Law Journal – Buy Sell Title Law

As the former owner of a brick house built in 1937, I was quite aware of some settlement cracks in the exterior. However, when I tried to sell the house, the buyer’s inspection report stated, “STRUCTURAL CRACKING: Cracking that appears to be of a structural nature is present. Suggest further evaluation by a structural engineer.” This was enough to cause the buyer to walk from the purchase, despite my verifying with a structural engineer that these were ordinary settlement cracks and not a sign of structural problems in the foundation.

A buyer of a 1946 house contacted me after their inspection revealed settlement cracks. They had a foundation repair contractor inspect who gave them a $8,100 estimate. After another structural engineer inspected the property, it was determined that the cracks were only due to minor settlement and not a significant structural problem.

In the new recently was fears of excessive sinking of a large condominium in Miami. The headline screamed, “The Porsche Design Luxury Skyscraper in Miami Is Sinking Much Faster Than Expected. A twelve-story residential building nearby collapsed in 2021.” The article then detailed how a University of Miami study of 35 coastal buildings along Miami’s shore have sunk between 0.8 and 3 inches. Given the collapse of the Champlain Towers building in 2021, there has been a renewed concern regarding the status of the luxury waterfront condominiums and their long-term viability. While the Champlain building collapse was due to neglected maintenance, poor construction and water intrusion, excessive settlement can cause major problems to a building’s long-term health.

Settlement issues are common in all properties. The weight of a building, the pull of gravity and the shifting of the underlying soil will all cause a building to settle. The ground on which a building is built will also affect the amount of settlement. For example, The Tower of Pisa leans because it was built on soft, unstable ground, primarily composed of clay and sand, which caused the foundation to sink unevenly during construction. Much of South Florida is built upon limestone which is naturally softer and more porous than the granite underlayment. This softness can contribute to increased settlement (as an aside it is also why the water is so hard in South Florida and the pizza and bagels do not taste as good as up North).

Besides the type of soil beneath a building, settlement occurs due to a variety of factors. Proper demucking and/or compacting a vacant lot prior to construction can reduce settlement. If the soil is too loose or sandy it will not be able to withstand the weight of the building, leading to faster or more pronounced settling. Proper choice of building materials and density calculations become a major issue for large buildings. The type of foundation can affect the rate of settlement with concrete being generally more resistant to settling than other materials, such as wood or steel beams (such as founds in older homes).

Climate change can also affect settlement. Constant water pooling around a building’s foundation can lead to increased uneven erosion that accelerates settlement. It is also common for new homes to have settled in the first year that leads to creaking and groaning sounds as if the building is haunted, in most cases this is normal.

The amount of settlement and the unevenness is what causes issues in a building’s foundation. If the settlement is uneven, the building will have settlement cracks in the exterior wall. The flooring in the interior may crack, and the flooring may become uneven. A simple rolling pen or small ball when placed on a floor can be evidence of uneven settlement.

When purchasing a home, especially an older home, a thorough inspection of the foundation must be made to determine if the visible signs of settlement actually mean a significant structural issue. Small settlement cracks generally do not indicate a problem, but these cracks should be properly sealed/caulked to prevent water intrusion. Larger signs like cracked dry walls, misaligned windows, large cracks in the flooring, uneven or sloped floorboards and gaps between the ceiling and walls are all indications of a settlement issue and should be noted by your building inspector.

If an inspection reveals substantial settlement issues, it will be necessary to effectuate repairs to the foundation. Depending on how the building is constructed will affect the method used to make repairs as well as the severity of the settling. Minor settlement can be addressed with slabjacking/mudjacking. After determining the best location to lift the slab, the contractor will inject a grout mixture under the concrete slab to raise it back to a proper level. If the settlement is substantial, it may be necessary to install support piers like helical piers or push piers, which are driven deep into the ground to stabilize the foundation

Thursday, November 26, 2020

Asset Protection Issues in Florida

I often get calls asking me to assist a client with asset protection. Many people believe they need a revocable trust in order to obtain asset protection. However, a revocable trust, which allows the grantor to retain control of their assets as trustee of the trust, provides no creditor protection to the grantor trustee, and is simply a tool for estate planning purposes. In order to use a trust for creditor protection the grantor must give up control of their assets and appoint a separate trustee the who is not legally obligated to act as directed by the grantor.

However, in Florida, there are many methods of asset protection that occur simply by residing as a citizen of this State. The primary protection lies in the Florida Constitution. Article X, Section 4 provides:

There shall be exempt from forced sale under process of any court and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty..”

This means that if you own a home, whether married or single, with or without children, condominium or cooperative, regardless of value and regardless of whether you have a mortgage, a judgment creditor cannot foreclose their judgment against your homestead property. Even a municipality is unable to foreclose a code enforcement lien on homestead property. This protection extends past the death as long as your property descends to your spouse or children. Note that if you file bankruptcy, the Florida exemption preempts State law, requiring that you must have resided at the property as your homestead for at least forty months to obtain full protection. Prior to forty months of continuous residency, the cap is approximately $160k. In addition, homestead property is limited to one-half acre in a municipality and one hundred sixty acres in unincorporated areas.

If you have a judgment and wish to sell or refinance a homestead property, Florida law allows clearance of those claims by giving the creditor a forty-five-day notice of homestead, which gives the creditor a limited window to challenge the homestead claim. In addition, after sale, the homestead sale proceeds remain protected as long as the proceeds are used to purchase a new homestead. We recommend placing same in a homestead trust rather than commingling the funds after any such sale while searching for a replacement homestead property.

Florida also recognizes a special estate, called tenants by the entireties. This is property owned by married couples, such as real property (non-homestead), bank accounts or brokerage accounts. Under common law in Florida the claims of individual creditors cannot reach properly-created entireties property. In the eyes of the law, property owned by a married couple is treated as one, hence not reachable by creditors or divisible without both spouses conveying the interest.

Special rules exist to create property as tenants by the entireties. It must be received as a married couple, each must hold title to the property, each must have equal use and possession of the property, must remain married and have an equal interest therein. Failure to meet each of these criteria invalidates the entireties protection. Also, the judgments are not invalid, only inchoate, which means that upon breaking of the entirety’s estate (by death, divorce, or transfer), a creditor’s judgment immediately attaches to the asset. Also, judgments against both spouses may still reach entireties property (so no fighting over the steering wheel).

Judgment creditors have another tool to obtain payment of claims against Florida debtors. They have the right to garnish up to twenty-five (25%) percent of a person’s wages and bank accounts. However, debtors who serve as the head of a household (married couples and single parent with children or dependent relatives) may not have these assets garnished. A head of household is the person that provides at least fifty percent of the living expenses for the household. A debtor, when served with the garnishment notice, must file notice of this exemption within twenty days.

A favorite method of asset protection is the limited liability company. For example, if you own a rental property and a tenant or guest is hurt, you are liable for any damages, even if owned as entireties property. Any claims in excess of insurance coverage would be a judgment against all other assets exclusive of homestead. However, if the property is owned in a limited liability company, the claims would only be against the company and its assets.

