This article was published on: 03/01/2005
COVER FEATURE: The List Issue 2005 - Legal
This article was published on: 03/01/2005
COVER FEATURE: The List Issue 2005 - Legal
Watch your step
3 ways to respond to buyer questions that challenge fair housing law
10 transaction documents you must keep
Real estate law in a nutshell
6 must-know escrow facts
Eight 1031 exchange rules you can’t ignore
5 provisions every buyer’s agreement should have
The List Issue 2005: Legal
Watch your step
Like it or not, we live in a litigious society. According to the U.S. Department of Justice, plaintiffs filed more than 259,000 civil complaints in U.S. courts during 2000 (the last year for which statistics are available). And real estate issues are a prime litigation area. The NATIONAL ASSOCIATION REALTORS®’ 2003 Legal Scan found that the biggest sources of real estate disputes were agency, fair housing, property management-related issues, and property condition disclosures. Issues that showed an increase in disputes from 2001 to 2003 were third-party liability (up 26 percentage points), property management and technology (each up 13 percentage points), and RESPA (up 10 percentage points). Yet even knowing the law and following it carefully is no absolute guarantee of staying out of court. So take a minute to review these tips to remind yourself of key legal points—and let someone else be the next lawsuit statistic.
3 ways to respond to buyer questions that challenge fair housing law
Problem: You’ve heard it a hundred times from buyers, and you still don’t have a good answer: “What kinds of people live in this neighborhood?”
Solution: The key is to provide concrete information that’ll give buyers a sense of the area without mentioning protected classes: race, color, religion, sex, national origin, handicap, or familial status. Next time, instead of stammering when a buyer poses this dreaded question, try these legal—yet customer-friendly—responses.
1. Focus on economic status and occupation, which aren’t protected by fair housing law. If you mention people you know or have worked with in the area, don’t describe them in a way that includes a protected class.
Say: “This is a middle-income neighborhood. Many of the folks who live here work at the businesses downtown. It’s a very easy commute from here. For example, Bob Smith, my accountant, just lives in the next block.”
2. Focus on specifics about the neighborhood that give a sense of its personality, such as whether it has many long-term residents or first-time homebuyers. Information on the number of sales in the area may also give buyers a sense of an area’s stability and vitality.
Say: “Most of the houses in the subdivision were built about 20 years ago, and a lot of the original buyers still live here. Aren’t the houses beautifully maintained?”
3. Focus on providing objective data from third-party sources. Making the data available to all clients also could protect you from charges of discrimination.
Say: “I get that question a lot, so I asked the chamber of commerce to provide me with a fact sheet about the area’s demographics that I could offer to all my clients. That way, you’ll have all the data to take with you. I also put the chamber’s number at the bottom so you can call if you have any more questions.”
10 transaction documents you must keep
It’s tempting once closing is over to dump the mountain of paper that every real estate transaction seems to generate. But clean out judiciously. You’ll want to keep:
1. The listing agreement. To prove you were the exclusive representative of your client in case of a dispute.
2. The signed or acknowledged agency disclosure form. To protect yourself in case any questions of fiduciary responsibility or liability arise.
3. The comparable market analysis. To demonstrate how you and the seller arrived at a sale price.
4. All marketing materials, including newspaper ads and printouts of online listings. To protect yourself from charges of violating fair housing laws.
5. All correspondence and phone logs with buyers, sellers, or other parties to the transactions. To provide evidence of fact in case of a charge of misrepresentation, which can be filed several years after the events occur.
6. Inspection reports and copies of all invoices for repair work required before the sale. To demonstrate what physical defects came to light during inspection and what repairs were done.
7. The lead-based paint and other hazardous material disclosure forms, if applicable. To ensure you have proof of compliance, keep lead paint forms for three years.
8. A copy of the purchase contract and addenda. To provide a record of the exact terms of the deal.
9. A copy of the settlement statement (HUD-1 form). To keep a record of sellers’ and buyers’ transaction costs and to gain points with clients by sending a copy to them at tax time with an explanation prepared by your accountant of what they can deduct.
10. Escrow account records relating to the transaction. To prove the monies were managed and disbursed.
Adapted from REALTOR® Magazine Online’s (REALTOR.org/realtormag) Risk Management Tool Kit.
Need to know
Real estate law in a nutshell
With so many federal laws and regulations governing real estate activities, it’s all too easy to forget one or two in the heat of a sale. Here’s an easy-to-use cheat sheet for some major laws affecting real estate.
Do-not-call/e-mail
Laws: The Telephone Consumer Protection Act of 1991 and related Federal Trade Commission regulations, The CAN-SPAM Act
Major provisions:
∙ Prohibits businesses—other than charities, pollsters, and political organizations—from calling individuals whose names appear on the National Do Not Call Registry (http://www.fcc.gov/cgb/donotcall/).
