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Foreclosure Defense / Real Estate

Portrait of a Real Estate Deal

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Buyers get super excited once they find that perfect property. Sellers get excited once they finally get a decent offer on their property. After the initial excitement, reality kicks in and it’s time to protect one’s interests. For the buyer, the main concern is doing adequate due diligence before handing over a pile of cash or taking on a big mortgage loan. For the seller, the concern is making sure the transaction goes smoothly without losing money in the process.

Much of the due diligence starts with selecting a real estate agent that is not cookie-cutter but actually keeps the client’s best interest first and foremost. For buyers using a loan, it is also very important to pick an ethical and diligent loan officer. These two players – Realtors and Loan Officers – will have a big impact on how stressful, smooth, or sloppy the process goes. 

COMMON PLAYERS IN A SALE/PURCHASE TRANSACTION

Cash deals are finalized quicker since buyer has the funds ready -usually in 2 weeks to a month. Deals involving a lender typically take 60 days from Contract to Closing. That time frame can be affected by all the players listed below. Documentation, information, and services are requested from so many sources, before Closing documents can be finalized for Closing Day. 

  • Real Estate Agents
  • Surveyor
  • Lenders
  • Attorneys
  • Property Inspector
  • Appraiser
  • Title Company
  • Closing Agent
  • Homeowners’ Associations
  • Homeowners’ Insurance Company
  • County Records Office

TYPICAL TIMELINE OF A PURCHASE TRANSACTION

  1. Contract: This is after an offer has been made and accepted. The written contract can be drafted by either side and will specify key terms such as the Price, Closing Date, Down Payment Amount, Earnest Money Amount,  Survey Needed or Not, Right to Inspect, Title Company. Termination Clause, Who pays for What, etc.
  2. Survey: The Buyer can agree to use an existing survey, or order a new survey if the existing survey is very old, or if there isn’t a survey in the property records already. The survey shows the exact layout and boundaries of the property. Seller typically pays for the survey and the buyer receives a copy.  
  3. Inspection: The Buyer can order an Inspection by a professional inspector, or rely on his/her own visual inspection. The Inspection report may reveal certain defects that will influence the buying decision, or trigger renegotiation of the terms or the purchase price. Buyer typically pays for the inspection and is not required to share the Inspection Report with the seller. 
  4. Appraisal: This happens behind the scenes and is done by the buyer’s chosen lender, if buyer will be taking a loan. The appraised value gives the lender an idea how much money to actually lend to the buyer. The reason is that the collateral must be worth more than the loan. Costs of appraisal are billed to the buyer (factored into the loan). Both buyer and seller can request a copy. 
  5. Title Search: This is done behind the scenes by the chosen Title Company. The search of the property records is done to ensure that the seller has clear title to the property and that there are no outstanding liens or potential other claimants to title. The Title Insurance is issued afterwards and is a way for the Title Company to protect the buyer from any oversight in title search.
  6. Title Report: Both parties will receive the Title Search Report. If a party is represented by a real estate agent, the report is sent to the agent. It is important to review this report carefully for any issues detected, and also for any restrictions that may affect the use of the property. Most times, a lawyer is needed for a thorough review and understanding of the report.
  7. Title Issues Resolved: The Title Company may find some title issues and insist that some things need to be done/ resolved before it will insure title i.e. before closing can take place. If the things are not resolved, parties can still close if they wish, but the particular Title Company would not insure the title. Sometimes the issues to be resolved are not required by the Title Company, but by the buyer. If no resolution can be reached, the contract may be cancelled, depending on the terms of the contract.
  8. Closing Day: The parties will show up at the Title Company for Closing which means they will finalize the deal on that day. Parties will review the final settlement statement which is a statement that itemizes the purchase price, costs, expenses, taxes etc., and shows which side pays what (as agreed under the contract.) Parties will also review and sign all disclosures given to them, and also sign the deed transfer documents. Buyer’s funds are released to the Closing Agent on the Closing day. Buyer’s lender will require buyer to select a homeowners’ insurance company before closing date. 
  9. Money Transferred: This happens at Closing or shortly after. Closing Agent will transfer the funds to the seller, either from the buyer directly, or from buyer’s lender. This is done after all signatures are verified and on the deed transfer documents. If there is any money that was put down as Earnest Money or Down=Payment, that will be released to the appropriate party as well.
  10. Deed Documents Recorded: The newly signed deed documents are recorded into the property records by the Title Company’s agent. Once the recorded documents are made available by the county, the parties will receive a copy.

