Sunday, June 23, 2013

Cash Gift of Commission Prohibited in Tennessee

Please remember that Tennessee prohibits real estate agents from giving or paying cash gifts, rebates or prizes in conjunction with a real estate transaction. This change in the law was made in 2007 and was codified in Tennessee Code Section 62-13-302(b).  While the prohibition is very broad, there is one particular area in which the question comes up with some frequency. That area is when an agent wants to let a buyer client use part of the commission toward the purchase price or closing costs at closing. According to the Tennessee Real Estate Commission, this practice is now prohibited by that law.

However, all is not lost. Remember, when you reduce your commission as the selling agent, it directly benefits the seller and you need to find a way to redirect that benefit to the buyer. You may be able to do that by agreeing to forgo a certain amount or percentage of your commission and having the seller pay that same amount or percentage toward the buyer’s closing costs. Or, if the seller is capped at paying the buyer’s closing costs, you may be able to reduce the sales price by the amount of reduced commission. Regardless of what approach you take, we advise you to make a decision early in the process to allow for proper planning.   Please call your managing broker with any specific questions about this law.

Monday, June 10, 2013

Credit In Lieu of Repairs?

Parties to a real estate transaction will occasionally find themselves faced with a situation involving a proposed credit in lieu of repairs. This usually comes up when the repairs that the buyer requested from the inspection are not complete at the final walk-through, either because there wasn’t sufficient time to have the repairs made or the seller just “didn’t want to fool with it.” So the seller may propose to give the buyer some money instead of making the repairs, which sounds like a win-win situation – the seller relieves himself of the work involved in coordinating the repairs and the buyer gets to pick who does the work. Our customary advice to agents who call us regarding such a proposal is to check with the mortgage lender to verify the acceptability of such an arrangement. Ironically, sometimes the answer from the lender is that it’s OK as long as it’s not shown on the HUD-1.

Don't accept this answer.  Here’s one simple rule that can help keep your clients (and you) out of trouble with mortgage fraud: If you can’t show it on the HUD-1, you can’t do it. The buyers and sellers certify the following when signing the HUD-1:

“I have carefully reviewed the HUD-1 Settlement Statement and to the best of my knowledge and belief, it is a true and accurate statement of all receipts and disbursements made on my account or by me in this transaction. I further certify that I have received a copy of the HUD-1 Settlement Statement.”

If they have knowledge that there is another receipt or disbursement in the transaction, namely the credit in lieu of repairs, that is not shown on the HUD-1, they have just falsified it. And it’s hard to argue ignorance as a defense when the same form contains this warning:

“WARNING: It is a crime to knowingly make false statements to the United States on this or any similar form. Penalties upon conviction can include a fine and imprisonment. For details, see: Title 18 U.S. Code Section 1001 and Section 1010.”

So the answer from the lender that it’s OK to do the credit in lieu of repairs as long as it’s not shown on the HUD-1 should not be an acceptable answer. Either the lender allows it (i.e. it can be shown on the HUD-1) or it doesn't (i.e. it’s an impermissible seller concession). 

Here are some possible solutions the lender may allow in the event it doesn’t allow such a credit:

1. Use the amount toward the payment of buyer closing costs by the seller (assuming the cap hasn't already been met), or
2. Identify and prepay a repair company at closing for repairs to be made after closing, or
3. Use the amount toward an immediate principal reduction payment on the new loan at closing

Obviously, coming up with any solution on the eve of closing is going to be problematic. A better approach would be to make a determination right after the inspection is complete as to whether the requested repairs can (or will) be done before closing; if not, then come up with a solution before the loan has gone through underwriting/final approval. We imagine it is much easier to make adjustments to things like closing costs, sales price, loan amount, etc. at that stage than after final loan approval has been secured.

Please contact your Realty Title representative with any questions on this topic.

