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Sunday, June 14, 2015

A BANKRUPTCY FILING BY A SELLER IS NOT A PANACEA FOR TITLE ISSUES


    While this may be a bit esoteric, and beyond the scope of what most people come to this blog to read, there is a little known rule about a party filing bankruptcy and its effect on judgments against them.  

    The narrow context in which we are focusing our attention on is the situation where a party had a money judgment entered against them and they subsequently filed a bankruptcy petition and they are now selling real property to a third party.  The issue is whether the judgment was wiped out by virtue of the bankruptcy filing. That answer, while clear, may not be as widely known as it should be.

    The simplistic thought that most people have, even many attorneys, and their level of inquiry, is simply this.  Did the Seller receive a discharge in connection with their bankruptcy filing?  If so, then they reason that the judgment must have been wiped out.  This assumption is wrong.  The judgment will only be wiped out if they named the judgment creditor in their bankruptcy petition.  However, we aren’t done with the inquiry.  Not close.

    If, upon reviewing the bankruptcy petition, it is determined that the judgment creditor was indeed named, most people think this is sufficient and think that it is then ok to proceed with their purchase of the judgment debtor’s real property, as the judgment will no longer affect their property.  Unfortunately, this isn’t true, although this is a false assumption that most people hold.

    Instead, what most people don’t realize is that what the bankruptcy filing only serves to release the judgment debtor from their obligation to pay the judgment and nothing more.  The judgment is still attached to the property, and is still a lien against the property, and any subsequent purchaser of any real property owned by the judgment debtor will take subject to the judgment.

    What is actually required from the judgment creditor, other than to vacate the judgment, is a property release for the property in question.  This is typically obtained by paying the judgment creditor a negotiated sum, which should be somewhat lower than what they would demand in order to vacate the entire judgment. 

    Even if a property release is obtained, such judgment will still be attached to any other properties that the judgement debtor may own.   This is why the judgment creditor may take a reduced sum to provide a property release, as they will continue to hold the judgment against other properties that the judgment debtor  owns and thus the judgment creditor expects that the same scenario will play out again and that they will be paid for a property release for such other properties.  Of course, the judgment creditor may also see this as their only bite at the apple and may seek a princely sum to release the property.

    One final thing to remember is that foregoing applies even in the context of a short sale where the judgment debtor has no equity in their real property.  Whether or not they have equity is simply irrelevant. 

    As can be expected, this issue actually comes up most often in the context of short sales as a seller of a short sale property may unfortunately have had various financial reversals that caused them to have a judgment filed against them, and which may led them to file a bankruptcy petition.  It is accordingly imperative that you have an experienced real estate attorney representing you when purchasing a short sale as there are a myriad of title issues that can have serious consequences post closing if they are not both identified and properly addressed prior to closing.

Saturday, May 30, 2015

DOES A CONTRACT OF SALE EXPIRE? (Is a contract of sale like a carton of milk?)

    One statement that I hear quite often, and one which is completely incorrect, is that a contract of sale has “expired”.   However, the simple fact is that a contract of sale is not like a carton of milk.  It does not expire on its own.   Instead, there is a process that must be followed in order to effectively terminate it.

    The mistake that most people make is to assume that the closing date contained in a contract of sale is akin to the expiration date that they see on the aforementioned carton of milk.   It isn’t and the milk carton   and a contract of sale aren’t really that analogous.

    Simply put, in the vast majority of contracts, the closing date is merely an approximate date as to when the closing may, but not must, take place.  It’s a ballpark date and nothing more and the contract of sale will not expire the minute that such date passes.  Instead, the side that wants to cancel the contract must serve an appropriate notice fixing a “Time of the Essence” closing date and, if done properly, then once that date passes, the party serving such notice may then cancel the contract and avail themselves of various remedies.

    An exception is if a contract of sale already has a “Time of the Essence” date, which is highly unusual and occurs typically only in limited kinds of transactions, for example, new construction, foreclosure and REO sales.   If a contract has such a closing date, and if the parties don’t close by such date, then the contract will indeed expire.

    Typically, most contracts of sale contain an “on or about” closing date which accords both sides the right to adjourn the closing by one month from the closing date contained therein without the permission of the other party.   However, this additional period does not in and of itself contain a deadline unless one party has fixed a “Time of the Essence” closing date.