Limited liability companies have a second benefit. Creditors can reach shares held in a corporation, but membership units in a multi-member LLC cannot be taken away, only the available distributions may be reached (which distributions are frequently controlled in closely held companies.

Asset protection is an important tool, but if deployed improperly may result in unnecessary expenses and consequences, so working with a good estate and asset protection attorney is key to obtaining the best results.

Thursday, November 26, 2020

Anatomy of a House Sale

Due to a combination of low interest rates, Covid-19, the desire for more space and the ability for many workers to work remotely in new locations has led to a very active and robust residential real estate market. Selling a residence is a multi-step process that involves a team of professionals including Realtors, attorneys, title agents, lenders, and government officials, all of which are necessary to conduct and complete a typical house sale.

The beginning of the process is the decision on how to market and sell the property. Traditionally most people interview and hire a local real estate agent to handle this portion of the transaction. While most Realtors utilize a standard form for a listing agreement, promulgated by their local Board of Realtors, this form is negotiable and does not have to be signed as presented. Some issues to consider include the length of the listing, whether the listing automatically renews, the terms and conditions of the sale such as allowing VA or FHA financing, or the offering of both leasing and sale.

The biggest issue is the Realtors commission. The person listing the house is known as the listing agent and the person who brings the buyer to the transaction is known as the selling agent (because the seller indirectly pays that agent). Traditionally both agents were paid a 3% commission. This is negotiable especially if the listing agent has both sides of the transaction or if the homeowner locates a buyer on their own. For example, a common reduced commission is known as the 5-2-1. listing. In this type of listing, the listing agent gets 5% if they have both sides of the transaction; 2% if they are the listing agent with 3% going to the selling agent; and only 1% if the seller finds the buyer on their own.

Once a house is listed for sale it will be subject to viewing both online as well as possibly in person especially once the Covid-19 pandemic ends. This includes the placement of a lockbox on your home which allows Realtors access for showings when you are not home. As a precaution, any valuables or medicine should be securely locked to prevent any question of loss during such visitations. While those risks are small, they do occasionally happen.

When a Buyer decides to make an offer, they will submit a contract to your agent for review and approval. The most common contract used is called the FAR/BAR Contract. Most attorneys, Realtors and title companies are familiar with this contract and its riders. The contract can either be an “as-is contract” wherein the Buyer gets a set number of days to complete an inspection and determine whether to cancel the contract for any reason or proceed to close regardless of the property’s issues, or a limited repair contract which requires the Seller to make certain repairs up to a fixed percentage (usually a maximum of 3%) and if the Seller makes the repairs the Buyer cannot cancel the contract. In practice, 90% of the contracts I deal with are the as-is contract, with a fixed inspection period and free right to cancel.

Once the contract is fully executed a closing agent must be selected. Please note it is the Seller’s or Buyer’s choice not the Realtor’s choice as to whom to utilize and I highly recommend that a real estate attorney be chosen instead of just a non-attorney title company. An attorney can provide greater protection and address more issues should they arise, and answer more questions regarding the purchase and sale.

In Palm Beach County, the closing agent is customarily selected by the Seller. In Broward and Miami-Dade Counties, the closing agent is customarily selected by the Buyer. Usually the person selecting the closing agent also pays the cost of the title premium. The other large cost customarily paid by the Seller is the Florida Documentary Stamp Tax due on the transaction, which is based on a rate of $7 per thousand in real property value. For example, a home that sells for $300,000 will have doc stamps in the amount of $2,100 due and payable from the Seller at closing.

Once the inspection period passes, and any financing contingency has been met (the buyer has obtained loan approval) the deposit becomes nonrefundable and the parties move towards closing. The closing does not have to be formal and in most cases today closing is done through an escrow transfer with the Sellers signing separately from the Buyers and the sale documents exchanged for the net proceeds to the Seller and access to the property for the Buyer. This includes frequent remote notarization of the Buyers or Sellers signatures on closing documents though many lenders still require a wet signature on mortgages and notes.

After closing, the title agent will issue a final Title Insurance Policy, insuring the Buyer and the Buyer’s lender have insurable and marketable title to the property. If the Buyer intends to reside at the property, the Buyer should then make an application for homestead with the property appraiser in order to obtain the tax benefit provided by Florida law.

Because selling or purchasing a home is complicated and is also generally the most expensive transaction a party will participate in, having an experienced real estate attorney assist you in the transaction is, in my opinion, a wise investment. This choice can save you money (for example by requiring a seller to provide a survey affidavit in lieu of a new survey) and protect you should issues arise such as improper disclosures, title defects, unknown liens and encumbrances and other issues that may be missed by the title agent or Realtor.

Friday, September 25, 2020

New Florida Law Changes Rules for Support Animals

Several months ago, the long-awaited update to the Housing and Urban Development Guidelines relating to reasonable accommodations for service and support animals under the Fair Housing Act was finally released (FHEO Notice: 2020-01). The revised guidelines had been greatly anticipated by landlords, apartment owners and condo/homeowner’s associations with no pet policies in the hopes that the Department of Housing and Urban Development would crack down on (i) the perceived falsification of applications for a reasonable accommodation for support animals by nondisabled persons using the request to place a pet in a non-pet residential unit based upon Internet acquired letters of disability and the need for a support animal; (ii) limiting the number of support animals to one per household; and (iii) addressing exotic or farm animals as support animals.

Unfortunately, while HUD discussed the issue of internet-based certificates, registrations and licensing documents for assistance animals, HUD did not make this type documentation invalid as part of an accommodation request.  Instead HUD stated that “…many legitimate, licensed health care professionals deliver services remotely, including over the internet.” Therefore, under said guidelines, if an accommodation is requested based on an Internet diagnosis, it appears that the accommodation must still be granted if the health care professional confirms, in writing, a person’s disability and need for a support animal when the provider has personal knowledge of the individual.

HUD also addressed the issue of multiple support animals and confirmed that there must be separate disabilities addressed by each of the support animals in order to receive a reasonable accommodation. Finally, regard to requests for a reasonable accommodation for non-household pets, defined by HUD as “unique animals,” HUD has stated that requests a “substantial burden of demonstrating a disability-related therapeutic need for the specific animal or the specific type of animal.”

The disappointment over the new HUD guidelines was short-lived as the Florida legislature stepped in and addressed the issue of Internet certificates in connection with requests for s reasonable accommodation for support animals. The new act, effective July 1, 2020 under Section 760.27 Florida Statutes, acts to block requests based solely on medical diagnosis prescribing a support animal over the Internet, a common method used to obtain a reasonable accommodation by many tenants and owners of dogs and cats seeking to rent or buy a in a no pet property.

