Do I really need a home inspection?

Finally, you found a house you really like.  Preliminarily, everything looks fine with the house.  Do I really need to pay an extra fee to someone?  My answer is going to be yes.

A home inspector is an independent, qualified, licensed individual who evaluates or comments about defects or areas of concerns for the home you are about to purchase.  For a few hundred dollars, you can save you thousands for a qualified person who gives an opinion about the condition of a home. Even more importantly, you may not want to purchase a home after you read an inspector’s report. In some cases, you may want to renegotiate the price of the home after the home inspection reveals defects.

A home inspection is a useful informational tool that will permit you to make a decision about purchasing your home.  A contract of sale usually provides for the property to be sold in “as is” condition. A word of advice, a home inspection is the last chance you have to negotiate your contract price or request repairs of the seller.

Like any person you hire, you want to make sure that the home inspector is qualified and licensed. The home inspector should comment on the structural integrity of the building, operability of appliances, roof, and major mechanical systems, including the plumbing, electrical, and heating and air conditioning systems.  Your inspector’s comments about the condition of a home are not usually something that is known by the prospective buyer, sometimes the homeowner, or the realtor.

Home inspectors also make observations of the useful life of the appliances, roof, and mechanical systems.  All visible defects should be noted in the report.  There should also be comments on recommendations for repairs, including, imminent repairs.  Some inspectors also comment on aesthetic related repairs.

Some of the defects a home inspector checks, includes, among others:

  • Cracked foundations
  • Hidden building sections with little support
  • Termite damage
  • Defective heating and air conditioning systems
  • Leaky roofs and leaks through walls
  • Environmental hazards, i.e., mold
  • Hazardous electrical aluminum and lead wiring
  • Inadequate water pressure
  • Drainage problems
  • Fire hazards
  • Asbestos
  • Radon
  • Carbon monoxide and smoke detector placement
  • Energy efficiency
  • Code violations

Home inspectors will try to limit the scope of the inspection to those defects which are visual.  Obviously, home inspectors, no matter how qualified cannot see behind the painted walls or above the ceilings, and thus, will limit their opinion to those items which can be seen

You absolutely should be present during a home inspection.  During a home inspection, you can ask the inspector any questions. The typical time for a home inspection is about two hours.

The appraisal was done and it is lower than the purchase price, what do I do?

The lender so far has asked the buyer to obtain all document to support a loan and for the issuance of a mortgage commitment. The commitment states, among other things, that a satisfactory appraisal must be performed.  So, this is not really a commitment, but, as a buyer, you are, nonetheless, excited.  The appraisal is ordered and the home that you are purchasing (or that you are selling) is lower than the purchase price.  What do you do?

I am assuming that you signed a standard form contract, which has a mortgage contingency clause providing that a commitment is not deemed firm unless an appraisal is performed and satisfactory to the lender.

As a purchaser, I most certainly would not want to purchase a home that is worth less than the appraisal.  If I am a seller, I am screaming the appraiser made a mistake.  Under this scenario, there are options for each party depending on what the parties’ intentions.

  1. Renegotiate the purchase price.  A seller may realize that the purchase price is high and given the comparables in the area, the seller reduces the purchase price.   The buyer is happy because the purchase price is reduced and the deal can be complete (for less than the original offer).  The seller is happy (well, not so really happy) because his/her house is sold.
  2. Request an appeal of the appraisal.  With the newly changed banking laws and regulations, appraisers are chosen on a lottery basis from the lender.  Meaning that the lender does not pick the appraiser based upon geographic area.  While it is thought that this may give a bank an unbiased opinion of the property value, one of the negatives for consumers in transaction is that the appraiser really may not be familiar with the area and quite often under-appraises the property (if you are an appraiser reading this, I am sorry I have seen this happen numerous times).  An appeal is made by to the lender requesting that a review of the appraisal be performed.
  3. Terminate the contract.  The contract may be terminated because the mortgage contingency cannot be satisfied for the failure of the condition that an appraisal is satisfactory to a lender.  As a buyer, you can request the termination for the failure of meeting the contingency.  As a seller you can cancel the contract because you are not willing to reduce the purchase price.  The deal is mutually cancelled by the parties.
  4. Complete the deal as is.  As a purchaser, if your lender will permit the deal to occur despite the low appraisal, you can come up with the difference to complete the transaction. All real property is unique and there can be a myriad of reasons why you would want to complete this transaction.  As a seller, this is what you want – selling the house at the original purchase price.

What should I do?

In all practicality, if the appraisal appears justified, as a seller you must still sell your house to someone and you may be faced with the same problem. As an example, you are selling your house in a clustered development (all houses appear to be the same size and look).  The house next door to you sells for $300,000 just two months prior.  Your buyer is paying $315,000.  Nice job by the realtor to get you the extra $15,000.  However, the appraisal comes in short because the appraiser cites the property two doors down as a comparable (in fact it does not get any better for the appraiser) for the $300,000 value.  As a seller, your hands are tied because it would be hard to justify an increase in the purchase price to $315,000 as the same exact house sold for $300,000 a couple of months ago.

So, as a seller you say, I have options – I will sell the property to someone else.  Well, remember this, the comparable of two doors down will always come up and be difficult for you to overcome for the any buyer.  Of course, if you are lucky enough to get an all cash buyer there is no issue (usually these contracts are not contingent upon a satisfactory appraisal), but these buyers are not easy to come by.

But, wait a minute, my kitchen has granite countertops, the other house is not updated since the owners moved in, I have landscaping, I have beautiful hardwood floors, my kitchen is custom-made, etc.  This is where you say, my house is not really the same as the house two doors down and you request an appeal of the appraisal.

Short Sales

How did this happen?

The real estate market runs in cycles. Presently, we are in an economic period in which mortgage delinquencies are on the rise.  Some of the causes of the increased foreclosure rates are higher interest rates on mortgages making payment unaffordable and the declining value of homes.  Some homeowners with adjustable interest rates are particularly stressed as their payment amounts increase, stretching their budgets to the limit.  Others see the value of their homes are less than the amount owed on the mortgage and make a business decision to not make payments.  The information herein will help you understand the short sale and how you can prepare for a short sale transaction.

What is a mortgage foreclosure?

Foreclosure is the legal proceeding in which a mortgagee, or other lienholder, usually a lender, obtains a court ordered termination of a borrower’s interest.  A lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan.  If the borrower defaults, the lender may has the right to repossess the property through this legal proceeding.

What is a short sale?

A short sale means the seller’s lender is accepting a discounted payoff to release an existing mortgage.

Why would a lender allow a short sale?