    While many clients and brokers will call me and frantically or matter-of-factly tell me that a contract of sale expired, very few attorneys do.   If I do receive such a phone call from an attorney, it is typically from one  that doesn’t practice real estate.  Typically, it is a litigation attorney and I will counsel them to research the matter and then to call me back if they want to discuss it with me intelligently.

    There is one context in which, as a Purchaser's attorney, I like to add what I would term a "sunset" provision.  Namely, when I have a client purchasing a short sale, and as the transaction can become overly protracted, I like to address this possibility at the time that the contract is first executed.    Accordingly, I will typically add language that if written short sale approval, consistent with the terms of the contract of sale, is not received by a date certain, then the purchaser has a unilateral right to cancel the contract and receive a full refund of his down payment.   Unfortunately, I have had to avail myself of this "out" quite often, far more than I would like.

    One final note.  Upon doing some further research into dates on milk cartons, apparently the date contained thereon is a sell-by date and not a use-by date.   Like a contract of sale, you still have some more time...

Thursday, April 30, 2015

IF HILLARY CLINTON WERE INVOLVED IN A REAL ESTATE TRANSACTION, WHO WOULD SHE BE?

The following post, for most real estate attorneys, would be suicidal.  It would cut-off their biggest source of new business and perhaps their livelihood altogether.  Thankfully that is not the case for me as due to my longevity and the nature of my practice, I have great independence.   Thus, I can freely tell you what everyone else knows, which is that typically the least credible and knowledgeable persons in a real estate transaction are the real estate agents.  Indeed, they are Hillary Clintonesque in their sheer lack of credibility, transparency and honesty.

    Certainly, I have to add the important caveat that there are some very knowledgeable and honest real estate agents that I have worked with over the years.  They help matters greatly and will help a deal close more quickly and smoothly than it otherwise would.  Sadly, this is the exception rather than the rule.  Instead, what I find is that I spend a great deal of my time correcting patently incorrect or misleading statements that a real estate agent has told a client.

    A simple case in point was what occurred yesterday. I am representing a seller and they contacted me very upset and confused.  Their real estate agent had demanded a copy of the survey for their house from them.  When they told her that they didn’t have it, she advised them that as their attorney, I would have a copy of it.  However, this made little sense as there is no reason for me to have a survey unless I had represented them when they had purchased their house and if I still had my file from such transaction.  As it turns out, they had purchased the house in 1984 when I was still in high school.   The real estate agent was of the mistaken belief that as I was representing the seller, I would automatically, perhaps magically, have a copy of the survey in my file, and, perhaps, every other document relating to the house from the beginning of time.   This is plainly not the case as I would only have the documents that either they or the title company had provided to me.

    The above is an example of ignorance, which unfortunately is not as bad as outright willful deceit.  This can take the form of misleading a party about the legality of a structure, playing bait and switch with various terms, misleading either side about closing costs, dissuading a buyer from taking protective measures, etc.   Other classic examples are telling a buyer not to get an inspection, pressuring a buyer by telling them that there are multiple offers behind them and they must act quickly, telling a buyer that a structure is legal, when it isn’t, etc.  What really irks me is that when they are called out on it, they will claim ignorance and use the excuse that this was a matter for their attorney to address.  Shifting blame for their actions is quite in keeping with their Clintonesque approach to things.

    As you can well imagine, I don’t get a lot of business from real estate agents and many will try to dissuade their clients from using my office.  They realize that having an independent attorney poses a real threat to them and they would rather retain control of the deal by instructing a party to use a certain attorney who will play along with them.

    While an agent may say after the closing, “What difference does it make?”, it certainly does if you are saddled with issues that could have been avoided.

Sunday, April 19, 2015

DOES A TYPICAL CONTRACT OF SALE CONTAIN AN APPRAISAL CONTINGENCY?

    One issue that I am discussing more and more with clients, and something that should be routinely discussed during a contract signing, is the following:  Is the buyer's obligation to proceed contingent on a satisfactory appraisal of the subject premises?   To wit, what are the consequences to both parties if the property fails to appraise for the contract sales price?   Obviously, in a market where prices are rising rapidly, the results of an appraisal are of paramount importance.   Before we answer the question at hand, let’s first consider how an appraisal is conducted.

