SEAGLE NEWS

Legal Issues That Matter

Tuesday
May102016

Real Estate Brokers and Sales Agents Should Read their E&O Policies

Last week, I attended the 52nd Annual Fund Assembly. The Assembly is a three-day long continuing legal education conference attended by around 2,000 Florida dirt lawyers like Yours Truly. I enjoy the Assembly because I always learn something new. This year, as it has for the past five years, the Assembly focused on CFPB regulations, TRID, the somewhat-new Closing Disclosure, and in-depth title insurance claims issues. 

However, we also had the pleasure of hearing an attorney who represents real estate agents and brokers when they are sued for malpractice. She reviewed a typical E&O Insurance Policy and its terms, and we learned some of the issues that land agents and their brokers in litigation most often. 

Here are some tips she asked us to tell REALTORs who refer business to our title agencies or our law firms for real estate matters:

 

  1. Once the closing is over, don't continue to be overly helpful to your customers. If they call and request a copy of their contract, don't feel the need to send them a copy of your entire file. Just send them exactly what they need, and -- before you send anything that they may not be entitled to as they would a contract or another document they executed (i.e. your e-mails to and from a home inspector) -- speak with your attorney.
  2. Don't keep more than one file for a transaction. Some agencies have a file at the reception desk, one in the broker's office, and another in the agent's car's trunk. Keep one file, electronically if possible, that has all of the communications and documents related to the transaction in one place. 
  3. Be careful when trying to save money by using procedures manuals or even file folders that were prepared for other brokerages. Those manuals and file folders (if they have checklists on them) set the standard of care that you are to follow in the transaction. If your firm is small, and the manual and checklists came from large firms with large compliance budgets, you are setting yourself up to fail to comply with your own standards of care.
  4. Don't scrimp on E&O insurance. Make sure you get coverage that covers everyone in your firm and not just the broker. Look for a deductible waiver clause in the policy. If this is present, your deductible could be waived so long as you had the following in your file:
    • a seller disclosure form signed by the buyer and seller prior to closing;
    • a home warranty purchased prior to closing (if you have to pay for it, do so)
    • a state or local board approved standard sales contract was used for the transaction; and either
      • a home inspection was completed and a copy provided to the buyer prior to closing; or
      • you acted solely as a buyer's agent, and advised them in writing that they should obtain a home inspection, and provided a list of at least three home inspection companies on the disclosure.
  5. Always check the brokerage records to see if the property you're listing now was ever listed with the brokerage in the past. If so, pull that prior file and review the seller's disclosure statement to make sure the same things are disclosed again in this listing. You're automatically presumed to have knowledge of the property simply because it has been listed with your brokerage before, so you should take steps to ensure you disclose everything your brokerage learned about the property in the prior listing. 
  6. Avoid listing your own properties or properties of family members for sale. Many E&O policies specifically exclude coverage for such transactions. 
  7. Judges are skeptical of transaction brokerage in the first place, so when the defendant REALTOR in a lawsuit is also a part owner of the title agency, the mortgage brokerage, or any other settlement services provider in the transaction, it doesn't help the REALTOR's credibility in the lawsuit.
  8. Report all potential claims to your E&O carrier as quickly as possible. The carrier may be able to assist with claims repair or avoidance to prevent it from becoming a major claim.

Also, be prepared that, if you are sued as a sales agent or broker, your life will be disrupted with depositions, meetings, mediations, and hearings. It will not be a "piece of cake" by any means. However, if you're prepared with well-documented evidence, and disclosures signed and acknowledged by the parties, you should be ahead of the game.

-- JES

Friday
Jan152016

LLC's and hidden entities in Miami-Dade and NYC to be scrutinized

Starting March 1, 2016, and ending August 27, 2016, FinCEN will require title companies to report the beneficial ownership information of legal entities purchasing real estate for cash if the purchase price is over $1 million in Miami-Dade County, or $3 million in New York City.

FinCEN is testing the waters to see if foreign or domestic criminals are using real estate to hide their illegally obtained cash in money laundering schemes. It is very common for foreigners and others to have their lawyers to create Delaware, Nevada, or Wyoming limited liability companies or Florida land trusts to be used to take title to real estate for which the member or beneficiary is using cash to purchase the property. The U.S. Government is concerned that they are unable to track the source of the cash being used to purchase the properties.