Specifically, the new legislation states that if a person’s disability is not readily apparent (usually some form of recognized psychiatric or mental disability, such as anxiety, post-traumatic stress disorder (ptsd), depression, etc.) then a request is contingent upon the delivery of appropriate healthcare information diagnosing the disability and its impact on a major life activity.  Previously, under the HUD guidelines, a letter obtained from a licensed practitioner over the Internet was sufficient to support a claim for a disability that warranted a reasonable accommodation (pet owners would simply pay a fee, answer a few questions online, and out popped a certificate prescribing a support animal for the owners disability). The new legislation goes further, and requires that any Internet-based diagnosis be conditioned on at least one in person treatment as follows:

Information from a health care practitioner, as defined in s. 456.001; a telehealth provider, as defined in s. 456.47; or any other similarly licensed or certified practitioner or provider in good standing with his or her profession’s regulatory body in another state but only if such out-of-state practitioner has provided in-person care or services to the tenant on at least one occasion. Such information is reliable if the practitioner or provider has personal knowledge of the person’s disability and is acting within the scope of his or her practice to provide the supporting information.

With this new statutory restriction, the number of anticipated requests for a reasonable accommodation will be substantially reduced. This assumption is based on the fact that many requests for a reasonable accommodation do not rise to the legal threshold of a diagnosable condition that interferes with  a major life activity.  Pet owners who previously relied on Internet certificates from so-called reasonable accommodation mills will now either have to obtain healthcare information from a local practitioner after an in person diagnosis, at a considerably higher cost, or give up their request for reasonable accommodation.

Friday, September 25, 2020

The Coming Eviction Crisis

With the pandemic in full swing and the loss of a substantial number of jobs in March 2020, the governor of the state of Florida issued Executive Order 20-94 on April 2, 2020. The Executive Order provided, in part: “I (the Governor) hereby suspend and toll any statute providing for an eviction cause of action under Florida law solely as it relates to non-payment of rent by residential tenants due to the COVID-19 emergency for 45 days from the date of this Executive Order, including any extensions.” That order expired May 17, 2020 but was extended through June 2, 2020 by Executive Order 20-121 and further extended through July 1, 2020 by Executive Order 20-137 and through August 1, 2020 by Executive Order 20-159.

On July 29, 2020, the Governor issued Executive Order 20-180, that continued the eviction stay, but included a condition that tenants must meet to avoid eviction. Specifically, the non-payment of rent must be due to the tenant being adversely affected by the COVID-19 emergency.  The Order defines that as being “…loss of employment, diminished wages or business income, or other monetary loss realized during the Florida State of Emergency directly impacting the ability of a residential tenant to make rent payments.”  This means that in any eviction action the tenant will have an affirmative duty to show a court that the tenant’s non-payment of rent is Covid-19 related.

The eviction process in Florida is regulated by Chapter 83, Florida Statutes, the Landlord-Tenant Act.  No eviction may be commenced nor may any landlord exercise a self-help remedy without complying with the provisions of the Landlord-Tenant Act and the judicial procedures promulgated thereunder.  First, landlords must provide a delinquent tenant with a written notice providing the tenant at least three business days to bring the lease current. If the tenant fails to pay, the landlord may commence an action in the Florida courts for eviction. A complaint is filed and must be served on the tenant either by personal service (a requirement if a landlord is seeking damages for unpaid rent) or by posting a copy of the complaint and summons on a conspicuous location on the rental property if two attempts for personal service have failed (only if the landlord is seeking possession and not seeking damages for unpaid rent).

Tenants have five business days to file a response to the Landlord’s complaint.  It is during this point in the preceding that a tenant must raise, as an affirmative defense, that their failure to pay rent is due to a Covid-19 emergency. Under the Landlord-Tenant Act, no defenses to an eviction can be raised (such as maintenance issues, leaks, mold, etc.) unless the tenant pays the unpaid rent into the registry of the court. Presumably, this condition will not apply if a Covid-19 emergency defense is raised. If the tenant fails to respond or raise any defenses to the complaint, the landlord is entitled to the entry of an Order for Tenant Removal. This Order directs the Clerk of the Court to issue a Writ of Possession, which directs the sheriff of the county to remove any persons in possession of the rental property. Once the Writ is issued, the sheriff will contact the landlord or their agent and schedule a lockout of the property. The sheriff will post notice of the lockout on the rental property, giving all occupants 24 hours to vacate.

Because many evictions have been stayed since April 2, 2020, there is a large backlog of unprocessed cases.  In addition to previously filed cases that were stayed by the initial Executive Order, the Clerk of Palm Beach County has indicated that an additional 1,000 eviction cases have been filed since mid-March 2020. This volume of cases will be difficult for the courts to process and different judges will interpret Covid-19 emergency defenses differently, resulting in some tenants being evicted while others will remain without paying any rent. It is unclear how long it will take to clear this large backlog of evictions.

One issue is the fact that the stay on evictions did not forgive the payment of rent.  The Executive Order specifically states, “All payments, including tolled payments, are due when an individual is no longer adversely affected by the COVID-19 emergency.”  It is not clear how many landlords will seek judgment for unpaid rent against tenants but regardless of their ability to collect on such judgment, it will affect the tenants’ ability to rent a new home or obtain credit.  However, it appears that once the courts start processing evictions, there will be many new homeless families who simply can no longer afford rent at a level prior to the pandemic.

Friday, September 25, 2020

Reverse Mortgage and Condominiums

First it was Robert Wagner and now Tom Selleck selling reverse mortgages on daytime television. The commercial promises that its “not to good to be true” and that its “not just another way for the Bank to get your home.” Repayment is due “when you leave your home” (no mention of death), and is pitched as a “way to bring a more stable and secure retirement” and allow homeowners to “stay in the home they love.”

Reverse mortgages work by using a portion of your equity to fund the loan with the remaining equity used to pay the accruing interest on the loan such that the borrower never has to repay the loan until they either permanently leave the property, die, or otherwise default under the loan (such as for failing to pay taxes, condominium assessments or insurance). The key feature of the reverse mortgage is cash up front, especially for people with substantial equity in their home, and the lore of no monthly mortgage payments.

What is never mentioned in Tom Selleck’s advertisement is the downside to reverse mortgages. At the very end of the ad is a disclaimer, in very small print, which actually provides a clear warning of the downsides of this program. It makes it clear that a reverse mortgage decreases your home equity through negative amortization; that borrowers are responsible for taxes and homeowners insurance; and that borrowers must reside in the home and maintain same, otherwise the “the loan becomes due and payable.”

Another thing not mentioned in the reverse mortgage advertisement is the high cost of a reverse mortgage. Origination fees may be as high as $6,000 plus there is normal loan closing costs and an upfront mortgage insurance premium. These fees are usually much higher than conventional mortgage loan closing fees. In addition, on top of the ongoing interest charged on the reverse mortgage, the reverse mortgage borrower pays servicing fees and annual mortgage insurance premiums equal to 0.5% of the outstanding mortgage balance.

Using a reverse mortgage to purchase a condominium is no different than traditional mortgage financing. However, qualification for a reverse mortgage is restricted to persons over the age of 62 years old. In addition, the amount that can borrow varies substantially depending on the age of the borrower.  A younger borrower is only eligible for a smaller loan while an older borrower can borrow substantially more on the equity in their condominium. All of this is based on actuarial data regarding how long the condo owner will live so that there still sufficient equity in the property when the loan comes due.

For example, a 62-year-old purchasing a $550,000 Florida condominium is only eligible for a reverse mortgage of $217,800 to $288,200 while a 78-year-old would be eligible for nearly $70,000 more.  In both cases, especially when considering closing costs, a substantial amount of cash would be needed to purchase that condominium, most likely in excess of $225,000 to $350,000.

