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COVER FEATURE: The List Issue 2007
LAW
5 real-life RESPA violations and how you can avoid them
1. Inflating costs may cost you. The U.S. Department of Housing and Urban Development considers it a violation under the Real Estate Settlement Procedures Act to inflate the cost of third party settlement services. That means your mortgage broker can’t charge your buyers more for a credit report at closing than it paid to pull their credit report. HUD recently settled a case against a national mortgage company for committing just that kind of violation and fined the company $370,000. If your company offers mortgages, charge consumers only what you pay for third party services.
2. Take no captives. HUD considers it a violation of RESPA when your brokerage’s title company or its owners have a financial interest in a captive reinsurance program formed by the title insurer that underwrites your title company’s policies. (A captive insurance company is wholly owned by the company with which it does business.) HUD’s investigations have uncovered strong evidence that such arrangements attempt to disguise the fact that the referral fee paid by the primary title company to the reinsurer is being funneled to the brokerage’s title company. The practice of paying referral fees to a captive seems particularly questionable when there are limited risks and a history of few payouts by the reinsurance company. Not convinced participating in captives is risky? Ask the three home builders who recently paid HUD $1,950,000 to settle claims that their affiliated reinsurance companies were captive.
3. Payments aren’t just money. When you make or receive a payment or anything else of value in exchange for referral of a settlement service, you’re violating RESPA. For example, HUD recently settled with an appraiser who gave a mortgage company’s employees restaurant gift certificates in exchange for referrals. The appraiser settled with HUD by agreeing to pay $4,000, stop providing the gifts, and cooperate with HUD’s ongoing investigation of the mortgage company whose employees accepted the gifts.
4. More than the market will bear. It’s OK to charge for services you provide to third party vendors, but inflating the fees is just a quick step down the path to trouble. HUD recently accepted settlements totaling $80,000 from four real estate companies that charged title companies using their conference rooms for closings at what HUD considered rates substantially higher than the rooms’ fair market value. HUD considered the amounts over fair market as disguised referral fees, which violated RESPA’s antikickback provisions.
5. No one wins at a shell game. Setting up shell entities to receive otherwise prohibited referral fees cost one real estate company and some of its associates $325,000. HUD found that the company encouraged its associates to establish a shell organization, a company with no significant assets or business operations, and use it to purchase an interest in a title company partly owned by the real estate company. The shell company collected a portion of the title company’s profits and then redistributed those profits to the associates on the basis of the number of transactions the associates referred to the title company. HUD also alleged that the associates paid below-market prices for their ownership interests in the title company. Where did the company and associates go wrong? HUD says the creation of the shell company and the purchase of interests in the title company at below market value were attempts to skirt the antikickback provisions of RESPA. Those methods disguised the financial benefit the company and associates received by referring business to the title company.
Source:U.S. Department of Housing and Urban Development (www.hud.gov)
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10 tips for settling disputes without going to court
Between attorneys’ fees and time spent in case preparation, going to court is often a no win even if the ruling is in your favor. Try these options instead.
1. Go to the source of the trouble. If there’s a dispute over the property’s condition, getting all the parties and the arbitrator if one is involved to meet and discuss the issue at the actual site sometimes gives everyone a chance to see the actual damage and resolve any issues.
2. Put the issue in perspective against the greater benefit of reaching an agreement. For example, if a seller refuses to make a repair requested by a buyer, you can present the cost of the repair as just a small reduction in the profit the seller will realize. Or point out to the seller that the cost and inconvenience of making a repair are small compared with the need to begin conducting open houses and showings again if the offer is rejected.
3. Appeal to people’s sense of fairness. Most people are reasonable, so use an argument such as, “If my clients agree to pay an extra $6,000 for the house, it seems only fair that you’d be willing to leave the custom draperies in the bedrooms.”
4. Keep good records of who said what and when. Sometimes disagreements occur because people truly don’t remember what they said or agreed to. Keeping careful, detailed notes is an excellent way to remind individuals of past agreements and prevent disputes. One easy way to keep notes on hand is to create a folder in your e-mail program for each transaction, then file the pertinent e-mails there. E-mail notes to yourself about phone conversations and verbal discussions and file in the same folder.
5. Assume the best. Always operate on the assumption that the other party is acting in good faith and that the dispute can be resolved.
6. Talk it through. Make every effort to negotiate a dispute between the parties before it escalates and ends up in arbitration or court.
7. Keep it cool. Getting angry and making personal attacks or using aggressive tactics to bully the other party will only escalate a dispute.
8. Take a break. Stop discussing whatever it is you disagree about and give everyone a chance to cool off. Sometimes that can diffuse the dispute before it gets too serious.