NOTE: This synopsis is for a typical real estate purchase/ sale deal, not for a refinance, brand new build, or other type of deal. For questions specific to your situation, please contact our office directly.

Accessory Dwelling Units (Tiny Homes)

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A few years ago, the City of Austin approved a city wide change to allow accessory dwelling units on all SF-3 zoned lots as small as 5,750 square feet in every neighborhood in Austin. Most homes in the Austin area fit this description. The City’s objective was to improve the housing crisis by allowing people to create smaller, more affordable housing. portland-ADU-1

Accessory Dwelling Units (ADUs) a/k/a Secondary Dwelling Units (SDUs) are commonly referred to as garage apartments, granny flats, or tiny homes. They tend to stand beside or behind the primary residence, and are independently fully habitable. By law, they are usually no larger than 1,100 square feet and are at least 10 feet from the main house. They can be used as a guesthouse or rented out (see limitations below).

ADUs come with fewer requirements for building permits, than a traditional construction and can be beneficial for homeowners and investors to maximize their investments. Homeowners can earn extra income through the secondary property, and investors can purchase a single property and then later split it up and sell it as two separate units, for much more money. Many ADUs are created from detached garages which increases the value of the overall lot considerably. Keep in mind though that between permitting, plans, and construction, even a modest ADU will cost close to six figures. However, there are specific types of construction and rehab loans for these types of projects. It’s also sometimes possible to place a pre-manufactured structure on the existing lot and connect utilities. This will depend on the subdivision rules and any other deed restrictions in the area. Make sure to factor everything in before making the decision to add an ADU.

At the November 2015 meeting, the City of Austin Council approved the following changes to the ADU regulations:

  • Reduce minimum lot size for ADUs on SF-3 zoned lots to 5,750 square feet.
  • Set the maximum size of an ADU to 1,100 square feet or 0.15 Floor-Area ratio, whichever is smaller
  • Reduce building separation to 10 feet (front to back and side to side).
  • Eliminate requirement that an entry be more than 10 feet from a property line.
  • Remove driveway requirement
  • Provide one parking space for the ADU in addition to main structure parking.
  • Eliminate parking requirement for ADUs within 1/4 mile of an activity corridor that is served by public transit
  • Limit use as short-term rental to a maximum of 30 days per year for ADUs constructed after October 1, 2015.
  • Prohibit use as a Type 2 short term rental (owner not living on site)

What is a HomeStyle Renovation Loan?

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The HomeStyle Renovation loan is a Fannie Mae (FNMA) mortgage loan that allows a home buyer to purchase residential property (1-4 units) and include the renovation costs into the mortgage. This includes manufactured/ mobile homes. Not all lenders offer the HomeStyle loan. Eligible borrowers include individual home buyers, investors, nonprofit organizations, and local government agencies. The loan is a permanent 15 or 30-year fixed loan and since it’s FNMA backed, has similar interest rates and fees as a conventional mortgage. Renovation

ADVANTAGES OF THE HOMESTYLE RENOVATION LOAN

It can help finance one or more major renovation projects, repairs and/or remodeling and is available for new and existing homes, even new construction. It could also be used to refinance an existing mortgage as long as funds for repairs or renovations are also needed. It’s convenient and economical since it allows borrowers can make repairs and renovations with a single-close first mortgage, rather than getting a second mortgage, home equity line of credit, or other more costly forms of financing.

The loan amount can be based on the as-completed (after repair) value of the home, rather than the total amount needed (purchase price plus renovations). This potentially allows for a larger loan than usual. The final loan-to-value ratio (LTV) will depend on the individual lender but can be up to 75% of the as-completed, appraised value of the property. FNMA recently made changes to allow LTV of up to 97% for some single-unit properties. The LTV may be lower for rental properties (non-primary).