When the reverse mortgage comes due, mostly caused by an elderly borrower no longer residing in the condominium or the last surviving spouse passing away, the condominium may be sold by the owner or the owner’s heirs to pay off the reverse mortgage. This is different than traditional mortgages which do not become due and payable upon vacating the condo or dying.  With traditional mortgages the owner or heirs have the option of continuing to make monthly payments until property values go up or to keep the property as a rental income producing property. This option is not available for reverse mortgage condominium owners. The mortgage must be satisfied, or the mortgage will be foreclosed.

Reverse mortgages on condominiums also carry with them the many restrictions that condominium themselves have on rentals and resales. For example, many condominiums prohibit renting a property for one or two years after sale. Because of the looming threat of foreclosure, it is sometimes necessary to rush the sale of a condominium encumbered by a reverse mortgage. Because of the rental restriction the market for buyers is reduced since investors or second home buyers may not be interested in a property they cannot be occasionally rented.

Many condominiums are also age restricted, prohibiting sales to buyers under the age of 55 either in a 100% restricted community or the more common 80/20% blended community. Again, these types of restrictions make resales more difficult. All of this of course is on top of dealing with a deceased parent and the probate requirements to clear the title to the condominium. In many cases after deducting the cost of sale and ongoing, accruing interest, there is little to no equity available and therefore, in many cases, the condominium is not sold and instead foreclosed by the reverse mortgage lender.

Deciding on a reverse mortgage is a serious, life altering decision that should not be made based on a commercial starring Tom Selleck. Sometimes things are too good to be true and reverse mortgage may be one of those for many people.

Friday, September 25, 2020

COVID-19 effects on the Real Estate Market Part 2

It is now been several months since the coronavirus, Covid – 19 has existed as a substantial force on the Florida economy. This impact has been felt especially hard in the real estate market, resulting in a substantial drop in the number of sales compared to 2019.

The first quarter of 2020 reflected the strong economy with a year-over-year growth of over 10% from 2019. In addition, inventory for single-family homes was a low 3.4 months and the inventory for townhomes/condominiums was a more average 5.5 months. The time periods from listing to contract was a short 43 days for single-family homes and only 55 days for townhomes/condominiums.

In addition to the strong economic news in the first quarter of 2020, the low mortgage interest rates also helped encourage sales, dropping nearly three quarters of a point from the same time in 2019, from an average of 4.37% to an average of only 3.51%.

The effects of the virus came to a head in April, 2020. In Miami, sales declined 40% compared to April, 2019. Broward County experienced a decline of 37.4% and Palm Beach County experienced a decline of 33.8% compared to April, 2019.

Interestingly, the median price for sold homes actually increased in April in all three counties. The median price increase in Dade County was 7.3% to $382,000 for homes and 6.9% to $265,000 for condominiums. The increase in Broward County was 6.1% to $382,000 for homes and 8% to $183,500 for condominiums. The increase in Palm Beach County was 4.3% to $365,000 for homes and 5.4% to 195,000 for condominiums

During March and April 2020 many pending deals were canceled by purchasers asserting a force majeure clause in their real estate contract. Some buyers gave up their deposits rather than proceed to close. Others sought to delay closing or fight to obtain the return of their deposit.

Many sellers pulled their properties from the market and the number of active listings in Palm Beach County fell 18.5% from April 2019 to a total number of listings of 6,126. New listings eventually declined from 2019 as well, only 1,264 new listings in April 2020, a decline of 39.4%. The time period from listing to contract also increased substantially from earlier in 2020 to nearly 76 days. This is a 21.6% increase from April 2019.

Unlike April, sales actually picked up some in May, 2020. Sales levels are still below similar levels in May, 2019 but listings and closings increased compared to April, 2020. Houses that were withdrawn from the market in March and April were relisted in May by many sellers. While the virus has restricted sales throughout the market the effect has been less on very high-end sales in excess of $10 million.

For homes priced over $1 million May. 2020 sales figures were encouraging. Sales surged 45% in Miami-Dade County over May. 2019 with Palm Beach County experiencing a 26% increase over May, 2019 and Broward County had a 23% increase for the same time. It is not clear if this increase will be sustained for the summer of 2020 or this just includes delayed closings from April.

Because the combination of canceled listings and fewer new listings the inventory of homes available for sale has fallen by 28.8% for single-family homes and 12.5% for townhomes/condominiums. This equates to a 4.2-month supply of homes in Palm Beach County. This number is below the generally accepted equilibrium number of 5.5 month’s supply. When the supply is below 5.5 months it is generally considered to be a sellers’ market which is reflected in the higher median sales price for homes that actually close.

The virus also affected the mortgage foreclosure market. The number of homes being foreclosed and sold at the courthouse has dropped dramatically. Only 24 homes were set to go to auction in June, 2020 at the Palm Beach County Courthouse compared to a total of 136 homes that were scheduled to be auctioned in June, 2019. In addition, Fannie Mae, Freddie Mac and the Department of Housing and Urban Development of all extended their stay of mortgage foreclosures through June 30, 2020, which make up the bulk of the residential housing market. It is also possible that a further extension of that stay maybe entered depending on the status of the economy at the end of June.

The appears in the short run that the real estate market will continue to be affected by the virus but that once the public perception is that the virus is contained and the economy is rebounding the pent-up demand for home purchases, coupled with the continuing low mortgage interest rates, should see increased sales at some point in the future.

Friday, September 25, 2020

Remote Online Notarization of Estate Documents

Last year the Florida legislature adopted a new high-tech procedure to allow for the remote execution, witnessing and notarization of legal documents, including last wills. This procedure solves a problem when a person has to execute a will or other estate documents and cannot access a notary public or witnesses, such as when traveling overseas, on a cruise ship, bedridden, hospitalized, too ill to travel, or homebound in a lockdown situation, such as a pandemic.

The procedure for online notarization is far more complex than a typical will signing. For physical presence notarization, the person whose signature is being acknowledged by the Notary Public will produce appropriate identification, and then wet sign the estate documents as the necessary witnesses watch, who then wet sign themselves. For in person estate documents, if the Notary Public may have concerns about the capacity of the person signing, they may ask a few challenge questions, such as “what is today’s date,” “who is president,” “do you know why you are here,” and “do you want to sign a will today.”

Starting in July, 2020, Florida will allow for online notarization of Wills, Trusts, Health Care Directives and Durable Powers of Attorney. The procedure for completing a remote estate document package is far more onerous than the in-person notarization described above. This is due to the perceived greater possibility of both notary fraud and the possibility of manipulation of an at-risk adult by third parties who would benefit from the estate documents to be notarized.

The initial step is for the attorney or notary to upload the estate documents to the online notary platform. Once uploaded they must be tagged for use. Tags include witness tags, signer tags, notary tags and text tags (for filling in dates, id type, and checkboxes, for example). Once tagged and ready for execution, the attorney or notary tells the system to request that the testator log in and create an account.