9. Ask each party to the dispute what the ideal solution would be. Although all parties won’t get just what they desire, this exercise often helps identify the real issues of conflict.
10. Honor your obligation to arbitrate. REALTORS® are required by Article 17 of the NAR Code of Ethics to arbitrate contractual disputes with other REALTORS® and with their clients through their local board or state association. Requests for arbitration are generally made by a REALTOR® principal. For other disputes, the Better Business Bureau (www.bbb.com) also offers a dispute resolution service, as does the Counselors of Real Estate (www.cre.org).
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3 risky situations and how to handle them safely
1. Beware of side deals.
The offering of a car or six months’ worth of home owner association dues to entice a buyer happens more often these days, but if you make a side deal, be sure it’s documented in the contract. Avoid getting tangled in the buyer’s attempt to defraud the lender, says Oliver Frascona, an attorney with Frascona, Joiner, Goodman and Greenstein P.C. in Boulder, Colo. Document the real terms of the transaction in the contract, he says. Include any concessions paid to the buyer before or after closing, such as loans that are to be forgiven, cars to be purchased, or any other incentives given to the buyer to seal the deal. Don’t let those concessions be part of oral side agreements or buried in addenda. Then make sure that the detailed contract is delivered to the lender and that all concessions are properly documented on the HUD1 closing statement.
2. Caught in the middle over home repairs.
More and more salespeople are getting caught in the middle over sellers’ failure to disclose home repairs, says Frascona. For example, the sellers had water in their basement but claim they had the problem fixed and don’t want to tell the buyers the problem ever existed. You can get squeezed when you know there were problems but don’t disclose there were repairs. “The smart money today is that if it’s anything significant that was broken and fixed, disclose that it’s been fixed,” says Frascona.
3. Small mistakes can turn into big fair housing problems.
“Salespeople can get sucked into another agent’s discriminatory practices just by not paying attention,” Frascona says. He gives an example: You’re the listing agent, but the flu bug has bitten you. You ask another associate to cover your open house, but you forget to tell the associate that there’s been a price reduction and that buyers will have access to a communal swimming pool. In addition, the agent finds some black-and-white flyers on your desk, not noticing the pile of color flyers nearby.
An African American couple come to the open house but aren’t told about the price reduction or access to the pool, and they walk away with a black and white flyer. At next weekend’s open house, you’re healthy again, and a white tester who goes through gets a color brochure and learns about the price reduction and access to the pool. “What would you think if you were African American?” asks Frascona. “Neither salesperson intended to discriminate, but our job is to make sure everybody gets the same representation.” The lesson: Make sure you pay attention to every detail so that nothing you do can be construed as discriminatory.
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Laws landlords must know
Managing rental property is a great alternative or addition to selling residential real estate. But you have to know the rules to play the game.
- Fair housing laws: Federal and state fair housing laws prohibit discrimination in advertising rental property and renting property on the basis of race, religion, national origin, color, sex, handicap, or familial status. Some state laws go further and protect marital status or sexual orientation. One mistake many landlords make is denying a rental unit to a family on the basis of the number of bedrooms available. Be careful to review local occupancy laws and how they apply to the number of people who can occupy each bedroom. Also remember that you can decline to rent to persons in a protected class, but the denial must be based on criteria poor credit, not having a job for more than three months used with all prospective tenants and for reasons other than their membership in a protected class.
- Fair Credit Reporting Act: You can refuse to rent to an individual because of a poor credit rating or rent payment history. However, if you do, federal law requires you to tell individuals a poor credit rating was the reason their application was rejected. You should also inform them that within 60 days of the rejection, they have a right to obtain a copy of the report from the agency that reported the poor credit. You must also give applicants the name, address, and phone number of that agency. In most states, you may charge an applicant for the cost of obtaining a credit report.
- Lead-Based Paint Hazard Reduction Act: Federal law requires that before tenants sign a lease on a property built before 1978, the landlord or agent must provide them with a copy of an Environmental Protection Agency pamphlet on possible lead hazards and have them acknowledge receipt of the pamphlet (available at www.epa.gov/lead). The landlord or agent must also provide information about any known lead hazards on the property, including copies of any lead hazard test reports. The lease also must include a specific lead hazard warning statement. If your building has four or more units, you must also notify tenants in those units about the potential health threats when renovation work is done at the property.
- Reasonable accommodation requirements for the disabled: Under the federal Fair Housing Act, you must permit tenants with disabilities to make reasonable alterations to their rented apartment at the tenants’ expense so that they can use the premises. You may require that a tenant return the property to its former condition upon vacating. In addition, you must make reasonable accommodations in the rules and regulations governing your housing so that a disabled tenant can fully enjoy the premises. Examples of accommodation include allowing seeing eye dogs in a no pet building or waiving rules banning large vans in your parking lot for those in wheelchairs.