∙ Allows calls to existing customers (those with whom you’ve done business in the last 18 months). Lists used for calling must be updated monthly.
∙ Allows you to call FSBOs only if you have a buyer for their homes but doesn’t allow you to solicit FSBOs for a listing.
∙ Provides a safe harbor from prosecution for inadvertently calling someone on the do-not-call list if your company has written procedures on calling, provides training on do-not-call regulations, has accessed the national registry within the last three months, and maintains a company-specific list of numbers not to call.
∙ Allows real estate practitioners to send out commercial e-mail soliciting business if the e-mail is clearly labeled as a solicitation for business and allows recipients to opt out of future mailings.
More resources: NAR Field Guide to Anti-solicitation Laws, NAR’s National Do-not-call Tool Kit Updates, and REALTOR® Association Executive’s “Spam’s New Rules: Your Association’s Duties Under the New Law”
Lead-based Paint
Law: The Residential Lead-Based Paint Hazard Reduction Act of 1992
Major provisions:
∙ Applies to houses and apartments built before 1978.
∙ Requires owners and their agents to disclose the known presence of lead-based paint on properties being sold or leased and to provide any available reports pertaining to lead-based paint hazards.
∙ Requires owners’ agents to give all prospective buyers or renters a copy of the federal pamphlet, Protect Your Family from Lead in Your Home. It’s available in several languages at the EPA Web site (www.epa.gov).
∙ Makes salespeople responsible for obtaining a signed acknowledgement that the pamphlet was received and for keeping that acknowledgment for three years as proof of compliance.
∙ Gives buyers 10 days to have an inspection of the property for lead paint.
∙ Does not require that owners test for the presence of lead paint.
More resources: The Environmental Protection Agency, the National Lead Information Center, REALTOR® University’s course “Lead Paint Disclosure: It’s the Law”
RESPA
Law: Real Estate Settlement Procedures Act of 1974 and U.S. Department of Housing and Urban Development regulations
Major provisions:
∙ Prohibits real estate practitioners from receiving referral fees or anything else of value from service providers unless the salespeople actually perform a service that justifies the fee. Fees just for referring business are illegal.
∙ Prohibits practitioners or homebuilders from requiring buyers to purchase title insurance from a particular provider.
∙ Requires lenders to provide good faith estimates of closing costs and use the HUD-1 closing document.
More resources: “RESPA-permitted fees” (REALTOR® Magazine, August 2002), and HUD’s RESPA information
Fair Housing
Law: Federal Fair Housing Act of 1968 and its amendments
Major provisions:
∙ Makes it unlawful to discriminate in the sale or leasing of housing based on race, color, religion, national origin, sex, familial status, or handicap. Note that handicaps include physical and mental impairments, AIDS or HIV, alcoholism, or prior drug addiction. Some state laws also protect other classes, such as sexual orientation, from discrimination.
∙ Exempts housing for the elderly, dwellings operated by religious organizations, and rentals in owner-occupied properties of four or fewer units (with the exception of racial discrimination, for the latter).
∙ Prohibits salespeople from providing information about an area that addresses its racial, religious, or ethnic composition as a way to restrict a buyer’s or renter’s choices.
∙ Makes it unlawful to refuse information on available financing to persons in a protected class.
∙ Prohibits advertising that indicates a preference for or against any protected group (see page 24). Note that this advertising exception applies even to owner-occupied properties with four or fewer units.
More resources: REALTOR® Magazine Online’s Fair Advertising Practices Sales Meeting and Risk Management Tool Kit (Fair Housing Risks), NAR’s Field Guide to Fair Housing, U.S. Department of Justice, and U.S. Department of Housing and Urban Development Fair Housing Guidelines
For direct links to all the resources mentioned here, click Current Links at REALTOR.org/realtormag.
6 must-know escrow facts
In some states, escrow agents—typically an attorney or title company—handle all aspects of a closing; in others their responsibilities begin and end with the earnest money deposit. But handling the money can be tricky, so be sure you know your client’s rights.
1. Escrow instructions should specify in writing how and under what conditions monies will be disbursed, especially if the transaction doesn’t close.
2. Escrow is a fiduciary relationship but is limited to the duties involved in the escrow. The escrow agent is a trustee of both parties and is equally responsible to both parties for the proper administration of the escrow.
3. If a transaction fails to close as scheduled, monies may continue to be held in escrow provided there’s no written demand from one party to cancel the contract. Monies are typically held after the closing date if the date to obtain a loan has passed but the parties still want to proceed with the transaction.
4. If the transaction is cancelled by either party, the agent holding the escrow monies shouldn’t disburse any funds until all parties agree in writing how to disburse them.