    An appraiser will look at three (3) recent comparable properties in the area (known as “comps”) where the property is located that have closed.   This requirement of a closing is very important.  The appraiser does not look at properties that are simply listed or just in contract.  Instead, they will look at properties that have already closed.  As the properties must have already closed, they represent a snapshot of what the market was a few months or perhaps a year or longer ago when prices were probably lower.  The appraiser then either adds or reduces the relative value of the house being appraised by comparing the given comp with the house being appraised for such things as lot size, location, updated kitchen and bathrooms, etc.  The three (3) comps are then averaged and a final number - the appraisal value - is produced.

    One of the biggest sources of fraud before the housing crash were manipulated appraisals.  Indeed, the appraiser is given some latitude in choosing what comps to use and if they get  creative, then they can easily inflate their appraisal.  The higher an appraisal is, the more that a mortgagee will lend.   Thankfully, since the housing crash, various rules regarding appraisals have been apparently been tightened to prevent such creativity.

    Getting back to our topic at hand, and keeping the above discussion in mind, it is easy to understand why the issue of a satisfactory appraisal should be of great concern to both sellers and purchasers.  The simple initial answer to the question is that the form contract that is used by most attorneys does NOT have an appraisal contingency.   However, this does not end the inquiry and as I like tell my clients, an appraisal contingency is implied in the contract.  What I mean by this is the following.

    If your contract contains a mortgage contingency then you are probably protected if the property fails to appraise.  This is because a mortgagee will typically lend based on the lower of the appraisal value or the contract sales price.  If the appraisal comes in low, then depending on the ltv (loan to value ratio), the mortgagee will deny your mortgage application and you will be entitled to receive a refund of your down payment.  Let’s use some numbers to clarify this point.

    Thus, if you are buying a house for $500,000 and applying for a loan of $400,000, then your ltv (loan to value ratio) is 80% and your mortgagee will give you a loan which is 80% of the lesser of the contract sales price of $500,000 or the appraised value of the house.  If the house is appraised at $450,000 then your lender will give you a loan of $360,000 and as you didn’t receive an approval for the principal amount of the mortgage contained in the contract, you can then cancel the contract of sale and receive a full refund of your down payment.  If the house appraises at $600,000, then your bank will still only give you a loan of $400,000 as, remember, they will give you a loan of the ltv of the lower of the sales price or appraised value.


    Where a buyer may have problems and where they will not be protected by virtue of a low appraisal is when their ltv is very low and the lender may then bump up the ltv.  Hence, using the same sales price of $500,000, if you are applying for a loan of only $100,000, you then have a ltv of 20%, which is extremely low.  If, like above, the house appraises at only $450,000, the lender will likely still give you a loan of $100,000 as your ltv is 22%, which means that there is little risk to them.

    A few final notes.  If you are purchasing a house and will only proceed if the house appraises for the sales price, regardless of your ltv, then you should ask your attorney to insert an explicit appraisal contingency.  Finally, beware of contracts that contain express language that the obligation of the purchaser to proceed is not conditioned upon a satisfactory appraisal.  I typically insert such a clause into my contracts when I represent a Seller to the detriment of various buyers.

Saturday, January 10, 2015

The Down payment at Contract: Why you have to pay and how much do you have to pay.

    One of the most important, and one of the first, things that I discuss with a buyer is the issue of their down payment at contract.  Some people are genuinely surprised that they have to pay anything when they sign a contract.  Even after writing a check, some people are still disbelieving and will say something along the lines of, “My check won’t be deposited, will it?”.

    Yes it will and there is a valid reason that a down payment is given when a buyer signs a contract to purchase.  It is essentially the seller’s security for the buyer proceeding with the transaction and against the buyer changing his mind.  If the buyer ultimately does change his mind, then he forfeits the entire down payment to the Seller.  The typical explanation that I give is as follows: “You can only lose your down payment if you obtain a mortgage commitment, your bank is ready to proceed and title is clear and you change your mind and decide that you don’t want to purchase”.