Lenders benefit because it can avoid the substantial expense and time of a foreclosure proceeding.  Most lenders do not want to own the properties used as collateral for its loans, because the maintenance costs and taxes add to their cost and decrease profitability.  Additionally, it will have instant liquidity once the sale occurs.

Do I need a realtor?

Although a realtor does not have to be involved in this transaction (remember it is the borrower that is requesting that the bank accepts less than the amount of the mortgage payoff), lenders usually want a realtor involved in the transaction.  The existence of a realtor gives the appearance that this is a bona fide transaction.

What is the process of a short sale?

Step1

Typically, an attorney or authorized representative of the seller may start the process by obtaining a borrower’s authorization to request information from the lender, which allows the authorized agent to act on behalf of the seller in order to discuss terms with the mortgage company.

Step2

The lender will usually require a laundry list of items that must be presented to it such that it may make a decision. The following items are generally required:

  1. Signed listing agreement;
  2. Sales contract and pre-approval letter or proof of funds to close;
  3. Preliminary HUD 1 (net sheet) of proposed sale (this should include all fees, transfer taxes, outstanding water and sewer charges, attorneys fees, realtor’s commissions, outstanding real property taxes);
  4. Hardship letter from seller explaining why payments have not been made;
  5. Proof of income of seller;
  6. Three months’ bank statements of seller;
  7. Two years’ tax returns of seller;
  8. List of all monthly expenses of seller;
  9. Contractor’s proposal of needed repairs;
  10. Title work on property; and
  11. Signed short sale request document provided by lender

Step3

The lending institution usually orders a BPO (a broker’s price opinion) and/or  an appraisal.  Depending on whether the lender accepts the offer, the lender may then counter offer the purchase price listed in the contract of sale.  The realtor or attorney will then need to negotiate with the buyer to see if the buyer is willing to pay an increase purchased price.  Obviously, there is no obligation on the part of the purchaser to increase his/her offer.

Step 4

Wait for the decision. This can generally take up to 30-90 days after all of the above have been provided to the mortgage company.

Why start a short sale versus allowing the bank to take the house in a foreclosure sale?

  1. The borrower does no longer have to deal with the long drawn out process and generally can walk away from the home without owing any more monies.
  2. Remember that in a foreclosure if the amount of monies secured at the auction are less that the amount owed, the lender could seek and attempt to enforce a deficiency judgment against the borrower. If a borrower defaults he/she runs risk of loss of his property by foreclosure and possibility of deficiency judgment if the value of land at time of sale is less than amount of obligation.

So, is the borrower off the hook?

Not necessarily. The lender still has options to try to collect the shortfall.  As a condition of the short sale the lender may require borrowers to sign a note to repay the shortfall. It may also file a collection or a judgment for the amount of the shortage.  Usually, debt forgiveness is granted.

Are there any tax consequences?

The answer may be yes depending on whether the home is an investment property or a principal residence and the amount of the shortfall.  The IRS recognizes capital gains on the forgiveness of debt (see the attachment).

What if there are multiple lenders?

Short sale approval is required from each lender.  The first lien holder usually offers the subsequent lien holders as little money as possible in order to achieve the sale.  Typically, subordinate mortgage holders do not have much leverage to negotiate with the borrower and accept much less monies from the first lien holder in the short sale process (sometimes as little as $500.00).  Do not forget that subordinate lienholders’ interests may be wiped out in a foreclosure sale and they may receive nothing.   Some subordinate lien holders will refuse to negotiate.

What should I look out for if I represent the buyer in a short sale transaction?

One of the biggest hesitations that a buyer has is entering into an agreement that is contingent on the approval from the seller’s lending institution.  The expenses of a home inspection, lender application fees and appraisals, and attorney’s fees generally turn people away from the process.  Additionally, time is a major factor as the decision to purchase a short sale home is usually a time consuming process.  It is very difficult to coordinate a purchase of a home with a purchaser who has already contracted to sell his/her home.

What should I look out for if I represent the seller in a short sale transaction?

  1. Try to obtain all the necessary information from the seller, i.e., ask the client the following:
    1. how many mortgages exist against the house;
    2. are there any additional judgments or liens; and
    3. can he/she make payment arrangements (or work it out with the bank in a modification).
  2. Assess the value of the home.  Lenders will not just accept any offer that is presented.  The value being offered should be reasonable.
  3. It is really important to explain to the seller that the lender will not allow the seller to make any money from the sale of the home.
  4. Explain that he/she should seek advice from an accountant to see if there are any tax consequences.
  5. Explain that there may be legal consequences.  Some lenders require that the seller sign a deficiency note.
  6. See what assets the borrower’s possess.  If the borrower owns multiple properties, just because one is a bad investment, does not mean that they can simply get rid of the property in a short sale.  Remember the lender will ask for a financial breakdown of assets and may seek the recovery of the deficiency from the other assets.

Excerpt from the IRS website relating to the Mortgage Forgiveness Debt Relief Act of 2007

What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does that mean?
Usually, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income.

Does the Mortgage Forgiveness Debt Relief Act of 2007 apply to all forgiven or cancelled debts?
No, the Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.

What about refinanced homes?
Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.

Does this provision apply for the 2007 tax year only?
It applies to qualified debt forgiven in 2007, 2008 or 2009.

If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and the Form 982 must be attached to your tax return.

Do I have to complete the entire Form 982?
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b.  Attach the Form 982 to your tax return.

How do I know or find out how much was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by January 31, 2008. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.

If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the “insolvency” exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent.  A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982, page 4.

Is there anything else I need to know before filing?
Yes. Because the Mortgage Forgiveness Debt Relief Act of 2007 was passed so late in the year, the software systems used by tax preparers and at the Internal Revenue Service need to be updated to accept the revised Form 982. The IRS expects to be able to process the new Form 982 electronically on March 3, 2008

The Role of a Lawyer in a New Jersey Real Estate Closing

The role of a lawyer in a real estate transaction is to provide protection for his client and ensure that ownership is transferred free and clear of all issues.  A real estate attorney is trained to handle real estate-related legal issues. You have the right to hire your own real estate attorney to represent your legal interests in a transaction.

Entering into a Contract

A buyer and seller come together to negotiate the purchase and sale of real estate.  Usually, buyers and sellers are introduced to each other with the efforts of a real estate agent.  The State of New Jersey is split into two regions in order to determine whether an attorney is involved.  Approximately the area of Ocean County to the northern part of the state, there is usually attorney representation.

In New Jersey, real estate agents are permitted to prepare standard residential real estate contracts.  A realtor prepared contract contains generally acceptable and standard language to all parties.  Please remember that there are generally no tailored provisions to the benefit of any one party, and every scenario is different.