UNIQUE THINGS ABOUT THE HOMESTYLE RENOVATION MORTGAGE:

  1. The property must need some repairs (moderate repairs are justifiable.)
  2. The property does not need to be currently habitable/ livable.
  3. The loan cannot be used for a tear-down/ demolition.
  4. The loan cannot be used solely to construct another residential dwelling on the property.
  5. Renovation General Contractor must be approved by the lender.
  6. All the subcontractors must work with one General Contractor to get paid.
  7. Lenders require General Contractor’s Scope Of Work (SOW) with itemized repair budget.
  8. Lender will require a *HUD inspector to inspect the property and provide a report of repairs needed. 
  9. Lender must approve the SOW and corresponding repair budget.

Under FNMA guidelines, for 2-4 unit properties, the lender is required to add a buffer to the repair budget i.e. a contingency reserve. This is usually 10% – 15% of the total budgeted cost of the renovation. That amount is added on top of the loan amount and is to help cover any costs that run over the estimated repair budget.

Remember, not all lenders offer the HomeStyle Renovation Loan and normal mortgage qualifications like minimum acceptable credit scores still apply. Consult with your loan officer for the full requirements.

*HUD is the U.S. Department of Housing and Urban Development.

FHA Mortgage Loans: What Exactly Are They?

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An FHA loan is a mortgage that’s insured by the Federal Housing Administration (FHA). The FHA program was created to help the housing market by making loans accessible to people that couldn’t afford a big down payment, or with below average credit scores. The federal government insures these loans for FHA-approved lenders, to reduce the lenders’ risk of loss should a borrower default on the loan.

FHA loans are frequently used by first-time home buyers because they allow low down payments even with a low credit score. For non-FHA loans, lenders usually require a down payment of 20% of the loan amount. For example, for a $300,000 home, a traditional loan requires a 20% down payment of $60,000, while the same $300,000 home with an FHA loan will only require $30,000 at 10% down payment, or $10,500 at 3.5% down payment. The actual down payment amount for an FHA loan depends on the borrower’s credit score but will never exceed 10%. Essentially, borrowers can borrow 90% or 96.5% of the total loan amount.

Borrowers can qualify for an FHA loan with a down payment of as little as 3.5% if their credit score is 580 or higher. The down payment is 10% for credit scores between 500–579. As with any loan, the lower the credit score, the higher the interest rate.  Unlike regular loans, borrowers of FHA loans must pay mortgage insurance premiums, which is what protects the lender if a borrower defaults on the loan payments. The mortgage insurance is typically a small amount paid monthly (added to mortgage/ escrow payments) and is required for 11 years or for the life of the loan, depending on the terms of that loan.

OTHER REQUIREMENTS FOR FHA LOAN

  • Steady employment history for the past two years
  • Borrower intends to use the home as a primary residence
  • Borrower has a minimum credit score of 500
  • No bankruptcy in the last 2 years (Lender can make an exception)
  • No foreclosure in the last 3 years (Lender can make an exception)
  • Borrower’s mortgage payment (plus HOA fees, Property taxes, Homeowners’ Insurance and Mortgage Insurance) must be less than 30% of borrower’s gross income (or 40% if Lender approves)
  • Borrower’s monthly debt (mortgage, credit card payment, car payment, student loans, etc.), must be less than 43% of borrower’s gross income (or 50% if Lender approves)
  • Property must pass FHA appraisal standards (if seller won’t make repairs requested by lender, borrower can opt to pay for required repairs at closing; the funds will be held in escrow until the repairs are complete)

If you believe an FHA loan is right for you, ask your realtor, loan officer or lender to help you find out whether you may qualify for an FHA loan. Keep in mind though that not all lenders are FHA approved.