Once access is granted, the testator may review the estate documents before signing. At the scheduled execution time, the testator will be required to have their identification scanned in using an app available on iPhone and Android smart phones. This app is similar to apps used for mobile check deposits. Driver’s licenses and passports are acceptable forms of identification. Once scanned and approved, the testator will have a maximum of two minutes to answer five multiple choice questions, which are soft pulled from credit reports, such as where did you live in 1995, what car do you own and the like. If the testator gets eighty percent correct, they then get to proceed to the execution phase. If the testator fails this test twice, the testator is locked out of the system and unable to sign using a remote notary for a period of twenty-four hours.

Signing the estate documents requires a desktop computer or laptop with a webcam and microphone. The testator must be running Chrome or Firefox (no Safari) to sign. At the same time the testator is online, the notary and the witnesses will also be online either remotely or, as to the witnesses, with the testator.

The notary must then verify that the testator is not (i) on drugs or alcohol that impair mental function; (ii) verify no physical or mental condition or long-term disability that impairs the ability to perform the normal activities of daily living; and (iii) ask if the testator requires assistance with daily care. If any answer is affirmative, then the estate documents may only be completed if the witnesses are physically present with the testator. In addition, the notary must advise the testator that if they are a vulnerable adult, the estate documents they are about to sign will not be valid if witnessed by means of remote audio-video communication technology.

Once the foregoing provisions are met, the notary must then verify five questions:
   1. Are you currently married and if so, what is the name your spouse.
   2. Who assisted you in accessing this video notarization today.
3. Who assisted you in preparing the estate documents you are signing today.
   4. Where are you currently located?
   5. Who is in the room with you?

The notary must weigh all of the foregoing before allowing the estate documents to be executed. Any invalid responses may form the basis of invalidating the estate documents in a later legal challenge.

Once all the estate documents are signed, they will be given a special encryption key which is designed to prevent future alteration. In addition, the notary host site creates a digital log of all transactions and a video record of the closing, which must be deposited with a qualified custodian until the testator dies, in which event the electronic estate document must be filed with the court. While more onerous, the ability to remotely notarize estate documents will facilitate planning when other solutions are unavailable.

Monday, March 23, 2020

COVID-19 effects on the Real Estate Market

With the Coronavirus effects growing with each passing day the Florida real estate market has been turned upside down, in both negative and positive ways.

2019 ended with Florida single family sales up nearly six percent, with townhomes and condos mostly flat.  South Florida had a more modest two percent growth rate for single family homes, but townhomes and condos fell by nearly two percent over 2018.  Prices continued to climb with the average single-family homes selling for $360,000.00.

2020 started with a bang, with single family sales through February 2020 up thirteen percent and townhomes and condos up twelve and one-half percent.  Nationally, new home sales jumped nearly eight percent, to a seasonally adjusted annual rate of 764,000 units last February, the highest level since July 2007.

Then the virus hit, dramatically changing the real estate landscape.  Reaction in the financial sector was swift.  At the beginning of March, the Federal Reserve cut interest rates by one-half percent, then two weeks later, another rate cut to make the borrowing rate from the Federal Reserve essentially zero percent.  The goal was to make money cheaper and protect the economy from falling into recession.

Despite these moves, and now a promise of an over one trillion-dollar infusion by the federal government, the stock market has dropped dramatically, losing nearly 1/3^rd of its value since record highs on February 12.  This has caused the yield on treasury bills to also fall dramatically, falling nearly one percent in one month.  The 10-year treasury yield, the rate most correlated with mortgages, has fallen from 1.5% in mid-February to below one percent on March 21.

This has led to a drop in home mortgage rates, perhaps the one silver lining in this otherwise catastrophic problem.  Thirty-year fixed rates have remained low, dropping from five percent in late 2018 to three and three quarters to start 2020.  Rates dipped as low as to three and one quarter (a record all-time low) on March 5 amid worsening virus news but have now increased to mid to high threes in response to the large number of loan applications inundating lenders.

Once the backlog lessens, and assuming the commitment to buy mortgage back securities by the Federal Reserve continues (started at 200 billion and could go over 1 trillion), rates will likely again fall, with some predicting rates at or below three percent by June 2020.  If you are currently paying over four percent on your home mortgage you should watch these rates carefully and be prepared to lock in timely.  On a typical $300,000.00 loan, a one percent drop in interest will save over $2,000 the first year.

Closing on these new loans, as well as existing home sales, has become a challenge for attorneys and title companies due to all the movement restrictions.  However, a new law that went into effect on January 1 is providing some relief for those still willing to close on sales and refinances.  The law now allows for remote online notarization of legal documents, including affidavits, deeds and mortgages.

Using a computer equipped with a webcam, two forms of photo identification and a cellphone that can take pictures and upload the images will be what is needed to conduct a remote closing from any location, including overseas (for United States citizens).  A seller or buyer/borrower will be given an email link to log into a special website to conduct the closing.

A common setup will have a text messaging window and instructions on the left, documents to sign in the middle and three video windows on the right.  Once logged in the consumer will see themselves in a video window, along with the notary public and the closing agent.  The user will hold-up their two ids for the notary to review, and once confirmed as valid, the consumer will use a special application on their cell phone to upload pictures of the ids for further verification.  Once verified, a set of common, consumer credit derived multiple choice questions, will further verify identity, such as what street did you live on 1995 and what color car do you own.

Once identity is verified, the closing agent will direct the consumer to read and sign the documents on screen using their choice of simulated signatures and initials.  As each document is signed, the notary will notarize where needed, and for documents requiring witnesses, such as deeds, both the notary and the closing agent will sign as witnesses to the document.  Once all closing documents are signed, the consumer can either download a copy or wait for an emailed copy.  The closing agent will take the documents that have to be recorded, such as mortgages and deeds, and electronically submit them to the Clerk of the Circuit Court using an e-filing program to official record the document

So now a sequestered seller in California can sell and a vacationing buyer/borrower stuck in Italy can buy and close on their loan as if they had flown in and closed at the closing agent’s office.  With low rates and remote closings, the devastation to the real estate industry from the virus will be partially blunted, but make no mistake, it will hurt sales dramatically and may take months or the rest of the year to recover.

Tuesday, December 24, 2019

“1031” TAX FREE EXCHANGES

Since the 1920s, property owners could trade investment property on a tax-free basis. The only catch was that you had to find someone to trade properties with you simultaneously. Mr. Starker had investment property he wanted to trade, but no one to trade with, so being resourceful, he sold his investment property and immediately used all of the proceeds to buy another, claiming that he had really traded the property, that his investment was converted to tangible funds for only a short period of time, and that should not be counted against him for tax purposes.

Unfortunately, the IRS did not agree, and they demanded he pay the profits on his sale. This result was challenged by Starker and he eventually won, successfully deferring his profits from his sale.

In order to address this result, Congress approved a revision to the Tax Code to authorize “Tax Free Exchanges” for certain types of real and personal property. This code section created a labyrinth of regulation, requirements, issues and strict timelines that must be complied with for a successful tax-free exchange.

