My reading of the legislation and what the title companies seem to be adhering too is:

When a Buyer brings in MORE THAN $50,000 to close that those funds must be wired and not the typical certified/cashiers/official checks that we have advised for years. For amounts LESS THAN $50,000 the “old rules” still apply.

So there ya go, be the best lawyer in the room, save time, and maybe save a closing or two by knowing the law!

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Buyers love the closing credits because in theory they can still borrow say 96.5% of the contract price while using the credit to lower their bottom line owed (simply they can borrower more and owe less at closing). For example, on a $100,000 purchase Buyer can borrow $96,500 and then that $2,000 repair credit would leave a Buyer needing only $1,500 to close (leaving aside other closing costs for the sake of discussion). Of course you could simply drop the purchase price to $98,000 but then Buyer’s loan amount gets lowered to $94,570 and Buyer owes more at closing versus the $2,000 closing cost credit example above (of course long term Buyer’s paying less on his loan over 30-years but sadly the issue is usually the short term matter of $$$ to close).

So that’s why Buyer’s love credits, Mo’ Money; but the flip-side for lenders is that the “credit Buyer” example above has less skin/money in the transaction and thus is viewed as the riskier borrower. And that becomes the trick, if lenders won’t let a credit be listed on the HUD-1, how do you make sure a Buyer still actually gets credit for that agreed upon contract credit at closing. The greatest challenges lies in transactions, notably FHA loans, where a Buyer can’t put too much money down yet she MUST invest 3.5% of the purchase price into the transaction.

What to do? Here are 3-4 tools to keep in your real estate closing bag of “lawyer tricks”…

1.  Hide the Credit Somewhere Else on the HUD-1. This is the easiest and the most frequently used solution and typically done in one of two ways. First, Buyer’s “closing credit” gets added into Buyer’s real estate tax reproration credit. When there’s a smallish Buyer’s credit of say $2,000 or less this is almost always the preferred solution and I’ve never seen a lender bat-an- eye.  Second, if you need to find to find a few more bucks, then some of Buyer’s costs should get moved over to the Seller’s side…mortgage interest, lender fees, etc.

2. How About a 203k loan? I’m going to write an extensive post on 203k loans upcoming…this is a HOT area right now. I think I represented one 203k Buyer over the first seven years of my legal career and have represented five 203k Buyers in the last 6 months. What is it? Simply, a Buyer can borrower more than a property’s current value in order to fund remodeling/repairs. So if you really need a big repair credit at closing, why not dial 2-0-3-K?

3. Have Seller pay Buyer’s Contractor Directly. I wouldn’t recommend this option but I did see this happen recently. Parties got to closing and Buyer’s lender wouldn’t let a large repair credit show on the HUD and Buyers couldn’t close without those dollars. Long story short, item #1 (above) was used to the point that it could be used, but a good chunk of the agreed upon credit was still outstanding. Seller ended up agreeing to quietly pay credit to Buyer’s contractor to complete the repairs…not sure about legality here but I’m just sayin’ I’ve seen it done to close a deal.

Or just don’t buy a property that you can’t afford…sometimes that’s the critical issue. If you’re squeezing for $$ too much just to close you may be asking for a disaster like here. Remember, if Buyer’s lender ostensibly won’t cooperate on this issue at closing that’s not the Seller’s problem and between Buyer/Seller if Buyer can’t close w/o the credit the Buyer likely is in a breach of contract scenario.

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Just last week I worked with some Sellers and there was a $12,000 Buyer’s closing credit in the deal. However, since Buyer’s were using an FHA loan they had to put at least 3.5% of the purchase price into the deal. So, Buyer’s couldn’t get full credit for the $12k at closing and more importantly their bottom-line thus needed to be about $9,000 cash to close versus $1,500 cash to close. Needless to say, Buyer’s attorney hadn’t prepared them for this eventuality. Miraculously this deal closed because the Buyer’s could bring in extra dollars.

But, if I’m those Buyers my summary recollection for my first home purchase is, “remember that sloppy attorney who was $8,000 off in his estimate of funds to bring to closing.” Nope, I’m not recommending him to anyone else.

In conclusion this is a thoroughness issue. The day before the closing you’ve got to review the file…contract, attorney review letters, title charges…simply know the numbers and advise your client accordingly.

YOU WANT YOUR CLIENTS TO REMEMBER YOU…BUT FOR THE RIGHT REASONS!

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I’m particularly troubled in real estate transactions when I observe real estate agents acting in their best interests and not their clients’. The relationship between agent and client is that of a fiduciary and principal and the agent owes a fiduciary duty to her client.