When Real Estate Seller is not a U.S. Resident

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Non-residents can acquire and invest in real estate in the U.S. by sending money over to purchase property located within the U.S. or by purchasing property while physically present in the U.S. Either way, Uncle Sam must get his cut. The law that governs these investments is the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

When the Seller is a non-resident, Buyer is responsible for withholding 10% of the Purchase Price, and reporting to the IRS on IRS forms 8288 and 8288-A (IRS will then send Buyer a stamped copy of the 8288-A and Buyer will give a copy to Seller). The forms and money must be sent to IRS within 20 days of the Closing date, or there might be penalties to the Buyer. Seller must have a TIN (Taxpayer Identification Number) prior to the closing date and can apply for one on the IRS website. These additional requirements are put on the Buyer to ensure that the U.S. government gets the taxes due from the Seller. Since the Buyer is the one bringing funds to the table, Buyer is in a better position to withhold some of the funds and send that directly to the Internal Revenue Service. Uncle-Sam-I-want-Your-Money-freshblue

If Buyer or Buyer’s agent suspects that Seller is a non-resident of the United States, Buyer must ask Seller directly if he/she is not a U.S. resident. If Seller maintains that he/she is a resident of the United States, Buyer must get an original notarized statement from Seller stating that the seller is not a foreign person and showing seller’s U.S. Taxpayer Identification Number (usually a Social Security Number). Buyer would then have no obligation to withhold any funds, or report anything to IRS. However, Buyer must keep an original copy of the signed Seller’s Statement of Residency. Even when Seller is a non-resident, there might be exemptions that allow the Buyer to skip the withholding altogether.

The 2 Most Common Exemptions are:

  1. If there will be no cash to seller (no profit). Seller will need to apply for a withholding certificate from the IRS that will grant Seller the exemption on the transaction using IRS form 8288-B. Seller must give Buyer a stamped copy as proof, and Buyer will then send all the forms in to IRS within 20 days after Closing.
  2. If the total sale price is $300,000 or less, and buyer or buyer’s family will be living in the house for the next 2 years. Buyer must sign an affidavit stating that the purchase price is under $300,000 and the buyer intends to occupy. The Title Company will usually provide a Buyer’s Affidavit of Intent to Reside. If not, have a real estate lawyer provide one to you. All parties must keep an original copy of the signed Buyer’s Affidavit of Intent to Reside but there will be no need to send any forms to IRS.

If there will be a profit to Seller, and Buyer will not be living in the house for the next 2 years, then Buyer must withhold 10% of the Purchase Price through the escrow officer, unless there is another exemption available. (15% for all distributions after February 2016). The escrow officer will send the funds to the IRS within 20 days of Closing. To avoid penalties, Buyer should make sure that the escrow officer at the Title company gets this done timely.

Lastly, remember that there are other exemptions not covered in this post. Contact a real estate lawyer or tax lawyer for help with figuring out if Buyer or Seller qualifies for any other exemption. Even when there is an exemption, the non-US resident Seller is still required to file a U.S. tax return to report the sale and then some taxes may still be due at that point. Sellers should seek guidance from their accountants or CPAs.

Building a New Home? 8 Things You Must Know

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A new construction contract is very complex. This post summarizes the main issues that homeowners tend to run into the most. Keeping this list in mind should help make the process smoother for you and your loved ones.

1. EARNEST MONEY. Earnest money on a new build is typically much higher than on a resale contract because the builder is creating a specific home for you and you get the option to choose structural upgrades and finishes.  The builder takes on the risk that if you fail to follow through, the next buyer may not love your particular taste in customization.  So, builders will usually require earnest money upon signing the contract. Additional earnest money may be required depending on selected upgrades.

2.  COMPLETION DATE. Most home buyers expect the home to be completed with a few months, based on conversations with builder’s sales agents. Inside the written contract, builders typically give themselves 1 – 2 years to build a home although they are usually done within a year. Do not move into a hotel or put in a lease termination notice until you are absolutely sure of the actual completion date.

3.  INTEREST RATE. You will not know the interest rate of your loan upfront. New build contracts take longer to complete therefore buyers cannot lock in an interest rate until much later in the timeline because lenders don’t lock in rates that far out.  This uncertainty makes some buyers uncomfortable since interest rates may be higher at the time of locking in a rate. Make sure you keep your credit score same or higher over the next year.

4.  INSPECTIONS. The builder’s agents will give you a calendar of expected inspection dates. If you find issues on a new build, you cannot use that as cause to back out of the contract but the builder is obligated to fix those issues while in the building process, or while you’re under warranty after closing.