5. If parties can’t agree on how to disburse funds, the escrow agent may file an interpleader, which names all the parties that might have an interest in the monies and asks a court to decide how to disburse the money. Otherwise, an escrow agent may be obligated to keep funds indefinitely.
6. If a transaction is cancelled by the parties, real estate brokers and other third-party vendors may have first claim to escrow funds. That claim would depend on procuring cause. For example, if the transaction failed because the seller backed out, but the buyer’s agent had produced a ready, willing, and able buyer, the buyer’s agent might earn a commission.
Source: Portions adapted from Going into Escrow, V.R. Oltmanns, Xlibris Corp., 2000.
Eight 1031 exchange rules you can’t ignore
These tax-deferred exchanges are great ways to postpone capital gains taxes on you or your clients’ real estate investments. But be sure you follow the rules.
1. Exchanges can be used only for investment properties or properties owned for use in a business. They can’t be used for residences or for second homes unless the property is used only for rental to third parties.
2. Exchanges must be made between like-kind properties. The like-kind properties must both be used for investment or business purposes, but that doesn’t mean they have to have the same exact use. An apartment can be exchanged for a strip center, for example.
3. To meet the Internal Revenue Service guidelines for an exchange, you must identify the replacement property for the one you exchange within 45 days of the initial property transfer date. You may identify up to three properties of like value or as many properties as necessary to total the fair market value of the property you are exchanging.
Properties may also be exchanged for tenant-in-common interest shares in larger, institutional-grade property. Say your client owns a $1 million retail property. The client can exchange it for a 10 percent ownership interest in a $10 million property. There are a host of benefits to these fractional interest exchanges. Your investor clients may be able to buy into properties of a size and quality they couldn’t otherwise afford. There’s also the chance to trade their management responsibilities for ownership interests in a professionally managed property. The Securities and Exchange Commission has asked NAR to propose ways that real estate practitioners could be compensated in tenant-in-common transactions.
4. You must close on the replacement property within 180 days from the initial transfer date of your property to the other party. Note that IRS regulations now let you buy the replacement property first in what is called a reverse exchange.
5. If the property exchange isn’t simultaneous, you must use a qualified intermediary—often a bank or an attorney—to hold the money until the other part of the exchange is complete.
6. If you end up with cash to even out the value of the two exchanged properties—often called a “boot”—that cash is taxable at current capital-gains rates.
7. All exchanged properties must be located in the United States.
8. If the property you receive in exchange is from a person related to you and you then sell the property within two years, the original exchange won’t qualify for deferred capital gains.
Note: Like-kind exchanges are often complicated. A failure to follow the rules can result in a disallowing of the exchange. Check with an attorney or other investment professional.
For links to the NAR Field Guide to 1031 Exchanges and Internal Revenue Service Web site, click Current Links at REALTOR.org/realtormag.
5 provisions every buyer’s agreement should have
1. The term of the agreement and the duties and responsibilities of the buyers’ agent.
2. The fee buyers will pay their rep if they purchase a home during the term of the agreement, and whether the fee will be offset by any amounts paid to their rep by the seller or listing agent. The agreement should also disclose instances in which a seller or listing broker won’t compensate a buyers’ agent.
You may also want to include a retainer or hourly fee compensation clause in the buyer’s agreement that states the buyer agent will be paid a fee or commission whether or not a customer purchases a home.
3. The circumstances under which buyers aren’t obligated to pay a commission. With an exclusive right of representation agreement, buyers would owe a commission on any property purchased during the time the contract is in force. Under an exclusive agency agreement, buyers have the flexibility to purchase properties they identify on their own but will still owe a commission if a purchased property is identified with the assistance of their agent. New construction and FSBO are the types of property that buyers are most likely to find themselves.
4. Procedures that will be followed if the agent shows the same property to more than one buyer or writes more than one contract on the same property. One option is to withdraw from representing one of the buyers. Another choice is to disclose the situation to both parties and obtain their written consent. This will create a dual agency relationship, however.
5. Disclosure of any relationship to the seller or other instances that might create a dual agency relationship.
Source: REBAC Instructor Lynn Madison, ABR®, GRI, of Lynn Madison Seminars (www.lynnmadison.com)
ONLINE EXCLUSIVES
For more on fair housing, disclosure, and agency, order “Don’t Risk It: A Broker’s Guide to Risk Management.” Visit REALTOR.org/store.
Visit REALTOR® Magazine Online (REALTOR.org/realtormag) and click Current Links to see the contents of our last two list issues and to find thousands of pages of online exclusive content, all geared to helping you succeed in business and in life.
© Copyright, 2012, by the NATIONAL ASSOCIATION OF REALTORS® |