Sunday, May 26, 2013

RESPA Investigations Alive and Well

With all the new rules coming out regarding mortgage financing, RESPA seems to have taken a back seat lately.  However, before you think the rules of RESPA don't apply anymore, I wanted to warn you that the Consumer Financial Protection Bureau (CFPB) is taking its role as the new regulator of RESPA seriously.  The CFPB recently investigated a homebuilder in Texas regarding illegal referral payments it was receiving from joint venture with a mortgage lender, and published issued its order last week. 

You may recall that RESPA permits Affiliated Business Arrangements (ABAs), in which someone in a position to refer settlement service business can have an ownership interest in a settlement service provider to whom he refers business.  However, ABAs must meet certain criteria in order to comply with the law; in particular, the person making the referral  to an ABA must provide the required disclosure to a consumer, must not require use of the ABA by the consumer, and must not receive any compensation other than a legitimate return on investment from the ownership interest.   As the Department of HUD (former regualtor for RESPA) examined the ABAs that were created, it determined that a number of them were sham arrangements solely designed to pay referral fees.  So in 1996 it published a Policy Statement of factors it considers in determining whether an ABA is a legitimate company or a sham arrangement.  The CFPB used those factors in deciding the case of the Texas builder, and determined that the ABA was a sham.  Some of the factors that weighed against this particular ABA were the fact that it had no separate employees, used one employee of the mortgage lender without any sort of formal agreement, had no separate office space beyond the mortgage lender, did not advertise to the public, and did not originate loans beyond the referrals from the builder.

The result was that the builder had to pay to the CFPB everything that he had made over the relevant time period - $118,194.20 - and was barred from engaging in any real estate settlement services beyond homebuilding for 5 years.  If you'd like to read more about this case, you can find it here. And if you are approached about participating in any ABAs, please seek competent legal advice. 

Monday, May 20, 2013

Use the Crye-Leike Disclaimer Notice

There was a recent Tennessee court case in which the buyers in a real estate transaction sued the sellers and real estate brokers when the sellers could not convey title to the buyers because the sellers did not own the property. Apparently, the sellers had contracted to purchase the property themselves, and were planning to sell to the buyers in a flip transaction. When that deal fell apart, the buyers sued not only the sellers, but the brokers as well, claiming that the brokers breached their duty of due care when making representations about the status of title. The brokers apparently only told the buyers what the sellers had told them, and weren't aware of the tenuous nature of the first deal. In ruling in favor of the brokers, the court relied upon language in the contract which said that the brokers could not be held responsible for those matters which would be revealed by a survey, title search or inspection of the property.

This case reaffirmed the wisdom of using the Crye-Leike Disclaimer form. This is the form that is used to explain to the parties that the real estate agents involved in the transaction are not experts in things such as surveys, home inspections, title searches, etc., and that the parties to the transaction should avail themselves of such professional services during the transaction if they are concerned about those matters. So our advice is to use this form in all of your deals. You can find the form on the Crye-Leike intranet under the Forms & Contracts section, under the Listing Forms subsection, entitled "Disclaimer Notice." If you have any questions about the use of this form, please contact your broker, Crye-Leike counsel, or your Realty Title representative.

Monday, May 13, 2013

An Issue Regarding Possession

Most of the Purchase and Sale Agreements that we see in our practice direct that possession of the property will be given at closing.  As we have previously discussed, the Agreements define "closing" to be the payment of the purchase price to the seller and the delivery of the deed to the buyer, what we typically refer to as the "swap."  However, occasionally the Agreement will direct that possession be given at some other time than closing.  The current version of the TAR Purchase and Sale Agreement provides two choices with respect to possession:  either 1) at closing or 2) at some other designated date and time.  Upon initial review, this seems to cover all potential scenarios regarding possession.  However, what it does not contemplate is the situation where the closing date is changed for some reason.  Most sellers presume that if clsoing is set for May 31 and possession is set for June 1, then if the closing date changes to June 1 the possession date will automatically change to June 2.  Technically, the pre-printed language in the possession paragraph does not automatically allow for this shift.  Therefore, if the closing date and possession date are different, and your clients are going to change the closing date by amending the contract, it would be prudent to change the possession date (assuming the two dates are different) to allow for the same time period between closing and possession that was agreed to originally.