- Landlord-tenant laws: Many municipalities have laws governing how you must handle security deposits made as part of an apartment rental and what procedures you must follow to evict a tenant. Like earnest money deposits, security deposits must usually be kept in a separate account and often must accrue interest. You may also be required to provide a written account of any deductions taken from the security deposit to repair the apartment at the time a tenant moves out. Eviction regulations often set down what types of notice you must give tenants before filing for eviction and how much time a tenant must be given to resolve any problems before eviction.
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5 other potential landlord liabilities
If you manage rental properties for yourself or clients, you could be facing a liability headache if
- Your property employees violate fair housing laws, even if you don’t know about it.
- Your maintenance workers or third party contractors are exposed to asbestos or lead paint while working on your property.
- Tenants or their guests are injured because of your negligence or failure to make repairs.
- Your employees commit criminal acts theft, rape, or assault against your tenants.
- You fail to review a new employee’s passport or other identification that establishes that person’s right to work in the United States and you fail to complete an Employment Eligibility Verification form (USCIS Form I-9).
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8 steps to success in small claims court
Emily Doskow, a part time small claims court judge and a legal editor at Nolo (www.nolo.com), which just released its 11th edition of Everybody’s Guide to Small Claims Court by Ralph Warner, shares these tips for making your day in court a happy one.
1. Know your limits. Each state has monetary limits on the size of cases allowed in small claims court. Top limits range from $1,500 to $15,000. Also note that only some states allow eviction proceedings to be heard in small claims courts.
2. Find out whether the person can pay you. Even if you win your case, you most likely won’t collect if the losing party doesn’t have enough resources.
3. Decide if you have a case. Review the hard evidence you have written proof of your arguments, photos, or written declarations from witnesses. You can go to court with just your word against the other person’s, but it’s a tougher go.
4. Get your paperwork in order. Obtain any necessary forms you need to file to get your case on the court’s docket. Many forms are available online, often at your local government’s or the court’s site.
5. Make friends with the court clerk. Don’t be rude to the clerks; as the people with whom you file your documents, they can become your best friends in explaining procedures to get your case to court. Clerks can’t give legal advice, but they can make your life a lot easier.
6. Get the person served. Once you have a court date, notify the other party in writing and get a signed receipt of the notification. You’ll have to get someone to serve the notice in person. You can’t do it yourself. In many states, notification by certified mail is acceptable.
7. Don’t wing it. Remember, this is a presentation, and making a good first impression counts. Practice what you’ll say.
8. Keep it short. Just the facts, ma’am, as Sgt. Joe Friday would say. Judges hear dozens of cases a day, so brevity wins points.
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6 ways to ensure you’re sued for misrepresentation
Want to put your foot in it and end up with a big legal bill? Here’s how:
- Tell the seller that since the buyer probably won’t notice a problem, it’s OK to not mention it. Hint: Always tell the purchaser about all material defects.
- Repeat “something you heard” about a possible hazardous waste dump in the neighborhood while standing in line at the grocery store. Hint: Don’t make statements you can’t verify. Make some effort to confirm the accuracy of what you’ve heard. If you can’t confirm that it’s false, make the buyers aware of the information and let them investigate it themselves.
- Take the sellers’ word that they’ve never had water damage, despite those suspicious lines on the foundation. Hint: Caution the clients about the need to be candid in their disclosures. If they insist on saying there hasn’t been any damage, you can withdraw from the representation or make sure all buyers are aware of the foundation markings so that they can conduct their own investigation.
- Assume you’ll remember exactly what you told the buyers about the property, even six months later when they dispute what you said. Hint: Document all information you share with the buyers.
- Pooh-pooh the buyers’ idea of getting a home inspection before closing, since the house is obviously in great shape. Hint: Always encourage buyers to get any inspections they want.
- Don’t worry too much if you don’t know anything about real estate construction or planned new developments in your local market; after all, your job is sales. Hint: Be informed on current matters in your market, including red flags indicating property defects.
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Mortgage fraud in real life
In a free market, anything can happen. But if something seems too good to be true, it may be fraud. Not recognizing the signs of fraud can kill a sale and embroil you and your client in legal action if a fraudulent sale closes.
- The surface: Buyer Joe Pass offers your seller the full list price for a home that’s been on the market for four months. It seems weird in a slowing market where comps have been going down, but you congratulate yourself on your good luck. Shortly after the sale, Joe asks you and the sellers to write a second purchase agreement with a sales price $15,000 higher than the list price and change the MLS. At closing, Joe wants to receive a decorating credit of $15,000.
