Monday, June 24, 2013
Crazy Real Estate Contract Clauses
In family law, there’s something called a lifestyle clause that is becoming increasingly common
in prenuptial agreements (which themselves are becoming increasingly common). They memorialize in ink agreements between
bride and groom that seem strange subjects for negotiations and contracts. The diaper clause, for instance, is the
colloquial nickname for an agreement not to have kids. And there’s a whole laundry list of in-law related lifestyle
clauses, including the popular no-overnight-visits term.
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In prenups, lifestyle clauses aren’t always binding.
But they do always create the opportunity to have a conversation about something which, if undiscussed, would probably lead
to marital strife. In real estate law, however, there are a number of strange contract terms and clauses which are
actually binding in many states. In fact, some are clauses are imposed by the state, whether or not the private parties
are on board with that. Here’s a glimpse into the strange world of real estate laws and contract clauses:
1. Irregular Inclusions. During the course of their transactions, most buyers and sellers
become familiar with the distinction between fixtures and personal property. Fixtures, items which are attached permanently
to the property, are included in the sale - personal property items are neither attached nor included in the transaction.
They are not included unless the buyer and seller expressly agree to include them, that is. Here’s a tip: if
you’re not sure that something will stay after closing, write it into the contract. And sellers, if there’s
something you want to make sure you can take with you, pull it out of the property before showing it or at the very least,
expressly exclude it from your contract. Your agent will help.
Most often, buyers and sellers negotiate
to include items (“inclusions”) that would keep the look, feel or function of the home the same as it was when
the buyer first viewed it, like appliances, television screens, custom furnishings and even lawn mowers, tractors and pool
equipment. On occasion, though, the negotiations turn to slightly stranger items. Many an agent has heard of or worked
on a deal where one party wanted to keep - or leave - the seller’s dog. (Outrageous, I know. But you know what they
say about different strokes.) I’ve also seen and heard of home sale contracts that include the tombs of the
family cemetery on the grounds, or require the buyer to keep the tenants that are currently in the property. (In fact, some
municipalities’ eviction control laws require that tenants be allowed to stay after sale, in some cases.)
But there’s also a lighter side of this conversation. Sellers have thrown in everything from a $1000 bar tab at
the local watering hole, to another whole vacation home as a bonus to their home’s buyer.
Last year, Law
and Order TV star Christopher Meloni reportedly offered his Manhattan condo for sale, offering a 2013 Porsche Panamera as
a bonus if the buyer closed by a certain date. Hollywood, generally, doesn’t disappoint when it comes to weird real
estate inclusions: my friend Ann Brenoff, reported a few years back that actor George Hamilton's demanded that the seller
of his LA condo, who owned a famous bakery, throw in a dozen cookies every month for the year following close of escrow.
2. Life Estates. In real estate law, a life estate is a type of ownership interest or
deed that is only good for the life of a particular person. For example, a wife might pass away and leave her husband
a life estate in her home, then direct him to pass it to her children. Some parents even go ahead and transfer their properties
to an heir before they die, retaining a life estate so that the title in the property goes directly to the heir upon their
death without any other estate planning required. Issues can arise, however, given that life tenants (the person who
has title until their death) are not able to sell the property and might not be able to even mortgage or make other desired
changes to it.
3. The Rule Against Perpetuities. The Rule Against Perpetuities is
another arcane law that prevents a property’s owner from dictating what happens to that property far into the future.
Traditionally, the Rule Against Perpetuities prohibits people from creating interests in property that could possibly be
activated more than 21 years after the death of a “life in being” at the time the interest was created.
It’s a bit complicated, but the long and the short is that the intention of the law is to prohibit someone
from dictating and limiting what can happen with a property for many, many generations in the future. This used to
be the law everywhere, but many states have eliminated it entirely, or extended the time frame to 90 years. Other courts
choose to wait and see how things turn out rather than invalidating will provisions that violate this rule. In fact, the
state of Florida’s stance is to wait and see - for 360 years. (No typo.)
If you have reason to want to control
what happens to your property for generations to come, it behooves you to work with a seasoned, skilled estate planning
attorney precisely to avoid violating this and other strange real estate rules.
