This is a follow-up to my previous posts which dealt with common myths about the Contract for Deed method of owner financing.  In this post I will discuss the advantages and disadvantages of the Contract for Deed.

The Contract for Deed will allow the sale of property when traditional forms of financing are not available to the Purchaser.

Unlike lease options or lease purchasers the sale is final when the Contract for Deed settlement documents are signed.  This can be extremely important for the parties who may wish to trigger time frames for capital gain rollover or exemptions.

With Contract for Deed financing closing costs are significantly less, since there is no Deed of Trust to record, no points to pay or other lender fees.  The Seller may be able to take advantage of a low interest loan they have secured by the property by wrapping that loan at a higher rate.

Perhaps, the greatest advantage is the Purchaser receives the tax benefits (deductions) of home ownership, thereby making a slightly higher payment affordable when comparing ownership under a Contract for Deed to renting.

As to disadvantages, the Seller remains liable on the underlying debt which may impact the Seller’s ability to procure new financing on a future purchase.  There is also a remote possibility that the underlying lender my consider the Contract for Deed as an event that triggers the due on sale clause and they elect to accelerate the loan.

A disadvantage for the Purchaser is the cost of a subsequent refinance of the property.

I have had considerable experience with Contract for Deed financing over the past 30 years and it has proven to be very successful for the majority of my clients.  I do believe however that a Contract for Deed should be used sparingly and should be reserved for special situations.  The parties to the transaction must be comfortable with the ability of the Purchasers to perform and the credibility and trust worthiness of the Seller.  Above all, the parties should be fully advised about the risks of the transaction and should seek legal counsel as Contracts for Deed do involve risks to both the Purchaser and Seller.

[John welcome questions or comments.  You can contact him at j.pitrelli@keytitleva.com]

This is a follow up to my previous post about Owner Financing.  The Contract for Deed has been frequently misunderstood and often maligned.  The purpose of this post is to dispel some common myths about the Contract for Deed.

The following are false statements:

- A Contract for Deed is illegal.

- Contracts for Deed violate the due on sale clause in all Deeds of Trust and will result in a foreclosure of the loan.

- A Contract for Deed is not a final sale of the property.

- Real Estate commissions will not be paid until the Deed is actually recorded in the future.

- An Owner/Purchaser under a Contract for Deed has no greater rights with respect to the property than a general creditor of the Seller.

- A Contract for Deed should not be recorded in the land records.

- Selling or Buying under a Contact for Deed is no better then renting.

- The IRS will not recognize a Contract for Deed as a sale or allow the Purchaser to deduct interest and tax expense for home ownership.

- There must be an underlying loan to sell by Contract for Deed.

In my next post I will explore the advantages and disadvantages of the Contract for Deed.

Recently, I have seen a renaissance in the use of owner financing in real estate settlements.  This is not surprising, since owner financing can be a powerful tool for buying and selling property, especially when bank financing is difficult to obtain.

One of the most frequently used methods of owner financing is the Contract for Deed or Installment Land Contract.  With this method of financing the Deed to the property is held in escrow and not recorded until the Seller (Owner) held financing is paid in full.  The buyer will enjoy all the benefits of home ownership recognized by IRS, even though the Deed to the property has not been recorded.

In my next post I will explore common myths about Contract for Deed and the advantages and disadvantages of that method of owner financing.

Another method of owner financing is the Seller held Deed of Trust.  With this method of financing the title to the property will immediately pass to the Buyer.  A security instrument (Deed of Trust) will be recorded in conjunction with the Deed to the property affording the Seller a foreclosure remedy in the event the buyer defaults on the loan.  A carefully drafted Deed of Trust will provide maximum protection for the Seller and still meet the requirements of the Virginia code.

In situations where owner financing is feasible there is extreme flexibility in how a deal can be structured.  The settlement costs are substantially less since there are no lender fees.  The need for formal appraisal is eliminated.  I still urge Sellers to exercise prudent underwriting of their loan, by checking credit and employment, but tempered with common sense if credit issues can be explained.  To this end the help of an experienced real estate professional is invaluable.

There are many buyers out there that cannot currently qualify for traditional bank financing.  They may be victims of the housing bubble burst, yet they need a place to live and are otherwise viable buyers. Owner financing may be the answer for these potential buyers and for Sellers who are willing to take a risk to sell their property.

In my last two posts I covered title concerns and risk imposed by Bank-counter addendums.  In this post, I will address home inspection issues and legal exit strategy for a buyer when the deal is no longer desirable.

In virtually all contracts with bank-owned (foreclosed) properties the buyer takes the property “as-is,” and “where-is,” with all it faults and no warranties or representation by the Seller.  Moreover, most of those contracts state that the buyer earnest money deposit is “non-refundable unless otherwise stated in the contract or contrary to applicable law.”  This is a scary proposition for most buyers.  In my view it is another reason why buyers should have a highly experienced real estate agent representing them as “buyer broker.”