The real facts: Joe is probably also arranging a false appraisal and using this inflated price to increase the perceived value of the property to the lender so that he can receive a loan far in excess of the property’s value and pocket the difference at closing.
- The surface: Gertrude Smith is a single, retired schoolteacher living on a small pension and some savings, but she’s just made an offer on an upscale, six-bedroom condo you’ve listed. It seems odd, but after all, it’s her life, and you stand to get a big commission on an easy sale.
The real facts: Gertrude is acting as a straw man. The actual buyer is using Gertrude’s good credit and respectability to get a loan. Then Gertrude gets a kickback for signing the property immediately over to another buyer, who will live in or rent the property without making any payments to the bank until foreclosure takes place.
- The surface. After a year of trying to find a buyer for a home, you convince the sellers to take back a second mortgage for your buyer, who doesn’t have the money to make a down payment and couldn’t otherwise purchase the house. You don’t mention the second loan in the purchase agreement, and the buyer sort of “forgets” to tell the lender about the second mortgage, which also somehow doesn’t get recorded.
The real facts: The lender made a loan without a true picture of the buyer’s financial obligations, which creates fraud. It also increases the possibility of the seller’s losing money if the buyer can’t make all the payments.
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4 steps in dealing with stigmatized property
The possibility of environmental problems or other stigmas relating to a property can stop a transaction cold. Try these strategies to reduce the threat of liabilities from stigmas.
1. Consider the source. Investigate the accuracy and source of information you receive about a stigma. Sometimes rumors and unsubstantiated information gradually become accepted as fact. Check law enforcement agencies, newspaper accounts, and even neighbors to try to determine the truth.
2. Find out your disclosure responsibilities. Many states have laws that address the requirements for brokers and salespeople to reveal particular stigmas, such as homicides or occupants with the AIDS virus. Laws protecting the privacy of individuals are another factor that should influence your decision.
3. Determine whether the stigma is material to a buyer’s decision. In the absence of a specific law, consider whether the stigma is a material fact that would probably influence reasonable buyers’ decision to purchase the property or the amount of money they’d be willing to pay for it. For example, the fact that the house belonged to a government official imprisoned for fraud may be sensational, but it probably won’t affect how valuable the property is to another buyer.
4. Talk to sellers about the need to disclose. It’s critical to explain to sellers the possible benefit of disclosing a stigma rather than having buyers find out about it on their own. Also, explain to them that they needn’t disclose the stigma to every casual looker. Disclosure is necessary when a looker is interested enough to make, or to consider making, an offer. Sellers should make the disclosure as early in the process as state or local law requires, allowing serious buyers sufficient time to consider the stigma.
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4 steps for a risk-free referral
Customers look to you for expert advice, but play it smart and give advice that doesn’t create liabilities for you.
1. Make a list of all categories of experts whom buyers or sellers might want to consult, including home inspectors, termite inspectors, structural engineers, environmental specialists, lenders, and attorneys.
2. List at least three experts under each category. You can make your choice on the basis of past experience or recommendations from others. Don’t forget to disclose any experts on the list who are affiliated with your company.
3. Give the same list to every seller or buyer you work with. That way, you make clients aware of their options and the need to use specialized experts if they have concerns in a particular area. And by doing so, you ensure that every buyer or seller consistently gets the same list of names.
4. Don’t ask for or accept any referral fee or other compensation from any individuals or companies on your list.
Source: Adapted from Real Estate Brokerage Essentials: Managing Legal and Business Issues, 3rd edition
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7 niches to target without running afoul of fair housing laws
Targeting a specific niche for your services is sort of Marketing 101. But take care that your focus on one sector doesn’t violate fair housing laws, which prohibit preferential treatment or discrimination in housing against individuals because of race, national origin, color, sex, familial status religion, or handicap. Try some of these options:
Parents of college students. If their kids want to live off campus, parents may find it a good investment to buy a home or condo for them rather than rent housing for four years. And they can rent out the condo to other college students after their own child has graduated or sell it and pocket any appreciation.
Divorcing couples. This may sound harsh, but family breakups often mean selling jointly held properties as well as finding new places to live.
Home owners facing foreclosure. Helping strapped owners sell before the bank takes back the property may, unfortunately, become a growing niche.
Historic home lovers. If you understand the challenges of owning and maintaining historic homes, those who favor such properties will value your knowledge.
Faux farmers and ranchers. Helping retiring boomers who want to return to the land at least a dozen acres or so can be valuable to those buyers who have no idea about wells or septic tanks.
New urban dwellers. Introducing those who’ve spent their lives in the ’burbs to the pleasures of walking to the store isn’t just a big city phenomenon anymore.
The carless. Mass transit and walkable communities offer an increasing appeal to environmentally conscious individuals.
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