Please note that the current version of the north Mississippi Crye-Leike Purchase and Sale Agreement provides a third option which seems to address this issue:  the parties can set a date and time a certain number of days after closing for possession.  Since this option would automatically adjust with any change in the closing date, there's no need to address it in an amendment to the Agreement.

Please contact your Realty Title representative with any questions on this issue.

Monday, May 6, 2013

FIRPTA Follow Up

Recently we discussed the topic of FIRPTA (Foreign Investment in Real Property Tax Act). As we indicated in that tip, there isn't any change to the law itself; rather, the only change is that reference to it now appears in the contract form in paragraph 2B. One thing we promised earlier was a suggestion on how to minimize any problems related to FIRPTA. Here's one idea: if you are the listing agent, ask your client (the seller) at the time of listing if he is a citizen or permanent resident alien of the U.S. If he answers "yes," then you should not have any problems related to FIRPTA since he is not subject to withholding based on that status (assuming he's honest with you).  However, if he answers "no" to that question, please contact us ASAP. We can help guide you through the process to ensure there aren't any problems at closing.

Please contact your Realty Title representative with any questions or visit the IRS website.

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Monday, April 22, 2013

What in the World is FIRPTA?

We occasionally receive questions about a relatively recent change to the Purchase and Sale Agreement relating to the “Foreign Investment Tax Act” (paragraph 2B). That law is actually called the Foreign Investment in Real Property Tax Act of 1980 (hence the acronym “FIRPTA”), and there’s really nothing new about it. The only thing that has changed is that it is now addressed it in the contract form.

The law generally says that a purchaser of real property must withhold 10% of the sales price and forward that money to the IRS when buying  property from a "foreign person" as defined under the law. In the rresidential arena, a "foreign person" is generally someone who is not a citizen or permanent resident alien (i.e. green card holder) of the United States. As you can imagine, this is a tax law so it’s not nearly as simple as that, and there a certain important exceptions that generally prevent you and your clients from having to worry too much about it. The two exceptions that are most applicable to your business are as follows:
  1. When the seller provides an affidavit stating that he is not a "foreign person" as defined under the law, and the buyer does not have actual knowledge to the contrary. (We routinely get these signed at closing)
  2. When the sales price is $300,000 or less and the buyer intends to use the property as a personal residence. The IRS has created a test relating to use as a personal residence as follows:  the buyer must have definite plans to reside at the property for at least 50% of the number of days that anyone resides at the property for the first two years after purchase. Days in which the property is vacant do not count in this calculation.
These two exceptions apply to the vast majority of residential real estate closings in the Memphis area, and I can recall only having to withhold a few times. So for your purposes, there shouldn’t be any real change in your practice. However, it does apply occasionally and in future tips we will provide some advice to effectively nip any FIRPTA problems in the bud.

Please visit the IRS web site for further information on FIRPTA.

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Monday, April 15, 2013

Top Crye-Leike Agents (RT referrals) - March 2013

The following Crye-Leike Agents are the top agents for Realty Title referrals in the respective categories:

Top Agents of the Month (Company Wide)
Bill Malone - Quail Hollow
Leigh Anne & Terry Boyd - Olive Branch
Judy McLellan - Quail Hollow
Cheryl Lamghari - Cordova
Dempsey Fisher - Quail Hollow
Doug Damico - Germantown Forest Hill
Sheila Pinnix - Southaven
Betty Carter - Cordova
Jeff Hawkes - Hernando
Helen Akin - East Memphis
Bill Murdock & Lisa Utterback - Hernando
Nancy Thompson - Collierville
Tammy Bunnell - Germantown Poplar