Fiduciary Duty:  A legal requirement of loyalty and care that applies to any person or organization that has a fiduciary relationship with another person or organization. It’s a duty is one of complete trust and good faith. And “breach of fiduciary duty” is a great little negligence action.

Sadly I see this duty ignored if not legally breached WAY too often. Some recent observations from my real estate world…

Dual agency a/k/a loyalty to no one. I’ve been dealing with a sad situation regarding some recent buyers that we represented. Long story short their sellers likely were fraudulent and in violation of various disclosure laws concerning some basement flooding that existed in the property and they surely knew about prior to the sale. They’ll be dealt with accordingly but the “dual” real estate agent who surely wasn’t acting in the buyer’s best interest likely will be receiving a little summons too.

Encouraging LESS/NO Contract negotiation. I get very uncomfortable if a real estate agent remains too involved in contract matters subsequent to a contract’s signing and it’s beyond just “lack of comfort” when my client’s agent overtly works against my client’s interests. For example, the agent recently who specifically discussed backing off of some of our proposed contract/inspection requests that were raised specifically by our client.

Over-Bidding. Any reason to bid above the listing price on a long-listed foreclosure property? Likely not…oh wait the agent’s commission is based on purchase price…sure.

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Home Buyer (11/6/09 version) Tax Credit:  10 Things to Know. I sometimes call myself a real estate lawyer but have been admittedly slow in getting up to speed on the revised tax credit…I do get to celebrate a few holidays, no? For my money the big change is the $6,500 credit to home buyers who have previously used the same home as principal residence for at least 5 of the last 8 years. Also note that military members on extended duty outside the U.S. have until 4/30/11 (a year beyond the rest of us) to take advantage of the credit. For the most part, the “first time” homebuyer part of the credit remains the same expiring 4/30/10 (or 6/30/10 for properties under contract by 4/30/10).

Here and Here are 2 somewhat complimentary stories on the success/not of the Making Home Affordable program…one a more national and the other more Illinois focused. On the upside, mortgage loans ARE now being modified (the lack of modification efforts used to be a favorite rant of mine). But, at least in Illinois only 7% of the modifications are permanent. So, does the program simply serve to lengthen the housing crisis by giving false hope to homeowners who in the end won’t be able to afford their homes in the end regardless??

Don’t Buy a House–Yet. I think the op-ed makes a compelling argument…namely, real estate prices likely haven’t hit bottom and the market’s recovery will be agonizingly slow so what’s the rush? Foreclosure rates remain near their high and banks haven’t even fully released all of their inventory onto the market and the unemployment rate is going to remain around 10% through the end of this year…those are facts.

Town house or condo. The difference isn’t always so obvious. Usually the townhomes are multi-story with the small front/backyard that you actually own whereas a condo is a self-contained unit on a single floor and the rest of the building is commonly owned. But it’s not always so stark…legally look at the declaration, a condo must use “condominium” is the legal title of the association and of course the Illinois Condominium Property Act governs condos but only section 18.5 governs town homes.

And lastly…

Debtor’s Dilemma:  Pay the Mortgage or Walk Away. A fairly lengthy piece from the Journal focusing on people who CAN afford to pay their mortgage loans but are choosing not to based on the property’s plummeting value. Hard for me to empathize too much with these people…I think this debate is centered in futile, American vanity. Namely the focus on your home’s value…if you’re like what 75% of people who aren’t planning on relocating, you needn’t/shouldn’t care if your home value has dropped. Banks aren’t offering lines-of-credit anymore anyways. Sit back, take that mortgage interest deduction, and enjoy the view.

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Here’s a sad example that I’ve been dealing with lately…

Clients purchase a modest home earlier this year…just barely. Meaning, they barely have adequate funds to bring to closing. Well, several months post-closing I get a call about some flooding that they’re experiencing in the home’s basement (they did do an inspection). Sadly upon review it seems like the property Sellers were fraudulent and that a claim under the Residential Real Property Disclosure Act seems likely. Yet enforcement of legal rights usually requires a little upfront investment….RETAINER!

Perhaps more importantly, if you don’t have $5,000-$10,000 in an emergency fund to deal with something like flooding/plumbing, etc. you likely can’t afford to own that home.