The most common 1031 exchange is the sale of real estate with all the proceeds used to buy new investment property. For example, Mr. Jones owns a building in Scranton that he bought for $100,000. Assuming no depreciation or capital improvements, his purchase price is his basis in the property which he wants to sell, which is often referred to as the “relinquished property.”

In 2019 Mr. Jones’ building is now worth 1.6 million dollars. If he sells and pockets the money, he will owe almost $225-300k in capital gains taxes. However, if Mr. Jones uses the proceeds from the sale to buy a building in Florida, he can defer all the tax due.

Note this is not tax avoidance, because the new apartment in Florida, called the “replacement property” will also have a basis of $100,000. When it is sold in the future, the gain will be recaptured.

In order to effectuate a 1031 exchange, a seller of relinquished property must enter into an exchange agreement with an independent third party prior to closing, called a Qualified Intermediary. Once the relinquished property is sold, the net proceeds must be directly delivered to the QI. In no case can the money go to the Seller or his agents, as the fiction of “no control” over the sale proceeds is required to protect the tax-free exchange.

Within 45 days of the sale of the relinquished property, the Seller must identify the replacement property by written notice to the QI. Up to 3 properties can be identified without special consequences.

The seller has 180 days to close on the identified property(ies), with the monies held in escrow by the QI transferred directly to the seller of the replacement property. If the closing is not timely completed the exchange fails, and the tax becomes due. Please note that if the 180-day window overlaps April 15, you must file for an extension, or your window will be terminate on April 15.

When originally promulgated, 1031 exchanges required deeding of the relinquished and replacement properties to the QI, resulting in extra costs and potential title issues. However, the IRS now allows direct deeding, which eliminates this step. However, the QI should still be listed as the seller or buyer on your closing statement, to reflect the exchange status of the transaction.

While 1031 exchanges are limited to investment property, it does not mean that you can not invest in residential real estate. For example, if you are selling investment property with a large gain, it is permissible to complete and exchange that property for a residence in Florida, so long as your initial intent is to use same as an investment property. While there are no promulgated time periods for establishing investment intent, the property should be rented for at least two or more years in a true, arms length fashion, to avoid an IRS challenge before you take personal residency of the replacement property.

1031 exchanges are not limited to equal swaps of value. You can make a partial deferment by buying a lesser value property, with the taxes prorated on the percentage difference in value between the relinquished and the replacement property. 1031 exchange proceeds can be used to leverage more than one replacement property and can be used to acquire a slice of a much more expensive property, in the form of tenants in common purchase.

One key element of 1031 exchanges are the strict timelines relating to the time frames. These are strictly applied and exchanges outside these periods will be rejected. Reverse exchanges are also permitted, allowing the acquisition of the replacement property up to 180 days before the sale of the relinquished property.

As exchanges are complicated, the cost of completing an exchange may make the benefit of deferral of taxes less enticing. Our firm charges approximately $1,000.00 for a simple exchange, plus costs. In addition, there are extra accounting charges for exchanges, and your sale proceeds will be tied up at least 180 days, usually without interest, during the exchange period. Therefore, a well thought out exchange strategy, including a thorough tax analysis, should be made prior to proceeding with an exchange.

Sunday, September 22, 2019

Fannie Mae and Freddie Mac Reorganization

President Trump has just announced plans to seek substantial reorganization of the Federal National Mortgage Association (FNMA) and known commonly as Fannie Mae, and the Federal Home Loan Mortgage Corporation and known commonly as Freddie Mac, the two main government sponsored entities that provide the funds for nearly half of the residential mortgage loans in the United States.

Fannie Mae was formed in 1938 during the Roosevelt Administration as a government agency to expand mortgage lending so as to encourage homeownership and home building. Prior to its creation, most mortgage loans were short term with a balloon feature, as banks were mostly dependent on their own savings accounts to fund the home loans. Any long-term lending meant tying up capital, precluding new, potentially more lucrative, new home loans and with defaults as high as 25% in the 1930s. substantial risk.

Fannie Mae allowed banks to make long term, fixed rate mortgages without the commensurate tying up their capital (or default risk) by buying the mortgage loans from banks. They created a secondary mortgage market wherein loans purchased by Fannie Mae would be sold as collateralized mortgage obligations or later as mortgage-backed securities (MBS) to investors. This freed up the banks to make new loans and receive a fee for each loan originated and sold to Fannie Mae. In addition, the loans sold by Fannie Mae were guaranteed by the full faith and credit of the United States making the loans less risky even if the underlying borrower stopped payment and the mortgage was foreclosed.

In 1954, Fannie Mae was reorganized into a mixed ownership corporation, selling off common shares to the public while the federal government retained control through its ownership of Fannie Mae preferred shares. Further changes occurred in 1968 when Fannie Mae was converted into a fully private corporation, splitting the entity into Fannie Mae and the Government National Mortgage Association (commonly known as Ginnie Mae, which remained a government organization, and which insures certain mortgages such as loans by the Veteran’s Administration).

To increase competition in the secondary mortgage market (which Fannie Mae had controlled for thirty years), the government created a new government sponsored entity, Freddie Mac. Freddie Mac was also a public company and also bought mortgage loans for sale on the secondary market.

The 1970s saw the steady rise of mortgage backed securities as the main vehicle of bundling of large blocks of mortgage loans. The attractiveness of these MBS was due, in part, to the implied belief that the MBS was guaranteed by the United States, even though the entities were no longer owned by the government.

The 1990s and early 2000s saw the push towards expansion of the loan market to (i) increase home ownership, (ii) expand lending in areas that were previously avoided by lenders (known as redlining), and (iii) assist low to moderate income parties to obtain a mortgage loan. This led to loosening of credit standards to meet these homeownership goals. In addition, competition from private investment companies, who were also bundling more attractively priced mortgage backed securities, led to a more aggressive, riskier approach in lending approval by Fannie and Freddie

This led to the subprime mortgage crisis in the mid to late 2000s with substantial defaults and failures of private investment firms and banks. As of 2008, Fannie and Freddie owned one-half of the estimated 12 trillion-dollar mortgage market, and a true public collapse would have substantially damaged an already weak home loan market. Instead, and as a result of mounting losses at Fannie and Freddie, the federal government placed both entities into conservatorship (essentially bankruptcy) to stabilize the housing market.

After investing hundreds of billions of dollars into Freddie and Fannie, the institutions stabilized, and eventually became profitable, paying back the monies invested. In fact, they have now repaid the full amount invested and a profit of nearly 110 billion dollars to the federal coffers.

Given this state of affairs, and the deregulatory mindset of the President, it is no surprise that he would propose modifying or even ending conservatorship. The stated goal is to create a limited role for the federal government in the housing finance system, enhance taxpayer protections and increase the role of private sector competition. This would be done by reducing the dividend paid to the federal government, allowing Fannie and Freddie to increase its capital reserve (now at only three billion dollars), a limited public offering and the long-term goal of total privatization.

Given a divided Congress and the bad taste of 2008’s housing crisis, it appears that any materially changes may take years to settle. In the meantime, low interest rates and high profits continue to benefit the federal government by holding onto Fannie and Freddie.