    The sobering fact is that people do change their mind.  When I sign a contract with a buyer, I will ask them if they are absolutely sure if they want to proceed and tell them what the consequences are if they change their mind.  I will remind them that they are making a big decision and that they shouldn’t accordingly rush into it if there is even one percent doubt in their mind.   Finally, I look to see if they are smiling.   If they look like they are in pain or upset, I will inquire further.  I will remind them that I don’t administer anesthesia and that signing a contract should be a happy event for them and they should accordingly be smiling and happy.  If they aren’t, perhaps they really aren’t sure of what they are doing.

    A common question that I am asked is “Do I receive my down payment back if my mortgage application is denied by my bank?”.  I remind them that such denial is not the same thing as them changing their mind and accordingly they will receive their down payment back, if they legitimately and honestly weren’t approved by their bank.  What I am alluding to here is to people who either provide phony or fraudulent documents to their mortgagee or who unreasonably delay their application.

    The next issue that is typically discussed is the amount of the down payment at the time that they execute a contract.  Historically, the amount paid at contract was ten (10%) percent of the purchase price.  However, that is not always the case any more and it depends on the product of negotiations between the parties.   As far as I am concerned, the down payment should be robust enough that the buyer would feel real pain were they to forfeit it as a product of their derelictions or default.  In many cases, the amount given is less than the traditional ten (10%) percent.  However, where the seller, or their counsel, insist on payment of a certain minimum amount, then unless you pay same, the deal will not proceed.


    This leaves aside transactions such as short sales where typically a nominal sum of $1,000 is paid or where the buyer is receiving a FHA loan with a 96.5% ltv.

    A prior post on this blog is quite relevant and helpful in this regard.  It is entitled "How safe is your down payment?".

    Finally, there is the friends and family argument that I often run into in various aspects of a real estate transaction, that is especially prevalent in the down payment context.  What I am typically told goes as follows, “My friend just bought a house and he only paid x when he signed the contract.  Why should I pay more”?  Leaving aside the issue that what your friends or family may have told you may be either greatly exaggerated or simply untrue, the fact is that what happened in their transaction has little impact or relevance for what happens with yours.   They dealt with an entirely different seller in an entirely different set of circumstances.

  Ultimately, the amount that a buyer will pay as and for their down payment at contract will be a product of negotiation, the relative leverage of both parties and local custom. 

Sunday, August 31, 2014

YELP IS OF NO HELP

I recently received a somewhat scathing review on Yelp, which was subsequently removed due to some apparent violation of the website’s posting policies.  The review ended with a left-handed compliment as it recommended me as a "litigator".  My purpose in writing this post is to submit a condensed version of the rebuttal that I would have posted had the review been permitted to remain.

There is one important lesson to be learned from the review, and it is something that I have stressed repeatedly on this blog.  Namely, when engaged in a real estate transaction, make sure that you hire an experienced attorney who specializes in real estate.  If not, be prepared for various difficulties as this party experienced.

The attorney that she hired was from New Jersey, which should have been a huge red flag.  It should go without saying that if you are engaged in a real estate transaction in New York, you should obviously hire an attorney who is located here and practices here.  Indeed, the system employed in New York is rather unique and seems quite foreign to outsiders.  Do you really want your attorney to try to learn as they are handling your file?

Thus, when I asked her really straightforward questions regarding the deal, I was met with confusion and ignorance.   For example, when I asked the other for certain certified checks for the closing, her response  was that the she couldn’t obtain certified checks.  This statement was later corrected by her as certified checks is what is customary and what is required by the contract of sale.  At the closing, I asked her what my “net” was.  She had no clue as to what I meant as she didn’t understand the term, one that any attorney in New York would have quickly understood.  She didn’t and instead was lost and I had to compute my own “net” from her various checks.

I had another recent experience with another New Jersey attorney handling a New York transaction and it was the same muddled mess.  When I had asked him at the inception of the transaction why he was handling a transaction in New York, he had told me that he was doing it as a "favor" to a friend.   That is some favor and some friend.  Indeed, if a friend asked me to perform brain surgery on him, I would politely demur and refer him to an actual brain surgeon.