Attorney review period

The buyer and seller are permitted to present a contract to an attorney.  An attorney can make amendments to the contract of sale.  A buyer and seller have 3 business days from the date a fully signed contract of sale (that is prepared by a realtor) in order to either cancel the transaction or make important changes to the contract of sale, or do nothing and let the contract stand “as written”.

What really happens? Once, an attorney sends a disapproval letter, the deal is treated as though it has been terminated.  Essentially, the contract is terminated but may be revived subject to the changes that the attorney proposes.

Satisfying Contingencies

In order for a closing to occur, there may be contingencies that must be satisfied prior to a deal being deemed firm.  A contingency means that an event must occur before the event of a happening, i.e., if your contract is contingent upon mortgage commitment, you must obtain a commitment before a closing can occur.  Two typically used contingencies are as follows:

1. Mortgage Contingency

Generally, a contract is contingent upon a buyer being able to obtain a mortgage commitment.  This contingency permits a buyer a given amount of time, usually 30 to 45 days, in order to obtain a mortgage commitment.  In the event, however, the buyer does not obtain a mortgage commitment within that time frame or is denied financing (depending on the contractual language agreed upon), the contract may be cancelled and the buyer will obtain a full refund of the deposit money.

Once a commitment is issued, the deal becomes similar to an all cash transaction, that is to say, you must purchase the house irrespective of the fact that the lender fails to fund the loan for any reason.  Therefore, choose your lender carefully.

During the 30-45 day period, your lender will be requesting from you certain documentation that will be used to evaluate your creditworthiness and qualifications as a borrower, i.e., pay stubs, bank statements, tax returns.  There may be certain conditions that the bank may require of you, i.e., pay off debt or produce letters of explanation for large deposits or derogatory credit, or sign gift letters.

2. Home Inspection Contingency

A qualified home inspector is hired to ensure that the property you wish to purchase is evaluated for visual defects, i.e., defects with the structure or mechanical systems or the existence of wood destroying insects.

In some cases, the attorneys for both parties may be called upon to re-negotiate the contract of sale (sometimes to include repairs that are to be performed by the seller or decrease the purchase price) with respect to items addressed in the home inspection report.

Municipal Certifications

Depending on the township you purchase in, a seller may be required to obtain a continued certificate of occupancy and/or a smoke detector inspection.  Sellers are required to obtain this documentation and real estate agents sometimes assist in this process.

Title Insurance

After contract contingencies are resolved, a title insurance company is hired to prepare a commitment of title, which is an examination of the history of the property in the public records.  The commitment of title usually discloses any defects in the chain, including, the existence of judgments, liens, and mortgages.  The property must be conveyed to a buyer free of defects.

Survey

A survey of the property is usually required on all real property.  A survey is a map of the property, as determined by the opinion of a surveyor, at a moment in time, which discloses where improvements lie in comparison to the property lines.

The attorneys for both the buyer and seller review the commitment of title and survey in order to eliminate any issues that would adversely affect the property.

The Closing

Once all the items mentioned above, as applicable, are completed, a closing can be scheduled.  At that time, the parties and attorneys (subject to the title company’s approval as to clear title) mutually agree for a time and place where all parties can appear for the closing of title.

Shortly before the closing date, the lender will prepare the mortgage documents and a list of costs associated with the mortgage.  A closing statement is prepared by either the title company or the attorney.

At the closing of title, once the deed is transferred, the buyer takes ownership of the home.

Mortgage Tax and Assignment of Mortgage

New York State, pursuant to Title 11, Chapter 26, Administrative Code, Tax Law Section 253-a imposes an additional tax to the borrowers of lending transactions for (the privilege of) borrowing monies against real property.  How does that affect me?  Here is an example, you love a beautiful two family home in New York City (it does not matter where), you offer $500,000 and you apply for a $400,000 mortgage amount.  New York City and New York State has the right to impose a mortgage tax for monies borrowed.  So, your closing costs just when up by $7,170 ($400,000 multiplied by 1.8% minus $30.00).

These closing costs are not often anticipated by your lender (if located out-of-state) and are substantial enough that it should not be overlooked.  Some lenders do not disclose this amount properly as it varies in each county in New York State.

It should be noted that mortgage taxes cannot be collected on cooperative units because cooperative units are not real property.

How do I calculate the mortgage tax?

  1. Mortgage tax varies from county to county so determine the correct percentage applicable to your county.
  2. Multiply the percentage by the loan amount.
  3. Factor in nuances for the county that the property is located in, i.e., New York City imposes a 0.125 % tax rate for transactions over $500,000 and depending on the type of property (vacant land, 1-2 family, commercial), the tax rate changes.

For certain transactions, lenders also pay mortgage tax in the amount of 0.25%

Mortgage Tax Savings

In order to avoid having to pay mortgage tax twice, an exemption exists in accordance pursuant to Title 11, Chapter 26, Administrative Code, Tax Law Section 255, which allows borrowers to pay mortgage tax on the difference between the new loan amount and the principal amount of the old loan.  This amounts to huge mortgage tax saving, which reduces your closing costs.

How does this work? To put it in more simple terms in the form of an example, JPMorgan Chase Bank (Chase) currently holds a loan with the borrower.  Borrower wants to refinance with Wells Fargo Bank, NA (Wells Fargo).  My office contacts Chase to arrange for Chase to assign its mortgage to Wells Fargo.  At the closing, Chase is paid with the funds from Wells Fargo refinance.  The mortgage is NOT satisfied of record; essentially giving the appearance that Wells Fargo bought the loan from Chase.

Additional documents will be signed at the closing to effectuate the tax savings.  For example, the difference between the existing principal balance and the new loan amount is called the “new money”.  If new money is borrowed, the borrower must sign a gap note and gap mortgage.  The new money is taxed in accordance with the tax rate applicable to your county.

REMEMBER – The new money is the only amount that is taxable.  If there is no new money, there is no mortgage tax.

An agreement is also executed between the new lender and borrower called a “Consolidation, Extension and Modification Agreement”, which consolidates the old loan with the new loan, extends the term of the loan and modifies the terms of the old loan.

Are there are any fees other than the mortgage tax?

Yes.  Due to the additional documentation that has to be signed and obtained from the old lender, your attorney or the lender’s attorney may charge for the additional services of procuring the necessary documentation.  The old lender charges processing fees, which range from $1,000.00 to in excess of $2,000.00.

 

Why not do CEMAs all the time?

There are certain instances where the costs to obtain the assignment of mortgage outweighs the savings.  Additionally, there is a time factor that is involved.  In some cases, the old lender may take a long time to locate the documentation.  In the meanwhile, rate lock fees may have expired and lenders may charge for extensions of the rate lock.