As a general rule a home inspection is critical whenever buying real estate and even more important when buying Bank-owned property.

Suppose you discover major structural issues in the home inspection, for example a leaky roof, poly-butylene pipes, termite damage, improper wiring, etc.  You can and should ask the Seller (Bank) to remedy these issues with an appropriate addendum.  If you don’t you will be soley responsible for making the repairs and may be unable to obtain financing from your lender to purchase the property.

Most properties in Virginia are located in a subdivision that is subject to Home Owner Association (HOA) or Condominium Association (COA) covenants and restrictions.  If your property is subject to Virginia HOA or COA Act, you have an unwaivable, unilateral way to cancel the contract.  Both Acts provide a 72 hour statutory rescission right that cannot be waived by the buyer.  The 72 hour period does not start to run until the buyer has been provided with an HOA or COA resale package.

A savvy buyer will use the HOA Act or COA Act to his or her advantage by not requesting the resale package until the latest, reasonable time and preserving the ultimate legal trump card for protecting themselves under the contract.  Buyers can legally use the applicable Act to recind the contract and get a full refund of their otherwise non-refundable earnest money deposit.

[John welcome questions or comments.  You can contact him at j.pitrelli@keytitleva.com]

When you are dealing with the bank
Currently a substantial number of our settlement transactions involve Banks or other lending institutions as the Seller.

Buying from a Bank can be risky.  It is my intention over my next series of posts to provide guidance to buyers to reduce the risks.  In this first post I will explore the issues that occur when contracting with the Bank’s asset manager.  Subsequent posts will deal with the issues of Special Warranty Deeds, the importance of title insurance and the need to resolve all issues prior to settlement.

Watch this addendum
When you submit an offer to a Bank it is usually presented using a standard Board of Realtors approved contract that will hopefully be drafted by an experienced Realtor® such as Kathy O’Neal.  Generally the listing will not identify the Bank, Seller, by name, but will instruct the selling agent to state the Seller as “Owner of Record.”  Invariably, if the Bank accepts your offered price and terms, it will demand that you sign its counter-offer addendum to ratify the contract.  It is this addendum that creates the major risks for the buyer.  This counter-offer addendum has been drafted by counsel for the Bank as a form to be used on all the Bank property wherever located and however acquired.

Know the risks
An instruction is usually sent with the counter-offer addendum to not strike through any of the terms of the addendum if you want to have your deal ratified.  However, banks will routinely consider reasonable revisions if you present them through a counter to their counter-offer.  If you ratify the Bank’s proposal without further modification you are frequently agreeing to accept the following risks:

-    accepting the property in “as-is” condition regardless of whether systems are in working order
-    using the Seller’s settlement agent to close the transaction
-    accepting insurable title rather than marketable title
-    subjecting yourself to a daily penalty if closing is delayed
-    having to order Homeowner’s Association and documents at your own expense
-    accepting deductions from Earnest Money Deposit if Seller defaults
-    assuming duty to pay the Grantor’s Tax normally paid by Seller

We recommend using a counter addendum to the Bank’s counter-offer addendum to reduce and/or eliminate these risks. An experienced real estate agent, with some assistance from us will understand the importance of and know how to draft this addendum.

You can contact John at j.pitrelli@keytitleva.com]

Once the closing documents have been signed and notarized, the post-closing process can begin.  The first step in post-closing is to verify that all funds have been received in “liquid” form (cash, wire or certified funds).

Assuming we have received the funds, we print checks to all parties that are to be paid in accordance with the HUD-1 settlement statement. We also print a balance sheet to confirm that the funds received equal the funds to be disbursed.  Before we can disburse any funds we have to record the Deed and Deed of Trust in the county or city where the property is located. As part of the recording process, the title examiner will do a final title update (commonly referred to as a “bring down”) to be certain that the Seller still has clear title and no new liens have been recorded since the previous title search.

The statute governing closings (settlements) in Virginia, known as the “Wet Settlement Act”, requires that the closing agent record and disburse funds within 72 hours.

Payoffs to the Seller’s existing lenders are sent by overnight delivery service with a certificate of satisfaction for the paid off lender to return to us, so that we can record a release of the loan.  We also include an instruction to the lender to refund any payoff overage and/or escrow refund directly to the Seller at the Seller’s new address.  Loans that have been paid, but not released, are a fertile area for title defects.  I will devote an entire future post to the issue and to our system designed to avoid the problem.

Seller’s funds are usually sent by wire to an account Seller designates at the closing.  To this end we advise the Seller to bring a voided check or wiring instructions with them to the closing.