Agents of the Month (By Branch)
Arlington/Hwy 64 – Suzanne Tidwell
Atoka - Karen Thompson
Bartlett – Rita Hallum
Collierville – Nancy Thompson
Cordova – Cheryl Lamghari
Downtown - Neal Jackson
East Memphis – Helen Akin
Germantown Forest Hill – Doug Damico
Germantown Poplar – Tammy Bunnell
Hernando – Jeff Hawkes
Hickory Ridge – Chauncey Burton
Olive Branch – Leigh Anne & Terry Boyd
Quail Hollow – Bill Malone
Southaven – Sheila Pinnix
Top Agents YTD (Company Wide)
Bill Malone - Quail Hollow
Judy McLellan - Quail Hollow
Leigh Anne & Terry Boyd - Olive Branch
Cheryl Lamghari - Cordova
Joyce McKenzie - Collierville
Trey Hogue - Cordova
Betty Carter - Cordova
Suzanne Tidwell - Arlington/Hwy 64
Lauren Criswell - Arlington/Hwy 64
Dempsey Fisher - Quail Hollow
Doug Damico - Germantown Forest Hill
Sheila Pinnix - Southaven
Note: Rankings are in order by unit numbers. Managers are excluded, unless no other agents qualify.

Contingency for the Sale of an Existing Home

Under older versions of the TAR contract (2006 and prior), there was no pre-printed provision about whether the contract was contingent on the buyer’s ability to sell his current home. However, it was typically not necessary because if the buyer couldn’t sell his existing home, he generally couldn't qualify for a loan to buy the new home and the financing contingency would be invoked. This would allow the buyer to have a "sale of existing home" contingency contract without actually having to put such a contingency into the contract. In other words, the buyer was able to say, “the contract may not have said that the purchase was contingent upon the sale of my existing home, but I can’t get a loan without selling my existing home and it was contingent upon my ability to get a loan.” That has all changed, and the current version of the contract says the following:

“Loan Obligations
. . . (5) Unless otherwise stated in this Agreement, Buyer represents that this loan is not contingent upon the lease or sale of any other real property and the same shall not be used as the basis for loan denial;” (lines 121 & 122 for the Tennessee contract and lines 100 & 101 for the north Mississippi contract)

Therefore, if you are the selling agent and the buyer has to sell his existing home in order to purchase the new one, it is VERY IMPORTANT to specify that the contract is contingent upon that. Here is some suggested language you can put in paragraph 18, Special Stipulations:

“This contract, and performance by the Buyer hereunder, is contingent upon the sale and closing of the Buyer’s existing home located at ______________________. In the event said home does not sell and close prior to the scheduled closing date for this transaction, then Buyer shall have the option to cancel this contract by written notice to Seller and receive a full refund of the earnest money. For purposes of this provision, Buyer agrees to pursue the sale of closing of his existing home in good faith.”

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Monday, April 8, 2013

The TAR Notification Form

Crye-Leike has created a form to be used in conjunction with the residential Purchase and Sale Agreement called "Notification" (or "Notice of Progress of Agreement").  This form is designed to help expedite the communication between agents for Buyers and Sellers. In particular, the form allows real estate agents to check the appropriate box for different notifications required under the terms of the TAR Purchase and Sale Agreement. For example, the Purchase and Sale Agreement has language that requires the Buyer to notify the Seller of the Buyer having applied for a loan, provide the lender’s name and contact information, and confirm that the lender has been instructed to order the appraisal and credit report. Use of the Notification form is a quick and easy way for a selling agent to provide this required notice to the listing agent. In this case, the selling agent would check box #3 on the Notification form, complete the blanks with the lender information, have the Buyer sign in the appropriate place, and fax, e-mail or deliver it to the listing agent.

There are a number of other pre-printed notifications on the form, so it can be used throughout the transaction prior to closing.  You can find the form on the Crye-Leike Intranet site (Form F26). It’s a handy little form and should prove to be a time-saver for you throughout your deals.

Please contact your Realty Title representative with any questions on the use of this form.

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