Friday, June 7, 2013

Seller Financing, Dodd/Frank and the SAFE Act

The regulatory landscape relating to seller financing of residential purchases (including land contracts and lease/options) has changed significantly in the past two years.

The NAR has published a helpful summary relating to some of the issues: 
Impact of Loan Originator Final Rule on Seller Financing

As usual with legislation, especially that adopted at the federal level to address an "emergency" or "crisis," people are well-advised to avoid using reasonableness as a guide to compliance.  "How could the solution to the financing crisis possibly involve removing all alternatives to conventional large bank financing," I have been asked.   

In my opinion, the SAFE Act and Dodd/Frank included fixes to largely imaginary problems  - ie consumers getting seller financing through fraudulent means or on unfair terms.  I can offer no explanation for the restrictions on seller financing except that the legislation to "fix" the financial turmoil caused by large financial institutions was drafted by the lobbies for those same large financial institutions.  Asking Dodd and Frank to guard the large bank henhouse probably makes less sense than asking Bernie Madoff to serve this function.  At least his story would make enough sense to fool the public.  There is no factual basis of which I am aware upon which to conclude that seller financing had anything to do with the financial meltdown.

To the contrary, general consensus concludes that the collaboration between the Wall Street investment banks and the mortgage lending syndicates created the home mortgage "crisis."  The financial bail-out, with which I have strenuously disagreed, covered the bets of these firms because they were "too big to fail."

Then, to add insult to our injury, these same firms drafted the legislation that is supposed to cure the problem they created.  Their cure restricts seller financing as an alternative means of purchasing a home.  They even include lease/options in the definition of a home mortgage under Dodd/Frank.

I have been working with clients including home builders, landlords who sell to tenants, and property rehab companies to work through this problem.  If you are considering selling or buying a home using seller financing such as a seller mortgage, a land contract, or an option to purchase concurrently with a lease, please contact me to discuss the implications of your particular facts.

NOTE:  This post, as always, is not intended as legal advice.  Further, this area of the law is in flux, and the author makes no representation or promise to update this information.

Attorney James N. Graham
Accession Law LLC

Thursday, April 25, 2013

Adverse Possession Law in Wisconsin - Now With Even More Confusion!!!

Through adverse possession, a landowner can use a neighbor's land long enough and in such a manner as to take ownership of the property.  What would be theft in any other context and what is by definition trespass for a period of years translates into the ownership of title to real estate.

The necessary elements of adverse possession, though often repeated, are never clear when applied to the facts. "The use of the land must be open, notorious, visible, exclusive, hostile and continuous such as would apprise a reasonably diligent land owner and the public that the possessor claims the land as his own."

However, the case law chips away at the clarity of each of these elements.  "Continous" apparently does not mean uninterrupted in time.  "Exclusive" apparently does not mean that others do not use the land.

And now, according to the Wisconsin Court of Appeals, "hostile" and "that the possessor claims the land as his own" apparently does not require the possessor to believe that the land is his own or that he is there without permission.

Wilcox v. Lake Delton Holdings LLC, 2012AP1869 (April 11, 2013)

Monday, March 11, 2013

REO Buyer = Huge Price Discount

As the foreclosure "crisis" has developed and lenders have ended up with large and growing portfolios of single family real estate owned (REO), the lenders have developed new systems for attempting to liquidate that REO without incurring additional liability.

One common approach that many professionals will recognize is that a financial institution will have a particular addendum that it requires to be included in any sale of REO.  These addenda have grown in length over the past 5 years, and they also have grown in the amount of liability which they shift onto the home purchaser.

For example, a buyer of REO might anticipate and be comfortable with the prospect of purchasing the property "as-is."  The buyer assumes the risk of inspecting and analyzing the condition of the property, and the lenders routinely ask the buyer to acknowledge and accept the risk of unknown defects.

This "as-is" concept now has been extended into the title.  Lenders are including in their addenda a provision indicating that the lender will not give the buyer a warranty deed.  Rather, the lender will provide what is effectively a quit claim deed.  The distinction is significant.  A quit claim deed merely transfers whatever interest the transferee has in the property, but it does not warrant that the transferee has any interest to transfer.

In the case of REO, and depending upon the lender, the timing, and the state, there is a significant risk that the lender may not have completed the foreclosure process properly and that there may be other interests in the property.  Lenders are refusing to accept the liability in those cases.  Rather, they want the buyer to assume the risk that the lender may have screwed up.

Doesn't title insurance cover that risk?  It depends.  Look carefully at the title insurance commitment, its requirements and its exclusions.  In many cases, the title insurer requires a warranty deed (which the buyer won't get).  The insurer also has standard exceptions which are only removed if the seller provides a particular set of affidavits.  Lenders typically won't provide these, so the exceptions to coverage remain.

When I'm asked by a buyer whether they should sign one of these REO addenda, my advice, of course, depends upon the entirety of the facts.  However, in general, if one is asked to assume risks, one should be compensated.  In the case of a buyer buying a property from a seller who may not own it and who may not be able to transfer it free and clear, I'd recommend that the buyer receive a significant price discount.

James N. Graham of Accession Law LLC provides real estate and business legal services in Wisconsin.

Tuesday, March 5, 2013

Lease Option - The Perfect Tool?

CAVEAT #1 - This post does not provide legal advice.  Readers must consult with an attorney in order to determine how the law applies to their particular forms, contracts, transaction, and circumstances.
CAVEAT #2 - This is information intended to generally inform for educational purposes, and minor changes in the facts can create major changes in the outcomes - SEE CAVEAT #1.

The lease option - is it the perfect tool?  Maker of millionaires, key to financial independence, or so many real estate "gurus" would have one believe.  I have several points to make in the following discussion relating to lease/options and the related dangers.  However, please do not understand this to mean that I am categorically opposed to leases and/or options.  I have used these tools with my clients as well as personally on countless occasions.

