and trends are featured in national
magazines, newspapers, on network and cable television. His annual yearend forecast; “What’s In, What’s Out with Homebuyers” is utilized by more
than 500 news organizations in North America.
Mark’s books include: 1001 Tips for Buying and Selling a Home, Real Estate
A-Z for Buying & Selling a Home, Fundamentals of Marketing for Real
Estate Professionals, Starting & Succeeding in Real Estate and Reaching
Out: The Financial Power of Niche Marketing.
He is broker associate with Coldwell Banker Residential Brokerage and his
real estate analysis has been featured on: Bloomberg Television, CBS
News, CNN, Fox News, HGTV.com, The New York Times, The Today
Show, and The Washington Post. The Library of Congress in Washington,
D.C. featured Nash in March 2007.
You can contact Mark at [email protected].
3.1.23
PERKINS, BRODERICK
Broderick Perkins parlayed a 30-year career in old-school journalism into a
digital-age news service offering editorial content and related consulting
services.
The award-winning consumer journalist, originally from Wilmington, DE, is
founder, publisher and executive editor of the bootstrap DeadlineNews Group,
a Silicon Valley-based content provider specializing in residential real
estate, consumer news and consulting.
An open house for news that really hits home, the DeadlineNews Group includes
the umbrella website DeadlineNews.com the flagship blog Deadline Newsroom, and
three Examiner.com outposts – Real Estate News Examiner; Consumer News
Examiner; and Offbeat News Examiner.
Along with a decade of work here with Realty Times, Perkins also provides content
for Silicon Valley based ERate.com and the new AOLNews.com, where now
“You've got news....that really hits home.”
His current work can also be found in Californian publications, the San Jose
Mercury News, San Francisco’s The Registry and the Salinas Californian.
Perkins obtained his formal journalism education from University of Delaware and a
journalism boot camp, the Institute of Journalism Education at the University of
California-Berkeley. He went on to 20 years of service as a daily newspaper
journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News,
Page 279
before launching DeadlineNews Group.
Perkins covered housing on the San Jose Mercury News reporting team which
earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma
Prieta earthquake.
He has also produced real estate, consumer and small business content for the
Wall Street Journal, Los Angeles Times, Better Homes and Gardens, the National
Association of Realtors, Homestore/Move and Nolo.com among more than four
dozen publications.
In addition to managing the DeadlineNews Group, Perkins served as chief editorial
consultant for “Nolo's Essential Guide To Buying Your First Home.”
3.1.24
REED, DAVID
David Reed, a veteran Mortgage Banker, successful Real Estate Consultant
and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over
250 Critical Questions About Your Home Loan, Who Says You Can’t Buy a Home!,
and Mortgage Confidential: What You Need to Know That Your Lender Won’t Tell
You, is a former columnist and Contributing Editor with San Diego-based
Mortgage Originator Magazine.
Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past
President of the Austin Mortgage Bankers Association.
3.1.25
ROBERTS, RALPH
Once dubbed by TIME Magazine “the best-selling REALTOR® in America,”
Ralph R. Roberts, CRS, GRI is an award-winning and internationally
recognized real estate agent, author, coach, and speaker.
Throughout his career, Ralph has proven his commitment to helping other
real estate and sales professionals build upon their past and present
success, grow and expand their businesses, and provide a rich and
rewarding future for themselves, their customers, their employees, and their
families.
As president and CEO of Ralph Roberts Realty, Ralph has personally
helped thousands of consumers realize their dream of homeownership.
While selling over 10,000 homes (and buying and selling over 3,000
investment properties) throughout his 30-year career, Ralph has made the
time to mentor and coach hundreds of professionals in real estate, sales,
and a host of other fields. Ralph is a recognized authority on real estate and
mortgage fraud; residential real estate; personal salesmanship; and, sales
force and office management, motivation, and design.
Ralph’s numerous websites, blogs, seminars, and speaking engagements
engage, entertain, and educate both consumers and professionals. Ralph
is also an accomplished author with several successful titles to his credit,
including:
Page 280
Power Teams: The Complete Guide to Building and Managing a
Winning Real Estate Agent Team
Mortgage Myths: 77 Secrets That Will Save You Thousands on
Home Financing (John Wiley & Sons)
Foreclosure Self-Defense For Dummies (John Wiley & Sons)
Protect Yourself from Real Estate and Mortgage Fraud: Preserving
the American Dream of Homeownership (Kaplan)
Foreclosure Investing For Dummies (John Wiley & Sons)
Advanced Selling For Dummies (John Wiley & Sons)
Flipping Houses For Dummies (John Wiley & Sons)
Walk Like a Giant, Sell Like a Madman (HarperCollins)
Real Wealth by Investing in Real Estate (Prentice Hall/Penguin
Group)
Sell it Yourself (Adams Media)
52 Weeks of Sales Success (HarperCollins)
To learn more about Ralph, visit RalphRoberts.com or check out his daily
insights on real estate and mortgage fraud prevention at FlippingFrenzy.com.
You can reach Ralph at [email protected] or by calling (586)
751-0000.
3.1.26
RODRIGUEZ, STEVE
Steve Rodriguez is the owner of Bulldog® Professional Inspection Services, a
professional home inspection company in the Kansas City area.
3.1.27
RUSSER, MICHAEL
Michael J. Russer (aka, Mr. Internet®) is an internationally acclaimed
speaker, trainer, author, and strategic consultant to the real estate industry
and small business. He is also the exclusive Internet columnist for
REALTOR® Magazine, the architect of the revolutionary e-ProductivityTM
system and leading voice for the use of Virtual Assistants in small business.
You can subscribe to his free monthly leading-edge newsletter ePOWER
NEWS by going to ePowerNews.com.
Page 281
3.1.28
SAVAGE, HENRY
Henry Savage, the president of PMC Mortgage Corporation in Alexandria, VA, is
a mortgage columnist whose work has appeared in numerous consumer,
real estate, and mortgage publications. Mr. Savage welcomes your
questions for possible use in this column, however because of the volume of
mail received, Mr. Savage cannot answer questions individually.
3.1.29
SCHWARTZ, BOB
Bob Schwartz is a Certified Residential Specialist, San Diego real estate
broker & co-owner of an Internet search engine optimization firm, specializing
in domain name registration and Internet domain website hosting. Bob
received his BBA majoring in real estate & computer programming. Bob is
an expert witness for major San Diego law firms, has served on the
Consumer Affairs Community of the San Diego Association of REALTORS®,
is past president of a local HOA and co-owner of a condominium
management Co., and directs a multi-state high traffic network of legal
directory sites. Visit Bob’s San Diego real estate blog.
Page 282

30 DRE Approved Credit Hours

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