We don't understand how they aren't tracking the cash already. We know of no settlement agent who would accept a bag of $1 million in cash to purchase a piece of property. So the funds would be required to go through the FED system either by wire or other form of deposit into the settlement agent's account. At that point, the banks would be reporting the large cash deposit already. Secondly, the settlement agent would issue a 1099-S to report the sale to the IRS who -- supposedly -- shares information with FinCEN along with the FED. Finally, if the property is to be held in a land trust, the trustee is filing Form 56 with the IRS to give the IRS notice of the holder of the beneficial interest in the trust since the trust is a pass-through entity for taxation.

We would be surprised if this new required form of reporting provides information to FinCEN than they already have access to, other than a faster and more detailed reporting. However, during the test phase, REALTORs and settlement agents who work with foreign buyers who buy expensive property in Miami-Dade or NYC, utilizing an entity to hold title, should prepare the buyer for the prospect of being required to give the settlement agent true identification of the members, shareholders, partners, or beneficiaries of the entity that is taking title to the property in the cash transaction.

The FinCEN bulletin is available online.

Thursday
Jan142016

Non-resident aliens to pay more tax at real estate closing time

On February 16, 2015, closing agents will be required to hold back 15 percent of the gross sales price when a foreign national is the seller of the real estate. This is the Foreign Investment in Real Property Tax that has been in effect since 1981 that requires foreign persons to pay U.S. Income Tax on the gains they make when they sell U.S. real estate. Until February 16, the withholding is only 10 percent of the gross sales price.

The FIRPTA tax is actually a tax that the buyer is required to pay if the tax is not withheld from the seller's proceeds and remitted to the IRS within 20 days of closing. So it is the buyer's responsibility to ensure that 1) the seller is not a non-resident alien of the United States, and 2) if he is, then direct the closing agent to withhold and remit the proper amount of tax to the IRS.

There are exceptions to the withholding, but we have always advised buyers to not assume the risk of not paying the seller's FIRPTA tax based on the exceptions. Instead, it is advisable to always pay the tax and let the seller apply for a refund on their own.

The current FAR/Bar contract references a "10%" withholding, so -- any contracts that will close after February 16, 2015, should be amended to read "15%".

Tuesday
Sep152015

Land Trusts and Non-Homestead Residential Property

We have heard that Miami-Dade and Duval Counties' property appraisers have been treating any conveyance of non-homestead residential property into a land trust as a "conveyance." This is important because, under Florida Statute Section 193.1554(3), non-homestead residential property is subject to a valuation increase cap of ten percent each year.

This means that, even if non-homestead residential property increases in value by 25% in a year, it can't be assessed at a valuation greater than 10% higher than the prior year's valuation. It also means that, over a period of time, the tax valuation of the property and the actual fair market value of the property could eventually move very far away from each other.

When the property is "conveyed," however, the appraiser is permitted to assess the property at the current fair market value, and the caps are reset at this new value.

We have heard of some investors facing increases in tax value as much as $14,000.00, which increases their taxes accordingly.

The appraisers sent out TRIM notices last month, and most have a process whereby property owners can informally discuss the valuation with the property appraiser's office to see if there is a way to adjust the valuation. However, if that is not fruitful, the owner can appeal to the county's Adjustment Board. The deadline in most counties to file this appeal is September 18, so it is important to review TRIM notices quickly and file the appeals prior to the deadline. Once the deadline has passed, there is no opportunity to appeal the valuation until the following year.

Tuesday
Aug042015

TRID and how it will affect closings

They announced today that the full implementation of TRID (TILA-RESPA Integrated Disclosure) will be October 3, 2015. This has been moved back from August 1, 2015. This gives us a little more time to prepare for the implementation and to ponder the effects it may have on the closing process.

As everyone is aware, the TRID is a new disclosure form that will be required for any 1-4 family, residential real estate closing where a federally-related mortgage is being used to finance the purchase price. The new form combines and replaces the Good Faith Estimate, Truth-in-Lending, and HUD-1 settlement statement forms. It looks nothing like any of the currently existing forms, and -- in many cases -- does not reflect what is actually happening in the transaction as far as funds disbursements or pricing are concerned.