How long does the process take?

Each lender handles the process differently and has different turn-around times.  Generally, each lender says 4 to 6 weeks for processing time.  Some lenders’ processing times are better than others.

Are there any up front fees or documentation required?

Every lender is different.  Some fees are charged up front and some are charged at closing by the lender.  These fees are generally not-refundable. Additionally, some lenders require a borrower’s authorization and mortgage schedule from a title commitment to start the process.

Do all lenders assign its loans upon request?

No.  A lender has no obligation to assign its loan to your new lender at your request.  It is really a privilege and not a right to request an assignment of mortgage.    Most of the well-known lenders will assign its loans upon request.

If you are a lender, mortgage broker or borrower in a refinance or purchase transaction and are having trouble with these calculations or need assistance in procuring an assignment, feel free to contact my office.

The Home Buying Process

Part I

The Home Buying Process

Step 1: Determine Your Real Estate Team

Identify an attorney who will assist you in the process.  Having a knowledgeable real estate attorney can save you money and give you peace of mind throughout the process.

Obtain a pre-approval from your mortgage consultant.  You should have a synergy with the team that you choose as your purchase may be a long drawn out process.

Contact a real estate broker who will assist you in locating your new home.  Some factors you may want to consider are the real estate broker’s knowledge of the area which you are looking to purchase and the amount of homes the realtor sells in a given year.

Step 2:            Locating a Home

Whether you locate a home through your own efforts or through the efforts of a realtor, purchasing a home is one of biggest decisions you will make in your life.  Factors that one considers in purchasing a home vary based upon location, size of the home, size of the family, and budget.   Carefully evaluate the factors important to you because the home you are about to purchase will in all likelihood be the home you are going to reside for a number of years.

Step 3:            Term sheet

The parties agree on a purchase price.  If a realtor is involved, a “binder” form is completed, which identifies the parties, the financial information, and the property and is forwarded to the attorneys, realtors, and parties.  If no realtor is involved contact your attorney to discuss the terms of the deal.  Be sure to have all the necessary information relevant to the term sheet.  Your preapproval that you obtained would be useful to the Seller here.

Step 4:            Perform a Home Inspection

A home inspection is a useful informational tool that will permit you to make an informed decision about purchasing your home.   A home inspection is the last chance you have to negotiate your contract price or request repairs of the seller.

A home inspector is an independent, qualified, licensed individual who evaluates or comments about defects or areas of concerns for the structural components and mechanical systems for the home you are about to purchase.

Some of my clients tell me that they do not want to spend the money on a home inspection or have a family member that is in the business and attempt to waive the home inspection in order to save money.  For a few hundred dollars, you can save thousands of dollars based upon the information given by the inspector.  Even more importantly, you may not want to purchase a home after you read an inspector’s report.  In some cases, you may want to renegotiate the price of the home after the home inspection reveals defects.

Like any person you hire, you want to make sure that the home inspector is qualified and licensed. The home inspector should comment on the structural integrity of the building, operability of appliances, roof, and major mechanical systems, including the plumbing, electrical, and heating and air conditioning systems.  Your inspector’s comments about the condition of a home are not usually something that is known by the prospective purchaser, sometimes the homeowner, or the realtor.

Home inspectors also make observations of the useful life of the appliances, roof, and mechanical systems.  All visible defects should be noted in the report.  There should also be comments or recommendations for repairs, including, imminent repairs.  Some inspectors also comment on aesthetic related repairs.

Some defects a home inspector checks, include, among others:

  • Cracked foundations
  • Inadequate water pressure
  • Hidden building sections with little support
  • Drainage problems
  • Termite damage
  • Fire hazards
  • Defective heating and air conditioning systems
  • Asbestos
  • Leaky roofs and leaks through walls
  • Radon
  • Environmental hazards, i.e., mold
  • Carbon monoxide and smoke detector placement
  • Hazardous electrical aluminum and lead wiring
  • Energy efficiency
  • Code violations

Home inspectors will try to limit the scope of the inspection to those defects that are visual.  Obviously, home inspectors, no matter how qualified cannot see behind the painted walls or above the ceilings, and thus, will limit their opinion to those items that can be seen.

You absolutely should be present during a home inspection.  During a home inspection, you can ask the inspector any questions. The typical time for a home inspection is about two hours.

Step 5: Meet with Your Attorney

Once that you have determined that the house is suitable for you, you will meet with your attorney to discuss the parameters of buying a home.  Among other items of discussion will be the amount of financing, the terms of the contract of sale the type home, the items included in purchase price, the time frames (for closing and contingencies).  The attorney may also discuss the closing costs associated with the purchase.  Additional, nuances discussed involve potential tax liabilities and affordability.  It is at this point that the contract of sale becomes fully executed (signed).

Step 6: Secure Mortgage Financing

The contract has been fully signed by all parties.  The lending institution receives a copy of your contract of sale.  It is at this point when you will be contacting your mortgage consultant to arrange and secure financing.  Your mortgage consultant will be requesting many documents from you, including, tax returns, pay stubs, bank statements, letters of explanation, etc.  After all the documentation has been evaluated and you are deemed worthy of receiving financing, a commitment will be issued.  A mortgage commitment being issued signifies a turning point in the transaction.

A mortgage commitment is a bank’s willingness to lend monies to you based on certain conditions. Once a mortgage commitment is issued, a contract becomes firm (meaning that the contract is no longer subject to mortgage financing – in essence, an all cash deal). Additionally, once a mortgage commitment is issued, most contracts provide that you must close title to the property even if the lender fails to fund the loan for any reason.

A mortgage commitment may contain several conditions that have to be satisfied at closing.  Your lender will assist you in the process of satisfying the conditions.

Step 7:  Prepare for the Closing of Title

At a certain point your attorney will cause a title report to be ordered.  A title report is a popular term for the preliminary certificate of title.  It is also referred to as a title binder or commitment.  A title company is may be requested to write a specific policy of title insurance in favor of a named insured, in a specific amount, subject to the requirements and exceptions shown in Schedule B of the commitment (and Schedule C, if any), and further subject to the conditions  and stipulations of the title commitment.

The title company and your attorney will clear any title exceptions which are not ordinary such that title can be delivered free and clear of all encumbrances such that a title insurance policy may be issued.

The amount of title insurance required is based upon the amount of the purchase price and the amount of the loan.  Title insurance rates are set by statute.

A survey should be ordered by you or your attorney.  A survey is defined as a horizontal projection of the premises showing the physical facts of possession with reference to the perimeter lines (see Law of Title in New York and Compendium of Real Property Title by William C. Hart). What does that mean?  Put more simply, a survey is a map of the property, as determined by the opinion of a surveyor, at a moment in time, which discloses where improvements lie in comparison to the property lines.