5.  CHANGE REQUESTS. Most builders build off a preset plan that they offer their customers and are called production builders. These types of builders are not as open to change requests i.e. custom changes. For a more customized build, choose a custom builder. Regardless, all Change Requests should be in writing and approved by you and any additional associated costs made clear in the Change Request Order form.

6.  FINANCING. With new builds, a buyer typically has 30 -45 days to back out for loan issue reasons but some builders will hold back a portion of the buyer’s Earnest Money.  If the buyer’s loan falls through late in the building process, the builder typically keeps the Earnest Money. Do your own due diligence by reading the contract terms and making sure you understand them.

7.  APPRAISAL. Builder contracts are not contingent upon an appraisal matching up with the contract price/ agreed price.  If the appraisal of the home comes in lower than the agreed price (once completed), the builder is not obligated to drop the agreed price to match the appraisal.  In such situations, the buyer will have to bring more cash to the table from another source because the lender will only lend up to the appraised value.  If buyer chooses to back out due to the home appraising lower than anticipated, the buyer usually will lose the Earnest Money.

8. REFUNDABLE FEES/ DEPOSITS. Make sure to ask the builder’s sales agents about this. Sometimes, there are clauses in new construction contracts that provide for nonrefundable fees or deposits. If so, make sure you review those terms inside the written contract in case you need to back out of the contract at some point.

The main complaint we get from buyers is that the builder is taking too long to deliver the  finished goods. Construction involves a lot of steps and processes which are not visible to the buyer. Such tasks and processes include approval of plans, obtaining the required permits, setting up for utilities, ensuring appropriate easements etc.

The written contract trumps any verbal communications. So, study the written contract in detail to make sure all the terms discussed are in there. Keep your credit score up and know under what conditions you are able to terminate the contract without losing your Earnest Money.

7 Steps to Consumer Due Diligence

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Due Diligence is a phrase that’s commonly tossed around in the consumer world, but has a special meaning within the context of a legal dispute. In a broad sense, it refers to the level of judgment, care, prudence, and investigation that a person would reasonably be expected to do under particular circumstances. If a consumer hasn’t done his/her due diligence, it could mean the difference between winning and losing a case, and will pose challenges to being able to dispute the contract terms or performance of the contract.

In the legal world, Due Diligence actually means a complete and appropriate review of documentation and facts by a party, before purchasing a good/service, or engaging in business with another party. It is a full and complete review using the advice of professionals as needed, so that when one is done, one knows all there is to know, before buying or engaging in business.

Due Diligence IS NOT similar to kicking the tires on a car. Due Diligence IS similar to taking the car to a garage, having it checked out completely, and personally checking out every part that does not require the expertise of a mechanic.

BASIS DUE DILIGENCE BEFORE ENTERING INTO CONTRACT

  1. Who exactly is going to be entering into the agreement?
  2. What is the price/ consideration for the products or services?
  3. What exactly are the products or services to be delivered?
  4. When and where are the payments, products, or services to be delivered?
  5. How long is the term of the agreement? (One-time; Month-to-Month; A year etc.)
  6. What constitutes a default or non-performance under the contract?
  7. What is the cancellation policy or early termination policy?

At minimum, all consumers should be fully clear on the 7 terms listed above, before entering into any agreement. There is no real valid excuse under the law for not clarifying these basic questions prior to signing any contract. Depending on the type of contract or transaction, there might be many more questions needed to be asked. Do your due diligence accordingly.

In addition, the consumer is required to read the contract thoroughly (front and back) prior to signing it (or hire someone to help), to ensure that the verbally communicated terms are consistent with the written contract terms. Do your due diligence. The best time to challenge a bad contract is before entering into one!

Inheriting Real Estate from a Sibling

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Siblings of a deceased most commonly inherit real estate in two ways – through conveyance by Will of the deceased, or through the State’s Intestacy laws. Intestacy laws are those laws that apply when there is no Will, or when the time period to probate a Will has completely closed. A person could gift the property to a sibling by putting it into a Will or Trust while alive, or in some instances, by filing the proper property documents for a survivorship transfer.