It is important to remember that the form is a disclosure form. It is not intended to be a disbursement disclosure as the HUD-1 has been used for several decades. It is also important to know that the form is required to be delivered to the borrower at least seven days prior to closing. When you add three days for mailing, that means that it must be sent out 10 days prior to closing.

The disclosed numbers have to be accurate -- at least much more accurate than the typical HUD-1, TIL, or GFE that was sent to the borrowers prior to closing in the past. To get that level of accuracy, closing agents are going to have to obtain HOA estoppels, title searches, municipal lien searches, and other closing information much earlier in the process than they have in the past so that they can provide accurate information to the borrower's lender for disclosure on the TRID.

Most lenders have made it clear that -- since they are liable for the timing and contents of the disclosure -- they will be the ones to send the TRID to the borrower; not the closing agent. Many lenders have also been informing the closing and title industry as to which electronic platforms they will be using to share closing information from and to the closing agent. Gone are the days of e-mails and faxes between loan processors and closing agents. Now, much like the Equator system that has been used by many lenders to track foreclosures and short sale workouts, the lenders will use similar systems to communicate closing information.

The penalties for failing to timely and accurately disclose information are pretty hefty, so lenders will likely err on the side of caution if a change in the numbers occurs such that the TRID disclosure must be changed. If the TRID changes, it must be re-delivered to the borrower which starts the 10-day countdown again...even if that countdown takes us past the Closing Date.

So, how does this affect the closing process? First, we would be surprised if any mortgage closing will be able to be completed within 30 days of the contract's Effective Date. Many REALTORs we've spoken with are already bracing for 45 to 60-day closing dates. Secondly, back-to-back closings will be a thing of the past. No longer will we be closing the sale of the seller's house in the morning, and their purchase of the new home in the afternoon, while moving trucks sit in the driveways waiting to be unloaded. With the timing requirements of the TRID disclosure, no one we have spoken with knows how such closigs could take place in light of the 10-day disclosure requirements. This also means that post-closing occupancy agreements could become the norm. These agreements will allow the seller to remain in the home for a few days after closing until they can finalize their financing to purchase their new home. Also, if the closing date is to become a moving target, based on TRID disclosures, it would be better for everyone to plan for the seller to remain in the home after closing anyway in many cases.

We're advising buyers to do a walk-through of the property at least 12 days prior to closing to see if there are any property changes that could affect the purchase price. If so, this would also affect the TRID. Might as well discover and deal with it before that final TRID goes out 10 days prior to closing. It's still advisable to do one more walk-through the day before or the day of closing just to make sure everything is still OK with the property, but the current FAR/Bar contract doesn't address an additional walk-through so far ahead of the closing date, so REALTORs should be aware of it, and suggest that the parties add it to the contract as an additional provision just in case.

We believe that there will be more need for attorneys to be involved in representing the buyer and seller in the closing process since contractual terms related to the closing date and arguments over the financing contingency will be more commonplace. We also are concerned that, eventually, the regulations will make it so difficult for an independent title agency or closing attorney to handle the closing, that the banks will be handed the reigns over the closing process. It only makes sense that this could eventually occur, because the banks are on the hook for most problems with the mortgage disclosure and financing. As such, it would make sense to eventually change the rules to state that -- when a federally insured mortgage is being used in the purchase -- the bank will choose the escrow and title agent for the closing. When that occurs, the buyer, seller, and REALTOR lose the choice and control of that part of the process, and they will need attorneys on their side to make sure contractual terms are clear and followed in the interests of the parties.

Finally, one last effect of TRID is that the 2010 HUD-1 settlement statement will die. While it will still be required for reverse mortgages, it will no longer be required in one-to-four family residential closings where a federally related mortgage is involved. From discussions with other closing agents, we have heard that many will adopt a very simple income and disbursement sheet for the buyers and sellers to sign at closing to agree to the disbursement of funds. The American Land Title Association (ALTA) is developing a new standard form that can be used to replace the old HUD-1. Until that is done and adopted, don't be surprised to see a wide array of various types of disbursement forms at closings.

We are confident that more changes will come to light as we delve into the world of TRID. We welcome you to share with us any insights or concerns that you have as we close in on the implementation deadline.

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