Step 8: Closing of Title

Your lender has approved your closing and permits a closing to be scheduled.  All the parties agree to a closing date.

Your lender will provide your attorney with its fees such that your attorney will be able to guide you in determining the amount of funds you will need to bring to the closing.

The entities attending the closing may be the following:

  • Purchaser’s Attorney
  • Real Estate Brokers
  • Seller’s Attorney
  • Lender’s Attorney
  • Title Agent
  • Purchaser
  • Seller
  • Mortgage Broker

Most of the parties listed above actually attend the closing.  If one of the parties cannot attend a closing, a power of attorney may be used.

Prior to scheduling your closing, remember to:

  • Transfer funds into an account which is readily accessible.  At the closing, generally, personal checks are unacceptable.
  • Schedule your moving company.
  • Contact your insurance and utility companies to setup your accounts.

At the closing, the deed will be tendered to you from the Seller.  The original must be recorded in the county clerk’s office prior to be given to you.  Your evidence of ownership is the deed.

REMINDER – “On or about closing date”: a closing date may take place within 30 days from the on or about closing date listed in the contract of sale.  This is set by case law based upon the notion that a reasonable time must be given to close title.

PART II

Frequently Asked Questions about Short Sales

How did this happen?

The real estate market runs in cycles. Presently, we are in an economic period in which mortgage delinquencies are on the rise.  Some of the causes of the increased foreclosure rates are higher interest rates on mortgages making payment unaffordable and the declining value of homes.  Some homeowners with adjustable interest rates are particularly stressed as their payment amounts increase, stretching their budgets to the limit.  Others see the value of their homes are less than the amount owed on the mortgage and make a business decision to not make payments.  The information herein will help you understand the short sale and how you can prepare for a short sale transaction.

What is a mortgage foreclosure?

Foreclosure is the legal proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a borrower’s interest.  A lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan.  If the borrower defaults, the lender may has the right to repossess the property through this legal proceeding.

What is a short sale?

A short sale means the seller’s lender is accepting a discounted payoff to release an existing mortgage.

Why would a lender allow a short sale?

Lenders benefit because it can avoid the substantial expense and time of a foreclosure proceeding.  Most lenders do not want to own the properties used as collateral for its loans, because the maintenance costs and taxes add to their cost and decrease profitability.  Additionally, it will have instant liquidity once the sale occurs.

Do I need a realtor?

Although a realtor does not have to be involved in this transaction (remember it is the borrower that is requesting that the bank accepts less than the amount of the mortgage payoff), lenders usually want a realtor involved in the transaction.  The existence of a realtor gives the appearance that this is a bona fide transaction.  Bona fide transaction means that the transaction must be real.  Bona fide is a Latin term meaning “good faith”.   It means a good faith, genuine, fair market value offer to purchase a property and, usually occurs where the purchaser and seller do not know each other.

What is the process of a short sale?

Step1

Typically, an attorney or authorized representative of the seller may start the process by obtaining a borrower’s authorization to request information from the lender, which allows the authorized agent to act on behalf of the seller in order to discuss terms with the mortgage company.

Step2

The lender will usually require a laundry list of items that must be presented to it such that it may make a decision. The following items are generally required:

  • Signed listing agreement;
  • Sales contract and pre-approval letter or proof of funds to close;
  • Preliminary HUD 1 (net sheet) of proposed sale (this should include all fees, transfer taxes, outstanding water and sewer charges, attorneys fees, realtor’s commissions, outstanding real property taxes);
  • Hardship letter from seller explaining why payments have not been made;
  • Proof of income of seller;
  • Three months’ bank statements of seller;
  • Two years’ tax returns of seller;
  • List of all monthly expenses of seller;
  • Contractor’s proposal of needed repairs;
  • Title work on the property; and
  • Signed short sale request document provided by lender

Step3

The lending institution usually orders a BPO (a broker’s price opinion) and/or an appraisal.  Depending on whether the lender accepts the offer, the lender may then counter offer the purchase price listed in the contract of sale.  The realtor or attorney will then need to negotiate with the purchaser to see if the purchaser is willing to pay an increase purchased price.  Obviously, there is no obligation on the part of the purchaser to increase his/her offer.

Step 4

Wait for the decision. Additional documentation may be required.  This can generally take up to 30-90 days after all of the above have been provided to the mortgage company.

Why start a short sale versus allowing the bank to take the house in a foreclosure sale?

  1. The borrower does no longer have to deal with the long drawn out process and generally can walk away from the home without owing any more monies.
  2. Remember that in a foreclosure if the amount of monies secured at the auction are less that the amount owed, the lender could seek and attempt to enforce a deficiency judgment against the borrower. If a borrower defaults he/she runs risk of loss of his property by foreclosure and possibility of deficiency judgment if the value of land at time of sale is less than amount of obligation.

So, is the borrower off the hook?

Not necessarily. The lender still has options to try to collect the shortfall.  As a condition of the short sale the lender may require borrowers to sign a note to repay the shortfall. It may also file a collection or a judgment for the amount of the shortage.  Usually, debt forgiveness is granted.

Are there any tax consequences?

The answer may be yes depending on whether the home is an investment property or a principal residence and the amount of the shortfall.  The IRS recognizes capital gains on the forgiveness of debt.

What if there are multiple lenders?

Short sale approval is required from each lender.  The first lien holder usually offers the subsequent lien holders as little money as possible in order to achieve the sale.  Typically, subordinate mortgage holders do not have much leverage to negotiate with the borrower and accept much less monies from the first lien holder in the short sale process (sometimes as little as $500.00).  Do not forget that subordinate lienholders’ interests may be wiped out in a foreclosure sale and they may receive nothing.   Some subordinate lien holders will refuse to negotiate.

What should I look out for as a purchaser in a short sale transaction?

One of the biggest hesitations that a purchaser has is entering into an agreement that is contingent on the approval from the seller’s lending institution.  The expenses of a home inspection, lender application fees and appraisals, and attorney’s fees generally turn people away from the process.  Additionally, time is a major factor as the decision to purchase a short sale home is usually a time consuming process.  It is very difficult to coordinate a purchase of a home with a purchaser who has already contracted to sell his/her home.

What should I look out for if I were the seller in a short sale transaction?