Wednesday, August 21, 2019

Real Estate Update 2019

The biggest change in the real estate market this year has been the dramatic decline in the interest rate on mortgage. After enjoying several years of very low rates, the strong economy, rising federal rates and inflation caused rates to rise substantially last year, with the average 30-year fixed rate mortgage in August 2018 reaching 4.5% and climbing to a peak of nearly 5% in November, 2018. Since then, the average has fallen 134 basis points to about 3.6%. This means that the monthly cost of a $250,000 mortgage has decreased from $1,332 to $1,136, a savings of $196 per month.

Lower rates also mean improved housing affordability. In May of 2018, national housing buying power was at $361,184. One year later, the index increased to $391,913, or over $30,000 more in affordability. In Florida the year-over data went from $314,574 to $341,844, or over $27,000 more in home affordability. Nationally, this is due to a combination of falling interest rates and a decline in the real house prices of almost 4%, but in the same time period Florida home prices has actually increased nearly 9%.

For many homebuyers, a thirty-year fixed rate mortgage is not the best choice. Only about 1/3 of homeowners stay in the same home for more than ten years. That means a majority of buyer/borrowers stay less than ten years. Therefore, an adjustable rate mortgage (an ARM) with a fixed term (5-, 7- and 10-year products are available) before adjusting may be a better alternative. Currently a 10-year ARM can be obtained at about 3.1%. This is a half-point savings, which, on a $250,000 mortgage costs $1,067 per month, a savings of $69 per month. Over ten years that equals $8,280 in lower payments, and another $3,500 in less interest, for a total savings of $11,780.

For sellers looking to sell their own homes (FSBOs or “for sale by owners”), there is a new alternative to craigslist. Facebook Marketplace is a free online site where an owner can list a home for sale or rent. Unlike craigslist, which gives total anonymity, Facebook shows you who the sellers are so that there is (hopefully) a lower risk of a scam.

If you are considering selling on your own, you can still place your home in the local multiple listing service (MLS) at very low cost. Companies like flatfee.com charge $95.00 to list your home (with packages to include more photos at higher prices). This gets you six months in the MLS and a listing on realtor.com. If you want to attract buyers working with a local real estate agent, you will still need to offer a cooperating broker commission to incentivize these agents to show their customers your home. This means paying 2-3% of the sales price to the buyer’s agent.

August is the time for the Notice of Proposed Property Taxes, otherwise known as the “Truth in Millage” (TRIM) Notices from the Palm Beach County Property Appraiser. These should be examined carefully and if there are valuation or exemption issues, a Petition to the Value Adjustment Board should be filed. These are due the 25th day following the mailing of the TRIM notice, but such time period may be extended if the petitioner can establish a good faith basis for a late filing.

Many petitions are resolved pre-hearing by the Appraiser’s office, but if not, a quasi-judicial hearing is held by in front of an attorney (for exemption issues) or an appraiser (for value issues) appointed by the County. Because the issues can be complex, and considering the cost of losing an otherwise valid claim, I recommend that an owner hire an exemption or valuation expert to review the case and, if warranted after review, to represent an owner at the hearing.

With values continuing to rise despite the 3% homestead cap and the 10% non-homestead cap, tax revenues continue to rise, allowing the County to maintain the same tax rate. However, voters last November approved a new property tax to help fund public schools. An additional $1.00 for each $1,000 in property value will be assessed for the next four years with the goal to raise 800 million dollars for schools. With a median tax value of $261,900, a homeowner with a homestead exemption of $50,000 will pay an additional $211 in property taxes to cover this new tax.

Monday, August 19, 2019

Understanding Surveys

If you ever purchased a home with a mortgage, or refinanced a home you acquired many years ago you may be asked to pay for a two dimensional drawing of the boundary of your property together with the location of all improvements shown thereon at a cost which can run several hundred dollars or even more for very large properties. Many people are confused by this expense, arguing that since the home has been located in its current position for years if not decades why do they need to pay someone to redraw and locate what are obviously perfectly good homes located in their proper position.

This drawing is called a Boundary or Land Survey and is one of the primary requirements of a lender when purchasing/refinancing a home in Florida.  The primary purpose of the Survey is to ensure that all improvements located on a subject property are located within the boundaries of that property. Furthermore, the purpose of the survey is to show easements which could interfere with the improvements located on the property, and to show encroachments of improvements either over the property line onto adjoining property as well as encroachments from improvements on neighboring property which encroach into the property being surveyed.

Virtually no lender in Florida will make a loan without a Survey of the property being completed.  One of the main reasons is the requirement that the Lender’s Title Insurance Policy must have the survey exception deleted, which exception may only be deleted under certain circumstances (including the requirement for a proper Survey.

Under Florida law, the practice of surveying is limited to licensed professionals who have met the minimum requirements for registration as a surveyor or mapper under Florida law. These requirements are set forth in Chapter 472, Land Surveying and Mapping, Florida Statutes.

In order to understand surveys, a person must first understand how property legal descriptions are created. Traditionally, descriptions were created based on the vast surveys of the United States created over two centuries ago. These north-south and east-west grids created the starting points for locating property and are known as metes and bounds descriptions. In order to facilitate development, the concept of platting was created which took the metes and bounds description and divided it into fixed lots which identify a specific property in each subdivision. For example, what was once the North 60 feet of the East 60 feet of the Southwest Quarter of the Northwest Quarter of Section 16, Township 23 South, Range 30 East, lying and being in Palm Beach County became the platted property known as Lot 1, Happy Acres, recorded in Plat Book 7, Page 9 of the Public Records Beach County, Florida.  Alternatively, condominiums described their legal description of both the common areas and buildings within the Declaration of Condominium itself, creating a legal description by unit and not by metes and bounds of the underlying land.

There are several instances wherein the survey expense may be avoided. For example, a condominium does not require a new survey because the original survey is included in the recorded Declaration. This is sufficient to allow for the deletion of the survey exception in the Lender’s Title Policy. In addition, if the seller has an existing survey which is certified to that seller then that survey may also be used if the seller is willing to execute an affidavit stating that no new improvements have been installed on the subject property since the date of that survey. Finally, a person not financing the purchase of their property (a cash buyer) can waive the requirement of a survey, assuming the risk of any possible survey defects.

In addition to providing the boundary description of a property, a licensed Surveyor can provide an Elevation Certificate which is used to determine the elevation of property pursuant to the Federal Floodplain Management Rules.  This Certificate is used to determine whether or not flood insurance is required or only optional.

While survey defects are rare, they do occur, and can include problems such as fences located on other people’s property, improvements constructed over the property line or constructed within required setbacks, easements which grant access rights to third parties that are blocked by constructed improvements and even issues relating to boundary lines and access and ownership to land abutting water or to a public road. Therefore, the expense of a survey is worthwhile and can help avoid these potential future problems that are unknowable without a proper survey.