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I have started to have more than a few clients who have worked with or are working with Redfin real estate agents. Redfin is the online real estate company that I think began in the Seattle market whose selling point is the refunding of 50% of a buyer’s agent’s commission back to the individual buyer. I’ve been reading about them in the general business media for some time now but I believe they’ve only been in the Chicago market for some 2ish years so I had not had direct dealings with them until this fall. Here’s what I’ve found both first-hand and sort of a report of what I’ve heard from my clientele:

Read the fine print on Redfin’s Agency Agreement. Although their marketing is that a buyer gets 50% of the agent’s typical 2.5% commission back the Agency Agreement’s that I’ve seen include a $5,500 minimum commission on Redfin’s part. So lets do the math…on a $250,000 purchase (isn’t the median Chicago sales price around $225,000 or so), 2.5% is $6,250. So Buyer’s “refund” on that purchase would be $750 and far from 50% of the buyer’s commission. Better than the $0 you’d get from most agents but just be aware that until you get a little over a $400,000 purchase price you aren’t getting a “50% refund.”

It’s a Team Approach. The feedback I’ve received on this part of the Redfin model has been overwhelmingly positive both for general customer service and by reducing overall sales pressure. On the customer service front simply more than one agent is involved so there are more people to help you look at properties so a buyer isn’t tied to just one persons schedule. Then once you’re ready to put in an offer you’re handed off to an individual who handles things more personally at the offer/negotiation/closing stage. On the lawyer side of things I thought the customer service was good. And the reviews I heard from clients was that with Redfin there was less “sales pressure” on the part of agents. I don’t know how their agents are compensated but since it is more of a team approach I’d guess it’s not purely on the sales commission like most agents.

Finally, I like the Forums feature that they have on their Website specific to the Chicago market. If nothing else, maybe you can use the threat of Redfin to negotiate your non-Redfin agent’s commission downward or get yourself a refund!

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I’m bothered a tad when someone asks me to represent them at their real estate closing but particularly when I hear attorney colleagues use that as an expression of residential real estate representation. It diminishes the practice and if that’s all you are doing then you’re not representing your clients very well. I view my representation of people buying and selling residential real estate as a 4-part process:

1.  Initial contract review, attorney modification and inspection negotiation.
2.  Mortgage/title clearance monitoring.
3.  Closing.
4.  Deed recording & title insurance follow-up, post-closing escrow releases, and final client correspondence.

And I think I’m particularly annoyed by the expression because it de-emphasizes the importance of what an attorney is doing pre-closing and to ASSUME that a contract will close and everyone will live happily ever after is stupid! Here’s the recent war story, short and sweet…

A long-term client recently asked me to look at her son’s file regarding a problem getting his earnest money back after a failed real estate deal (he was the prospective buyer). And the lawyer he used seemed to have been writing the proper letters and the client appeared to not be at fault. He wanted to get out of the contract based on various legitimate inspection and mortgage contingency reasons.

Yet I saw 2 BIG things I didn’t like:

1.  Buyer’s attorney letters are never “accepted” by Seller’s attorney. Have an assistant follow-up on these after a day or two if you’re asking for a mortgage contingency extension or whatever. This file I was reviewing contained at least 5 extension requests but none are accepted by the Sellers attorney…that’s at a minimum a serious communication problem.

2.  You must keep proof of service/notice of your letters. This was the true shocker when reviewing this file. This law firm only kept its fax confirmation pages for two months. So now this client is considering options to get his earnest money back, including litigation, and yet he’s going to have a serious problem proving proof of proper notice. Send your letter, printout and staple your fax confirmation page to the letter, and file. Simple.

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Just a quick follow-up on our recent post about the chances for the first time homebuyer tax credit extension. NYTimes reports that the extension was discussed in the President’s meeting with Senate Majority Leader Reid and Speaker Pelosi yesterday…

Extending and possibly expanding the popular home-buyers credit, which is due to expire after November, is high among options for further stimulating the economy and creating jobs, Congressional aides said, though a White House official said it was only briefly mentioned on Wednesday in an Oval Office meeting between President Obama, Speaker Nancy Pelosi of California and Senator Harry Reid of Nevada, the Senate majority leader.

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Well, since there’s nothing more Chicago than a Bungalow and the Expo is free I don’t mind giving them a shout out:

October 17, 2009, 10am – 4pm, The Merchandise Mart

What is the Historic Chicago Bungalow and Green Home Expo?

The Historic Chicago Bungalow and Green Home Expo is Chicago’s largest and most popular home restoration, preservation and energy-efficient renovation expo.

Created in 2002 as the Historic Chicago Bungalow Expo and expanded in 2006 to include green home renovation resources, this event is continually evolving. Vendors and workshops address the needs of anyone looking to preserve, update, or improve energy efficiency in their home.

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