  1. Gather all your information at once, include the following:
    1. Documentation listed above;
    2. Let your representative know the following:
      1. how many mortgages exist against the house;
      2. are there any additional judgments or liens.
  2. Assess the value of the home.  Lenders will not just accept any offer that is presented.  The value being offered should be reasonable.
  3. The lender will not allow the seller to make any money from the sale of the home.
  4. Seek advice from an accountant to see if there are any tax consequences.
  5. Seek the advice of an attorney.  Some lenders require that the seller sign a deficiency note.  See what assets the borrower’s possess.  If the borrower owns multiple properties, just because one is a bad investment, does not mean that they can simply get rid of the property in a short sale.  Remember the lender will ask for a financial breakdown of assets and may seek the recovery of the deficiency from the other assets.

PART III

Refinancing and the Mortgage Tax

Mortgage tax is imposed for the privilege of borrowing monies in the State of New York.  Additional, mortgage taxes may vary from county to county and even within each county.  The amount of mortgage tax paid also varies based upon the tax class.  I have assumed for the purposes of this discussion that most people will be purchasing a one or two family dwelling or a condominium.

Westchester is one of the few counties in New York that have varying mortgage taxes within the State.  In Westchester, mortgage tax can be computed by calculating 1.05% of the mortgage amount less $30.00 for one or two family dwellings when indicated in the mortgage. For Yonkers properties, mortgage tax can be computed by calculating 1.55% of the mortgage amount less $30.00 for one or two family dwellings when indicated in the mortgage.

Mortgage tax is NOT imposed on cooperative units.

Saving Mortgage Tax

In order to avoid having to pay mortgage tax twice, an exemption exists in accordance with Section 255 of New York Tax Law, which allows borrowers to pay mortgage tax on the difference between the new loan amount and the principal amount of the old loan.  This exemption applies to the difference of monies borrowed over and above the existing principal balance of the mortgage being assigned and the increased loan amount.  This difference is called the “new money” and is the taxable mortgage tax in the transaction.

This difference is called the “new money” and is securitized by a mortgage called the “gap mortgage”.

An agreement is also executed between the lender and borrower called a “Consolidation, Extension and Modification Agreement”, which consolidates the old loan with the new loan, extends the term of the loan and modifies the terms of the old loan.

How it works:

The underlying bank assigns the mortgage (or some cases multiple mortgages and agreements) to the new lender.  Provided that all the documents are satisfactory to the new lender, a consolidation, extension and modification agreement will permit the new lender to consolidate the old loan with the new loan to form a new single lien.  Of course, the old terms change to the new lender’s terms.

Procedure:

  1. Determine whether the monetary savings outweighs the costs of recording, attorney’s fees, and time waiting for the request for an assignment.
  2. A request is made to the underlying bank to assign the mortgage to the new lender.  Of course, the underlying lender must be willing to assign its loan to the new lender.
  3. All collateral documents (mortgage, note, and assignment) must be forwarded to new lender’s attorney at or prior to the closing for review.  In some situations, documents cannot be retrieved by the underlying bank or recreated, i.e. a lost note or missing endorsement.  In this instance, the new lender will not accept the assignment.

Some of the reasons why an Assignment of Mortgage is not pursued:

  • Time constraints: In some cases, lenders may take up to 4-8 weeks to process the assignment of mortgage.   A lead time for coordinating the assignment is required.Lender approvals from the seller’s lender and the purchaser’s new lender must be obtained.  Some lenders do not assign its mortgages.
  • Knowledge:  Clients may not be educated about this loop hole and simply do not know because they never heard of it.
  • Costs:   Is it worth it?  There are fees associated with obtaining the assignment from prior lender.  For example, some lenders require an up front fee, the lender’s attorney requires a fee, additional recording fees, and increased bank attorney fees.
  • Lender Participation:  In addition to the existing lender permitting the assignment, your lender must also participate in permitting the assignment of mortgage.

I want to sell my house – where do I begin?

Selling your home is a time consuming process and unnerving experience.  Everyone wants to sell their home for the highest price possible and for the most part want to sell their house as soon as possible.  In some cases, selling your home becomes even more difficult when you try to coordinate your sale with a purchase of a home.

So, where do you begin?

Gather your paper work.

The following documents are useful in selling your home

  1. The deed – the deed is the evidence of ownership for your home.  You should have kept this document in a safe place.  If you have lost the deed, you can obtain a copy of your deed at the county clerk’s office in the county which the property is located.
  2. Survey – the survey is diagram or map of your property which discloses the state of facts of the property at a moment in time (usually when you purchase your home).  The facts that are usually disclosed are encroachments, improvements (such as garages and sheds), decks, etc.  The purchaser in some cases may be able to save money by relying on the survey you purchased at your last closing.  This can be a savings of up to $800.00.
  3. Certificate of occupancy – a certificate of occupancy is evidence of compliance with building code with the local municipality.
  4. Mortgage statement – the mortgage statement is useful to your attorney and your realtor to determine how the property will be sold.  For example, it is extremely important to know that the purchase price exceeds the value of all existing mortgages.   The useful information on a mortgage statement is the principal balance of your loan, contact information, and escrow information. Further, a mortgage statement has useful information so that your attorney may be able to contact the lender in order to secure a payoff statement prior to your closing.

Some of the information that you need to obtain is public information and can be obtained online.  For example, Brooklyn, Queens, Bronx, and New York counties makes its public records available for free.  Some counties in New Jersey also allow free public records.  Additionally, you may be able to obtain your certificate of occupancy for free in New York City by visiting www.nyc.gov.

Choose your attorney in anticipation of your sale. 

Your attorney will be able to explain the process of selling your own and what fees are involved in the transaction.

Make your attorney aware of any issues that relate to the property prior to selling.  Some of these issues will delay your closing if not dealt with in advance:

  1. Title issues, including, prior owner mortgages
  2. Encroachments of structures on your property or beyond your property
  3. Improvements made to your property without securing a proper permit or certificate of occupancy, including, illegal decks or pools
  4. A tenant that will not leave in anticipation of selling your home
  5. Your mortgage amount exceeds the market value of your home.

Additionally, your attorney may be able to assist you with gathering the information above and assisting you to choose a qualified realtor.  Certainly, a realtor is not necessary in a real estate transaction.  However, realtors offer an additional source of buyers that can visit your home.  This exposure to buyers is generally unavailable to you when you sell your home on your own.

Contact your realtor and interview them about ideas of selling your home.  Ask a realtor about their approach.  Perhaps, some realtors have recommendations about having your home presentable prior to having buyers view your home, for example, paint the house or make some repairs.

Contact my firm to discuss your options in selling your home.

First time home buyers, I am nervous so should I buy?

So, you want to buy a house. There are so many thoughts running through your head. Can I afford this house? How much money do I need? Is now the right time to buy? Where do I start to look? Where do I begin? Which realtor should I choose? Do I need an attorney?