When the market heats up and buyers are forced into fast-paced competition with each other, escalator clauses tend to come
into vogue. An escalator clause is inserted into a buyer’s offer to purchase a property, and essentially guarantees
the seller that the buyer will beat any other legitimate offer by a certain dollar amount, up to some maximum price.
There are a couple of challenges with escalators. First, they tend to set the scene for disputes about whether another offer
was legitimate. More importantly, they tend to result in purchase prices that are not justified by the recent sales data
on comparable properties - prices that are not likely to be supported on appraisal. So, both buyers and sellers in
transactions with escalators should be prepared for the possibility that the property won’t appraise. Smart sellers
and listing agents in these situations often will not accept a contract with an escalator unless and until the buyer agrees
and proves that they can make up the difference between the purchase price and the appraisal price with their own cash.
5. Seller Contingencies. If you read much about real estate, you’ve probably seen
thousands of references to the first-time buyer and the downsizing empty nester. But today’s market has created
a whole new persona that is being forced to bring back a long-ignored contract clause. I call this player the Exasperated
Seller/Buyer. These are folks who waited long and patiently for the market to recover so they could sell their home and move.
Now that they are no longer underwater, they are concerned about selling because it’s so difficult to buy!
These folks have reintroduced the phenomenon of Seller Contingencies, contract clauses in which the seller accepts
a buyer’s offer contingent upon the seller being able to find and successfully purchase their next home. The effect
of a Seller Contingency is often to extend all the time frames of the contract and escrow events until the seller has secured
a new home. It also allows a seller to back out of the deal entirely if they can’t find another place, and empowers
the buyer to give the seller notice of their intention to back out and buy another property if the seller doesn’t
move the deal forward.
Thursday, June 20, 2013
Zombie Foreclosures Just Won't Die
RealtyTrac estimates tha there are about 302,000 "zombie" foreclosures in the U.S. - with
more than 31,000 in Illinois - that are haunting the recovering housing market this year. The term "zombie foreclosure"
has been popping up a lot lately, but what is it? It is an "undead" property - one where the foreclosure process
has been started and homeowners have vacated only to find out later that they still own the home and could still be on the
hook for taxes and fees because the foreclosure was not finalized.
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Tuesday, June 18, 2013
Housing Starts Miss Expectations, but Overall Tone is Upbeat
WASHINGTON (Reuters) - Housing starts rose less than expected in May, likely reflecting labor and material
constraints, but the overall trend remained consistent with strength in the housing market.
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permits for future home construction fell, that followed a surge in April, which hoisted them above the 1 million-unit mark.
The pullback last month reflected a drop in the volatile multi-family sector, but permits for single-family construction
touched their highest level in five years.
The Commerce Department said
on Tuesday housing starts rose 6.8 percent to a seasonally adjusted annual rate of 914,000 units. April's starts were revised
up to show a 856,000-unit pace instead of the previously reported 853,000 units.
by Reuters had expected groundbreaking to rise to a 950,000-unit rate last month.
are ramping up construction to meet demand for housing against the backdrop very low inventory, have been complaining about
labor shortages and increased material costs.
Sentiment among single-family home builders hit a
seven-year high in June, a report showed on Monday, amid optimism over current and future home sales.
Lean inventories are pushing up home prices, which are in turn boosting consumer confidence and spurring consumption,
helping soften the blow on the economy from tighter fiscal policy and slowing global demand.
Federal Reserve has targeted housing as channel to boost growth, through monthly purchases of $85 billion in government and
Though residential construction only accounts for about 2.5 percent
of gross domestic product, housing has a wider reach on the economy. Analysts estimate that for every single-family home
built, at least three jobs lasting for a year are created.
Starts are expected to top a 1 million-unit
pace this year.
Last month, groundbreaking for single-family homes, the largest segment of the
market, rose 0.3 percent to a 599,000-unit pace. Starts for multi-family homes increased 21.6 percent to a 315,000-unit
Permits to build homes fell 3.1 percent last month to a 974,000-unit pace. Permits for multi-family
homes dropped 10 percent to a 352,000-unit rate. Permits for single-family homes rose 1.3 percent to a 622,000-units, the
highest since May 2008.