Saturday, June 22, 2019

Reverse Mortgages Update

In 2015 I explained reverse mortgages in this column.  Recently an article published in USA Today on June 13, 2019 (tinyurl.com/y36lvwjp) basically claimed that reverse mortgages were simply predatory lending designed to steal seniors and the heirs homes without any benefit or knowledge.  The flaw in the article is that it fails to clearly mention several important facts:
          1. Without the loans, many seniors would have been forced to sell the homes anyway, due to the inability to pau maintenance costs, existing loans or taxes and insurance;
          2. No one forced these seniors to take the loans and spend the money they received, even if spent frivolously;
          3. That a majority of foreclosures occur not due to defaults relating to non-payment of taxes or insurance but due to either abandonment of the home (residing in the home is a condition of getting and keeping the loan) or death;
          4. Claiming that the heirs lost out on getting the home due to the reverse mortgage is a false premise, because it presupposes that the heirs deserve the home even though their parents needed and got to enjoy the benefits of the money; and
          5. Many foreclosures occur simply because many reverse mortgages were granted before the crash, and the monies given were based on a higher pre-crash value.  Combined with the accrued interest over 10 to 15 years (a key to how these work, seniors pay nothing during the term of the loan) and all the costs of sale (as high as 8% for real estate commissions, taxes, transfer taxes and title insurance), there is little to no equity left to interest the heirs or the estate to consider selling the properties.

As a Florida HUD Commissioner, I have handled hundreds of reverse mortgage foreclosures for HUD.  In only one instance was a foreclosure based on the failure to pay taxes.  All other cases were either abandonment of the home or death.  HUD is only obligated to wait one year after abandonment of the home or death to begin a foreclosure action, but in all cases, HUD gave the family more time to decide whether to sell or walk away.  In all my years, I have never received a complaint from a senior or beneficiary that HUD has stolen their home.

As I stated in 2015 there are several criticisms of the reverse mortgage program.  High upfront costs are an issue and frequently not properly discussed with borrowers.  Interest rates are higher than conventional loans.  High pressure sales tactics (including late night tv ads) have encouraged seniors to take out reverse mortgages, spend the money on vacations and gifts, without consideration of the ability to pay and maintain the property going forward.

As a result of the number of reverse mortgage foreclosures, there was a revamping of the HUD program in 2017 to address such issues.  First, the mortgage insurance premiums charged to fund the government’s guarantee of the loan has changed.  Instead of a floating premium of up to 2.5% based on the amount advanced at closing and in the loan’s first year, a lump sum of 2% is taken at closing.  This could result in higher premiums for some borrowers.

However, the monthly mortgage insurance premium has been reduced from 1.25% to 0.5%, saving borrowers on the accrued monthly charges at a rate of about $166 for each $50,000 borrowed.  The new rules will benefit borrowers who use their available funds at closing, but likely cost seniors who open a reverse mortgage as a line of credit for future use without drawing out fund.

In addition, the new guidelines have reduced the amount that can be borrowed.  The maximum amount is a complicated formula based on the value of the home, the age of the borrower and the interest rate.  Lowering the amount borrowed will likely reduce the number of foreclosures, benefiting both seniors and the guarantee fund.

A reverse mortgage can be a great tool for many homeowners, but it is a program that should be carefully reviewed to insure that it fits an individual’s needs. Discussions with a cpa, your children and a HUD loan counselor are a must before taking out a reverse mortgage.

Tuesday, March 19, 2019

Trust Basics

The creation of a trust for estate planning is a valuable tool that can be used to solve many specific needs, such as avoiding probate, reducing estate taxes, creating a charitable legacy, providing for future generations, protection of disabled or spendthrift beneficiaries, obtaining Medicaid reimbursement and other estate needs. Depending on the issue to be addressed, specific types of trust can be created to provide for these goals. Trusts can be complex or simple, can combine multiple outcomes, can be standalone or incorporated into a will as a pour over trust. The most common types of trusts are as follows:
          1. Revocable Trust. A revocable trust that holds real and personal property with the creator or grantor of the trust serving as the trustee and initial beneficiary, with the power to terminate the trust at any time. This is the most common and is used to reduce or eliminate the need for probate after death. Upon the death of the grantor/trustee, a successor trust takes their place and directs the distribution of the trust assets to the grantor’s beneficiaries as directed in the trust. A revocable trust does not provide creditor protection for the grantor or the grantor’s assets in trust.
          2. Irrevocable Trust: An irrevocable trust is similar to a revocable trust that holds real and personal property. However, the main difference is that the grantor is not the trustee of the trust and does not have the power to terminate or amend the trust after creation. Unlike a revocable trust, a properly created irrevocable trust can provide creditor protection for the grantor’s assets in trust.
          3. Qualified Terminable Interest Property or QTIP Trust: QTIP Trusts are used to gift a surviving spouse a lifetime income in an asset or property, and have the remainder pass to a third party (like children from a previous marriage), but gain the benefit of marital exemption from gift or estate tax that usually requires the surviving spouse to obtain 100% title to the asset.
          4. Credit Shelter Trust: Allows for the first spouse to place the value of the estate tax exemption in Trust at death with the remaining sum passed tax free to the spouse. After the death of the surviving spouse, the beneficiaries get the sheltered funds tax free plus the surviving spouse’s funds with a full exemption as opposed to the surviving spouse getting the whole estate and then passing on a large tax bill to the beneficiaries.
          5. Qualified Personal Residence Trust or QPRT: A QPRT Trust allows for the owner of a valuable residence to place their home in trust for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary. The grantor of the trust receives exclusive rent-free use, possession and enjoyment of the residence during the term of the QPRT and any tax deduction benefit for taxes they pay. The benefit only works if the grantor outlives the term of the trust, when the property must be transferred to the beneficiaries.
          6. Charitable Trusts: These are irrevocable trusts that provide charitable benefits for the grantor and/or beneficiary. A Charitable Lead Trust gives the designated charity payments for a fixed term and at the end of the trust term, the remaining funds go to the designated beneficiary tax free. A Charitable Remainder Trust gives the trust funds to the charity subject to the charities’ obligation to pay the beneficiary income from the trust funds for up to twenty years with an income spread of not less than 5% or more than 50% of the initial fair market value of the trust’s assets
          7. Special Needs Trust: An irrevocable trust that allows the disabled beneficiary to enjoy the use of property that is held in the trust for his or her benefit, while at the same time allowing the beneficiary to receive essential needs-based government benefits such as Medicaid and Supplemental Security Income.
          8. Irrevocable Asset Protection Trusts for Medicaid: A specialized irrevocable trust created to allow the preservation of principal to prevent the loss for medical expenses that would otherwise be covered by Medicaid benefits. The trust must be created and funded at least five years before applying for Medicaid benefits. A child can usually serve as Trustee, and income from the trust can be paid to the grantor.
          9. Spendthrift Trust: A spendthrift trust is a type of trust (or a provision in a trust) that prevents the creditors of a trust reaching the beneficiary’s interest by forcing the Trustee to pay over the claimed sum. This does not apply to federal and state taxes or an enforceable support order.

Creation of an appropriate trust can result in substantial benefits to both the grantor and the beneficiary. While estate taxes are not currently an issue today due to the high exemption (11 million for individuals, 22 million for couples), these exemptions can change so proper planning is still warranted. Choosing the right attorney, financial planner and tax accountant can assist in creating the proper tools without wasting funds on unnecessary products.