In Texas, a Will must be submitted to probate within 4 years from the date of the death. In most instances, if not done within the 4 year period, the intestacy distribution laws must be followed. In very limited situations can a Will be probated after the expiration of the 4 year period. Inheritance-3-2-boost

Things to Keep In Mind Under Texas Intestacy Laws

  1. The term “Children” includes biological and adopted children.
  2. If the Property is considered Separate Property of a married person, the Children inherit 100% of the Real Property. However, a surviving spouse has the right to live on the Property until his/her death.
  3. If the Real Property is considered Marital/ Community Property, and ALL deceased’s children are also children of the surviving spouse, 100% of the Property goes to the surviving Spouse.
  4. If the Property is considered Marital/ Community Property, but NOT ALL deceased’s children are children of the surviving spouse, then the surviving spouse gets 50% and all of deceased’s children split the remaining 50% equally.
  5. Anytime a person that could have inherited is no longer alive, we pass that person’s share to his/her children.
  6. The law always first looks to pass down (to descendants), then if not possible, next looks to pass up to parents (ascendants), and then finally looks to pass around to siblings if one parent is dead, or if both parents are dead.
  7. Siblings only inherit under Intestacy laws, if the deceased had no children, AND one (or both) of the deceased’s parents is dead.

This is a broad overview and summary of the main parts of the intestacy distribution laws for real property. To obtain an exact determination of your right to inherit from a family member, consult a Real Estate or Estates/Probate lawyer. The lawyer will take all circumstances into account, thoroughly review your family tree, and also make sure the proper documentation is filed into the Property Records to secure your ownership rights.

Homestead Protection & Multiple Properties

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The Homestead of a family or single adult is protected from forced sale for purposes of paying debts and judgments, with the exception of limited situations such as mortgage lenders, taxes, and home improvement loans. Homestead protections are available only to individuals—not corporations, partnerships, or LLCs.shutterstock_343813226_gold-house

Generally speaking, Texas only allows a property owner to claim a Homestead Exemption on one property – the primary residence. Legal primary residence is one that is occupied most of each year by the homeowner but the focus is on intent not actual occupancy. Second homes, vacation homes and investment homes are not primary residences and won’t qualify for homestead exemptions.

However, there are instances where one may claim more than one property as a homestead. In Urban areas, a homeowner may claim contiguous properties as his/her homestead i.e. adjoining or adjacent properties. The properties must touch along a boundary or share a common area. To make a homestead designation on contiguous properties, the county may require that the contiguous properties are in the same exact names according to the deeds (recorded title).

It is useful both for property tax purposes and for protection from creditors, to file an affidavit designating the homestead in the real property records of the county where the property is located. NOTE: This is not the same as the form submitted to the county’s property tax office for tax exemption.

NOTE: this is not the same as the form filed with the property tax office.

Tax Liens and Foreclosure

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On January 1st of each year, a tax lien attaches to all real property in Texas, to secure the payment of property taxes. This is pursuant to the Texas Property Tax Code. The Property Tax Code also sets this lien’s priority in terms of superiority (or simply put, seniority). This means that even if the tax lien attaches to a property after another valid existing lien, the tax lien is considered senior to the other lien e.g. mortgage lien, or judgment lien.  MoneyDNA

Property Tax bills are mailed out to property owners in October and November of each year. Payment is due by January 31st of the following year and by February 1st, the payment is considered delinquent. Interest then accrues at a rate of 1% per month or 12% per annum.

Tax Suit:
At any time after tax payment on Property becomes delinquent, a taxing unit may file suit to foreclose the lien securing payment of the tax. In reality, taxing units rarely exercise this right immediately. Most times, property taxes will remain delinquent for at least two years before a taxing authority will initiate a tax lawsuit. However, it is best to try and resolve the delinquent payments before a lawsuit is filed.

Judgment:
If the past due payment remains unresolved after notice of the lawsuit has been given to the property owner and any lienholders, the civil court will grant an order for foreclosure of the lien and for sale of the real property.

Sales:
In Texas, tax foreclosure sales are done by public auctions that take place on the first Tuesday of each month. Following the sale, the property owner has a right of redemption, but that comes with a higher interest rate and may include additional costs. For more on redemption, see our video: Getting Property Back After Tax Foreclosure.