The Buyer’s lender is provided a complete closing package including its original loan documents and copy of the Deed of Trust. Real Estate commissions, Home Owner Association payments, Home Warranty information and payment and payment to various service providers are also sent out with a copy of the final HUD-1.  After all documents have been recorded and all funds disbursed we scan the completed file to digitally store all pertinent documents and information.

The final step in post-closing usually happens several months after the closing, when we send out the original recorded Deed and the final owner’s title insurance policy to the Buyer.

[This post by John Pitrelli.  You can contact John at j.pitrelli@keytitleva.com]

As a home buyer, one of the most important parts of the transaction is the closing.  What are some of the pitfalls of the closing process and how can you avoid them?  In my next few posts I hope to describe what should happen and what you can do to avoid problems.

By the time the parties get to the closing table much has happened to provide for a smooth event.  In this first post I will focus on the pre-closing process.

It all starts with our receipt of the ratified sales contract.  We open a file by entering information from the contract into our database.  We send out welcome letters, to both buyer and seller, which explain the role of Key Title, detail our fees and include an information form to be returned to our office.  The buyer is requested to indicate how they wish to hold title and the name of their new lender, while the seller is requested to provide names and account numbers for existing lenders, sellers social security numbers and contact information for homeowners associations, if applicable.

The next step is to order a 60 year title search from an abstract company and a survey, if required.  We review the search and survey to determine whether there are any issues of marketability or encroachment.  The results are then compiled into a title commitment (binder) which is sent to the new lender.  The commitment will reveal ownership of the property, encumbrances such as mortgages, judgments or liens, as well as easements and/or restrictions that impact the property.

In the meantime, we are gathering information such as payoffs of existing loans, the status of homeowners association dues, including any special assessments, delinquencies or violations.  We also communicate with the real estate agents to verify commissions, admin fees, reimbursements and home inspection issues.  The highly qualified and experienced agents we work with, make the process go smoothly, by alerting us to issues regarding property condition, lender appraisal, termite problems and amendments to the sales contract.

After receiving all the information, including the lender’s instructions, we are ready to prepare a draft settlement statement (HUD-1) which provides the accounting for the funds to be received and disbursed at the closing.  At this point it is our policy to send a copy of the draft HUD-1 to the real estate agents, buyer, seller and lender so that we can correct any errors or resolve any outstanding issue prior to closing.

Although, we try to anticipate and resolve problems prior to closing, the process is not always routine.  I hope to deal with the actual closing process and some of the surprises that can occur in future posts.

[ You can contact John at j.pitrelli@keytitleva.com]

A 1031 or tax deferred exchange is a method by which a property owner trades one investment property for another property, without having to pay any federal income taxes as a result of the transaction.

To take advantage of 1031 you must own the property for investment or business purposes. Typically residential rental property or commercial property will meet this requirement. The property does not have to be improved (raw land can qualify). However, certain individuals or companies will not qualify if they are considered by IRS to be “dealers”. For example, if you are a builder and own the property strictly for resale, such as a builder’s inventory of new homes, you will be considered a dealer. Also, if you buy property with the intention of reselling it quickly (”flipping” the property) you may likewise be treated as a dealer and ineligible for a 1031 tax deferred exchange. If you own your property as a second home or use it personally for more than two weeks per year, you will be unable to utilize a 1031 exchange for that property.

If you qualify, the advantages derived from exchanging are abundant. By deferring taxes you can put the same money to work for you in productive ways so that your funds are working and growing while you move on to your next investment. In effect, you are getting an interest free loan from the IRS.

Another advantage of exchanging your investment property is to acquire a property that better meets your investment preferences. For example, you may wish to trade an older property that is deteriorating for a newer property that requires less maintenance and upkeep.

Location is always an important factor in real estate ownership. You may want to change the location of your investment property to one that is more suitable to your current needs. If you self-manage your investment properties, a 1031 exchange may give you the freedom to move both your residence and investments to a more desirable area without any tax consequence.

A tax deferred exchange can also be useful to improve your cash flow. You may be able to find a property to trade for that will reduce your monthly carrying costs or increase your monthly income, or both.

If you plan ahead you may be able to avoid the taxes entirely through a series of exchanges and estate planning or retirement strategies. I hope to deal with these strategies in great detail in future articles.

As you can see, a 1031 or tax deferred exchange can help an investor achieve his or her personal goals and be their saving grace.

If you’d like to get a better foundation on 1031, check out the educational video I did in Kathy’s Video Center. You will get more details on how this process works, but don’t worry, it is not spoken in “legalese.” It is an easy to understand and practical explanation, and we give you the fundamentals quickly, so you can get a sense of whether this might work for you. If you own more than one property now, or if you see yourself having an investment, vacation, or retirement property someday, you should be aware of this option. We also have a more detailed 1031 booklet that you can request, and certainly feel free to call (703 803-8600) or email me (j.pitrelli@keytitleva.com) with any questions you may have.