All these answers to these questions are not so apparent. From my own personal experience of owning a home, there are so many variables that I did not consider when purchasing a home. For example, my utility bills being so high; my property taxes increasing; furnishing the home; repairs; did I mention the heating bills? Be realistic about the expenditures that you will be making when you purchase a home. Most certainly, you should be informed and you can do this by asking questions to the realtor and the seller of the home you are purchasing. Ask the seller for utility bills and this request is not unreasonable. Ask your inspector about the upcoming recommended repairs or useful life of appliances and mechanical systems. Ask your realtor, the seller, or your attorney about the amount of the property taxes. Ask about the any association fees or whether the property is located in a flood zone (which would require you to purchase a flood insurance policy). Okay, so I scared you off a little bit. I just wanted you to be educated about your purchase. After all, being an informed buyer may save you in the long run.

Why buy now?

Interest rates are at historic lows. Now, one may ask themselves interest rates are low, but how will I know if I am getting a good deal? This is a valid point, but when you buy a stock how do you know that you will be able to get the lowest price and sell the stock at the highest point? Obviously, if you knew the answer to this question, you would not be reading this blog. But, on a serious note, the real estate market was at its highest level between 2005 to 2007. It is a fact that values in the New York and New Jersey areas have decreased, in most cases, 20% from the those values.

This is a buyer’s market. Meaning that the buyer’s have leverage in transactions. Gone are the days, for now, where people are bidding up purchase prices. People are low balling offers so that they could get a good price. How much do I offer then? While the answer is not clear cut because no two houses are the same, your realtor would be able to assist you in formulating your offer. Ask your realtor what are the comparables in the area.

The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence. It also authorized a tax credit of up to $6,500 for qualified repeat home buyers. The deadline is set to expire on June 30, 2010 provided that a contract was executed before April 30, 2010. What does this mean? First time home buyers and repeat home buyers who qualify, are able to take advantage of monies available to them with no obligation to the government. For more information to see whether or not you qualify, please visit http://www.federalhousingtaxcredit.com/key_info.php.

Can I afford this house?

The ultimate decision making process of whether you can afford this house is up to you. I once read a letter to the editor in a newspaper that puts the mortgage crisis on simple terms that I think everyone could understand: Only you truly know whether you can afford to make payments. If people understood this concept, we would not be in this financial mess. But, this is a topic that will not be discussed in this article.

Financing is Still Available

Most people begin with little or no downpayment. It was recommended that first time home buyers have a 20% downpayment in order to start looking for a home. However, over the years, the Federal Housing Authority (FHA) has backed loans, which greatly reduce the amount of your downpayment to 3.5 % of the purchase price of your own funds. Of course, great credit, good downpayment (usually 20% or more) and good income is the surest way to secure financing.

Further, there are government grants that assist with closing costs and downpayment assistance. Of course, you must qualify for these grants and certain restrictions may apply. One such grant that I normally come across for New York City residents can be found at this website: http://www.nyc.gov/html/hpd/html/buyers/downpayment.shtml. Of course, you must qualify, but qualified applicants receive up to 6% of the purchase price to be used toward downpayments and closing cost assistance.

Do I need an attorney?

You are dealing with friends and family that seem to know everything, real estate agents, bankers, and a title company. So much paperwork, so many terms and words I do not understand, do I really need an attorney.

Well, being an attorney I would tell you the answer is yes. First off, a bit of non-legal advice that goes a long way with not only purchasing a home – do not sign anything that you do not feel comfortable signing. Once you sign the document, you have a legally binding agreement that can be enforced against you. But, most people do not know how to structure a deal to protect their legal rights and do not know the contents of a legally binding document called the contract of sale. It is usually that one paragraph that can cost you thousands of dollars. Further, the custom of the industry for most counties, including New York City and Long Island, us to have attorneys in each transaction.

 

BLOG #2

Buyer’s guide to a short sale – I want to buy a short sale or a real estate owned property (REO).

First off, I do not want to assume that everyone knows what these terms mean, so here are the definitions of each.

“Short sale” a term to describe a situation where the proceeds of the sale of a home are less that outstanding liens that exist against the property. For example, you owe the lender $400,000 but your house is worth $200,000. If you are unable to pay your loan, you may attempt to sell your home by requesting that the lender accept less money than what is owed.

Real Estate Owned Property also known as REO property is a property which is acquired by lender after no successful bidder at a foreclosure auction.

From my experience in representing parties in these types of transactions, there are many problems that are involved.

If you want to buy a short sale type property, please remember the following:

Lower purchase price – generally, offers for short sales are lower than a straight resale offers. Why? The reason for this is that the seller is not going to gain from the proceeds of the sale of the home, so it is no matter to a seller what the offer is (bearing in mind that this is a primary residence). Of course, the seller would like the offer to be reasonable with the ultimate hope that if the offer is at fair market value, the lender is willing to accept the short sale offer. Usually, financially distressed properties are also in need of repairs. Buyers should make their offers accordingly. While formulating your offer, do not consider what the existing liens are but what the fair market value of the home is.

Why most short sales fail:

  1. Time factor – banks are quite simply inundated with the amount of files that exist. Many lenders are understaffed and are at a lag time of 6 months or more. You, as a buyer, must understand that this process is time consuming and lengthy. If you are not willing to wait, do not make an offer and waste your time.
  2. Expenses – with risk comes reward. You will expend monies on a home inspection, appraisal, attorney, title report, survey, etc. and time with a chance that the deal will not go through. While it may seem unfair that you will lose the monies you have expended, you will be rewarded with the ultimate goal, owning a home. I would gladly be willing to spend monies to make sure I have the property that I want to purchase ensuring that it is suitable for me. Meaning, I will spend monies on an engineer and title report rather than waiting for a short sale approval only to learn 6 months from now that the property is not suitable or too distressed to even purchase. If you do not have these monies to spend because you have a tight budget or are unwilling to spend these monies, then purchasing a short sale may not be right for you.
  3. All lien holders must agree to release the property. Perform a title search to make sure that the lien holders are not many in number. I cannot tell you how many times this results in a deal-breaking situation. Buyer’s attorneys, at the insistence of their clients, do not order a customary title search until a short sale is approved from the mortgage holder. Once the title report is received, it sometimes discloses credit card judgments. Somehow, sellers do not remember be served with a summons and complaint (the start of a lawsuit). Of course, the lender is reluctant to pay off judgments and the seller does not have any monies to discharge these judgments. For example, I once negotiated a short sale where there were three mortgage holders (not the norm) and two judgment holders (credit card judgments). The lender approved the short sale but was unwilling to pay for unsecured judgment creditors. In this situation, the judgment creditor single handedly held up the closing of title because it would not release the property unless they received its full judgment amount. Of course, I worked a juggling act and made all parties concede some monies make it work. But, not every transaction can work because the numbers are just too large far apart.