Getting back to the transaction that the review concerned, it also didn’t help that the other attorney was only admitted to practice law for approximately two (2) years.  As I have stated many times, there is simply no substitute for experience.  I have been practicing now for nearly twenty four (24) years and scenarios and issues that may be novel to others are ones that I have encountered repeatedly.

Finally, the other attorney had done something throughout the course of the transaction that had greatly surprised me.  Actually, it was something that had shocked me as it was so obviously incorrect.  She had communicated directly with my client and had continued to do so until I finally told her to stop.  At that point, she seemed quite surprised by my injunction and confirmed to me that she would stop engaging my client.  Her trespass was extremely glaring as the prohibition against speaking to someone who is represented by counsel, otherwise known as an ex parte communication, is learned early on in law school.  For whatever reason, she just ignored this very basic professional rule.

The reviewer obviously couldn’t have been expected to know any of what I have set forth hereinabove.   Accordingly, she really didn’t truly know why the transaction didn’t go smoothly and why she was so frustrated.

She had one more complaint, which was a stylistic one.  She was upset by my being aggressive and contentious.  In this regard, she was absolutely right.  If you are seeking someone polite and passive, who is more concerned about not upsetting people instead of protecting your interests, I am not the right attorney for you.  You are far better off with a mousey, dovish attorney who stays quiet as your rights are being trampled upon.

Sunday, April 27, 2014

LIVING CONSTITUTION vs. LIVING CONTRACT (Does a contract mean what it plainly says?)

      Many of us are aware, though we may not be happy about it, the now decades old shift in the courts toward what is referred to as a “living constitution”.  The word ‘breathing” is also thrown in as well, as if to legitimize this trespass against the plain meaning of the law.  On a much smaller scale, I find that the same phenomenon with contracts and it can be extremely frustrating, if not downright disappointing.   I had such an example happen to me recently which brought this to mind.

    I had drafted a contract as a seller’s attorney which plainly and clearly advised the buyer’s attorney that the buyer would close subject to all open real estate taxes and that the parties would not adjust for the same at closing.    The tax issue would represent a $8,300 “hit” to the party that had to absorb it, which was quite substantial to both of the respective parties, who were both experienced investors.
 
      There was no subterfuge whatsoever in my adding such a clause to the contract as I did not hide it in another paragraph and instead created a separate paragraph in the Rider and made it the last paragraph thereof, with the parties signatures appearing directly below.   Thus, it was plainly highlighted to my reader, ie. the buyer’s attorney.  Sadly for him, and to the detriment of his client, he missed it.

    What the buyer’s attorney should have done at that point, and something that no one does, is to confess that he missed the clause and to ask that we renegotiate it anew.  Instead, the buyer’s attorney tried to transform the contract into a living and breathing document.  He went from being a textualist to a purposivist.   That is, he sought to strip the text of its plain and ordinary meaning and to infuse it with a completely novel and tortured interpretation.

    His first move was to ask his client if he was aware or had discussed this tax issue.  The argument was essentially that as the issue had not been discussed ,there was no meeting of the minds and hence no enforceable contract.
   
    I countered this defense by telling him that any pre-contract discussions were wholly irrelevant as through the doctrine of merger, everything had merged into the contract.  Moreover, by my inserting such a clause in the contract, and by the fact that I had given it such a prominent place, I had alerted him to the issue, if not practically shouting it out to him.  That it was then incumbent upon him to both inquire and to research it prior to signing the contract, instead of doing so on a post hoc basis at the closing.

    His next point was, and this is a common plea from the living constitution crowd, fairness.  That the clause in question was unfair to his client.   This is again an argument wholly devoid of any merit whatsoever.  Leaving aside the issue of the buyer’s attorney’s derelictions, the simple fact is that the purchaser did not perform his necessary due diligence prior to executing the contract.   Having failed to do so, he now wanted to renegotiate the deal at the closing table.   That is the very definition of unfair.

    One final note.  I have great sympathy when an attorney will “bury” a clause in a contract and try to hikd it from the other party’s attorney.   This is typically done by adding or removing language from the boilerplate contract and doing so in a way that it is difficult to detect.  This is the very essence of unfairness and something that should be frowned upon  and where the phrase “Philadelphia lawyer” is derived from.