I have no objection to using either a lease contract, an option contract, or both in the appropriate circumstances.  Problems arise with the substance of transactions in which they are sometimes used.

Point #1 - You are not going to get rich quick.  As I have written previously, I receive many calls from students of real estate "gurus."  One of the techniques taught in seminars is the lease/option.  Often a form book, CD, or link is sold to the student as part of a package (for a mere $500, $1,500, $5,000 or more) which is represented to contain all necessary forms which have been tested by the finest lawyers in all 50 states.  This is nonsense.  A "form" is just a piece of paper with words on it.  A "contract" is an agreement in which there is a meeting of the minds.  Form is not synonymous with contract.  In fact, the law commonly recognizes a doctrine called "substance over form."  This means that the law will analyze the actual details of the transaction over what the papers call the transaction. 

Point #2 - There is nothing inherently wrong with using a lease, with using an option, or with using both a lease and an option in a coordinated fashion.  To the contrary, these documents are widely used, often in completely appropriate, legal, and binding ways.

Point #3 -  Be careful.  I say this not only because I am an attorney but also because it is good advice - go see a knowledgeable real estate attorney.  Small changes in the facts can result in large changes in the outcome of lease/option transactions.  Some of the dangers include (and this is NOT a comprehensive list):
  • the transaction could be construed as a land contract in which case
    • Wisconsin law requires (with certain exceptions) the party offering seller financing to have a mortgage originator's license and
    • the failure to have a license could subject the seller/financer to sanctions including administrative action, $25,000 forfeiture as well as the possible ability of the buyer to rescind the transaction and receive return of all of their payments.
    • the Seller would have to foreclose the buyer out of the property (rather than simply evicting the tenant).  This can be much more costly and time-consuming and is an equitable remedy which can permit the Court to address the "fairness" and totality of the transaction.
    • the IRS would likely be owed interest and penalties in the event that the transaction were to be construed as an installment sale.
  •  the transaction may trigger the "due on sale" clause.
  • Under the terms of a standard mortgage, if any interest in the mortgaged property (or beneficial interest in the property) is transferred without the lender/mortgagee's prior written consent, the lender/mortgagee may, at its option, require immediate payment in full of the principal balance due on the note. This is indicated under the provision known as the "due on sale clause." 
    12 USC 1701j-3(d)(8) provides that the "due on sale clause" is triggered by any lease for longer than 3 years and any lease that includes an option to purchase. 
    While triggering the "due on sale clause" is not unlawful provided that one is prepared to accept the consequences, one must be careful not to commit a fraud on the lender/mortgagee in an effort to conceal the transfer. 
    I have been told that there is "no way that the lender could know" about the transfer of a beneficial interest or grant of a lease/option.  This is an evidentiary question.  Is there a change in insurance?  The lender receives notice of that directly.  Is there a change in the utility payor or real estate tax payor?  Could a third-party vendor perform this relatively simple investigative service?  There are services currently that perform this investigation for foreclosures (in order to determine whether the property is occupied and, if so, owner occupied).
    Granted, very few notes are called as a result of the due on sale clause ... currently. However, we have historically low interest rates. Lenders might become more diligent in reviewing files once interest rates rise substantially.  
  • the transaction includes all of the risks associated with being a landlord.  Landlord/tenant law is notoriously pro-tenant and full of traps for the unwary.  A lease and option deal creates a landlord/tenant relationship with all of the associated liability.  Further, the deal typically involves a tenant/buyer with poor credit.  If they could arrange for traditional financing, there usually would be no need for the lease/option.  Is that person who is a poor credit risk a fair tenant risk?  One shouldn't give the keys to a bad tenant just because the tenant might buy the property later. I always recommend that the tenant be qualified as though there were no option agreement.  
So, is the lease/option the perfect tool(s).  Consider the wood chisel.  Is it the perfect tool for carpentry? No, there really is not such a thing as the perfect tool.  Further, whether it is even an appropriate tool depends entirely upon what one is trying to accomplish and under what circumstances.    A lease contract used in coordination with an option contract can be a good set of tools.  However, it depends upon circumstances.

Attorney James N. Graham is a real estate and business lawyer with Accession Law LLC. 

    Monday, March 4, 2013

    Who Owns Interplanetary Real Estate

    Real estate law is moving into the final frontier: The Outer Space Treaty of 1967 is an agreement that no nation has sovereignty over any extraterrestrial bodies. However, the issue of extraction of resources was not addressed in that treaty. Opinions vary widely among space law scholars on interpretation of this treaty and on other legal precedent which might govern how asteroid mining rights might be assigned. 

    See the case of Gregory Nemitz. Nemitz published a claim to an asteroid named Eros. The claim was recorded and published by a non-profit registry named the "Archimedes Institute." He also filed a UCC filing in the State of California. About a year after Nemitz publishing his claim, NASA sent "NEAR Shoemaker" spacecraft to the asteroid. Nemitz demanded that NASA pay him fees which NASA declined to do. Litigation eventually ensued which went up to the 9th Circuit Court of Appeals who upheld the district court's decision to dismiss Nemitz' claim for "lack of a recognizable legal theory." 
    Interesting discussion:

    Space Law: Is Asteroid Mining Legal?

    Can a private company claim ownership of an asteroid based on sending a probe out to it? Can it at least get exclusive mining rights? Would it own the gold, platinum or other materials mined from the asteroid?

    Saturday, March 2, 2013

    Owner in possession exception to adverse possession

    Engel v. Parker, 2012 WI App 18 (Wis Ct App, 2012), the Court of Appeals held that party attempting to "re-take" land through adverse possession needed to have done more than to simply build a fence on the old boundary line.