In closing, I want you to part with this advice, be patient and with risk comes reward.

The property that I am purchasing contains a violation in New York City. What are my options?

This issue seems to come up, it seems, in every transaction. Typically, a seller made an improvement to the home without obtaining a new certificate of occupancy or proper permit. The most common examples are illegal decks, pools, extensions, finished basements, and converting garages into living space. A building inspector issues a violation when the building department is prompted to appear at the property for a routine inspection or receives an anonymous tip (usually from a disgruntled neighbor) that there are illegal structures on the property.

The violation usually requires remediation and payment of a fine. The payment of a fine does not necessarily mean that the violation has been cured. To remediate the violation, the homeowner usually has to restore the improvement to its prior condition or to obtain the proper permits to allow the improvement to exist. In either case, depending on the type of improvement, a building inspector may be required to re-inspect the property. In some cases, an affidavit called a certificate of correction may be submitted as evidence of remediation. A certificate of correction is an affidavit indicating that the work was done to remove the violation to comply with building codes. In some cases, in addition to the permit, a new certificate of occupancy may be required. A certificate of occupancy is a document issued by the building department of the municipality that the building may be occupied for its intended use.

Assume you have entered into a contract of sale for the purchase of a certain property and the title search discloses a violation. As a purchaser, you usually have three options when a violation appears on record:

  1. The seller is notified and remediates the violation. Under this scenario, there really is no issue because the seller shall deliver the property with all improvements containing the proper permits or with a proper certificate of occupancy.
  2. Accept the premises in “as is” condition subject to the violation. You must be careful in this situation because you have just purchased a property which requires you to comply with the building codes. When you attempt to sell the property, you may then have to remediate the violation (unless, of course, you can convince the purchaser to accept the premises “as is”). Even if the seller renegotiates the purchase price to entice you to close title, ultimately, you must remember that there is a chance that the improvement may not be legalized. Be careful and due your homework.
  3. Terminate the contract. A contract of sale usually contains specific language which requires that violations must be remedied by the seller for those violations which exist prior to contract signing. Further, a contract of sale can be cancelled if a building contains an improvement, which a seller has refused or fails to legalize. Careful consideration must be given to requiring that the seller remediate all violations that exist prior to closing. If contractual grounds exist for you to terminate the contract, this is an option that may be available to you.

What if I want to buy the property despite the knowledge of the existence of an illegal structure without a violation being issued?

This question is difficult to answer because it depends on the type of improvement. Just because a violation has not been issued does not necessarily mean that a violation will never be issued.

A purchaser may make a business decision and purchase the property “as is”. These purchasers take the chance that a violation will not be issued or purchase the property knowing that a violation will require remediation, but in the meanwhile, enjoy the improvement.

For example, one of the reasons you like a house is because the backyard is set up the way you like it with a nice pool and deck. Unbeknownst to you at the time of signing the contract, the seller did not secure the proper permits. At a certain point you discover the pool and the deck have not been legalized. You are now two months into the process (contract is signed, mortgage application has been approved, etc), and you think to yourself, I really do not care if it the pool and deck are legalized. If you purchase the property subject to the improvement being accepted in “as is” condition, then it becomes your problem once you purchase the property. This may be a risk you would be willing to take. However, you should keep in mind that there may be a chance that the improvement, in this case, the pool and the deck, may never comply with building codes.

Of course, if you are demolishing the building and improvements there is no real issue here because the removal of the improvement usually will satisfy the building department requirements to remove the violation.

However, some improvements simply cannot comply with building codes, i.e., an extension to a building. What then? You may be required to remove the entire improvement and restore the building to its prior condition. A huge expense for you and most certainly not what you had bargained for. This is a chance you should not be willing to take.

There is one other point worth noting, just because you accept the property in “as is” condition, does not necessarily mean that your lending institution will accept the property with the illegal improvement. So, prior to accepting the property subject to the violation, check with your lending institution.

In conclusion, when you purchase a property, careful thought should be placed into whether or not you should purchase a home with a violation existing against the property. The options available to you are to request that the seller remove the violation, accept the property “as is” subject to the violation (with or without a reduction in the purchase price), and to terminate the deal. The worst case scenario is that the condition cannot be remediated and you must remove the improvement.

The information contained in this blog is limited in scope, is for informational and educational purposes only, and applies, generally, to the five boroughs of New York City (Staten Island, Brooklyn, Queens, Manhattan, and Bronx).

Does a home inspector need to be licensed in New York?

Effective December 31, 2005, the real property law is amended by adding a new Article 12-B, “The Home Inspection Professional Licensing Act.” In essence, any persons engaged in performing home inspections of residential buildings for compensation, must be licensed.

Article 12-B of the Real Property Law is entitled “Home Inspection Professional Licensing.” The section law as written is clear as to the licensing of individuals who provide home inspections for compensation. The relevant text of the article is as follows:

§ 444-d. License requirements for home inspectors

No person shall conduct or represent that he or she has the ability to conduct a home inspection for compensation unless such person is:

  1. LICENSED as home inspector pursuant to this article; or
  2. a person regulated by the state or a political subdivision thereof as an ARCHITECT who is acting within the scope of his or her profession; or
  3. a person regulated by the state or a political subdivision thereof as an ENGINEER who is acting within the scope of his or her profession; or
  4. a person who is employed as a code enforcement official by the state or a political subdivision thereof when acting WITHIN THE SCOPE OF THAT GOVERNMENT EMPLOYMENT; or
  5. a person making home inspections for the purpose of meeting the requirements of section 444-e of this article to qualify for licensure as a home inspector.

Therefore, any individual who claims to be able to inspect a home for compensation must be licensed (UNLESS THAT PERSON IS AN ARCHITECT, ENGINEER OR CODE ENFORCEMENT OFFICIAL pursuant to §444-d).

What is Home Inspection?

Home Inspection is defined as the process by which a home inspector observes and provides a written report of the systems and components of a residential building including but not limited to:

  1. Heating System
  2. Cooling System
  3. Plumbing System
  4. Electrical System
  5. Structural Components – foundation, roof masonry structure, exterior and interior components or any other related residential building component recommended by the Home Inspection Council and implemented by the Department through the regulatory process.

Who must apply for a license?

Persons engaged in performing home inspections of residential buildings FOR COMPENSATION.

What do you mean by residential buildings?

A Residential Building means a structure consisting of 1 to 4 dwelling units and their garages and carports, but shall not include any such structure newly constructed or not previously occupied as a dwelling unit.