Real Estate

Last month’s Insight Blog focused primarily on real estate related matters. Dramatic changes have occurred in other areas of the practice of law over the past fifty years. Here are five more that come to mind.

1. Jury System.  No one likes to get summoned for jury duty.  Everyone agrees it is an essential part of our judicial system, but what an inconvenience to have to take off a day or more from work to sit on in a courthouse.  If you receive a jury summons, you will be required to serve for one day or the duration of one trial at the most.  Most often you don’t spend more than a part of a day fulfilling this obligation.  Furthermore, most trials last only a few days or less than a week.  In 1972, however, the system was quite different in Massachusetts.  A juror was expected to serve for one full month, regardless of whether there were jury cases pending or scheduled to start.  If taking off work for one day raises the ire of your employer, imagine what thirty days would do!  Fortunately, the system was changed, I think some time in the mid or late 70’s.

2. Books.  Nothing was more impressive or shouted scholarly thought more than a room full of legal books.  It seemed every issue that humans could possibly raise could be addressed and solved with the knowledge contained in those books.  In fact, it was one of the most significant investments that a young lawyer opening a practice had to make.  And after buying the books, it was necessary to subscribe to an updating system which would periodically send you “pocket parts” which updated the content of the given book.  These pocket parts would literally be inserted in a pocket on the inside of the back cover of the book.  It was a real shocker when we found that a 24-volume set of legal books could be stored on one compact disk.   No need to be shocked for long, now all that wisdom is found online.  If you see books in a law office these days, chances are they are for aesthetic purposes only!

3. Estate Taxes.  A bill was introduced to the most recent session of the Massachusetts Legislature to increase the threshold at which an estate must pay Massachusetts Estate taxes from one million dollars to two million dollars.  Surprisingly, it did not pass.  I am sure it will at some point in the not-too-distant future.  In 1972, the threshold was $60,000.00!  Enough said on that topic.

4. Suggested Fee Schedule.  Fees are always a sensitive topic to discuss.  Young lawyers are never sure what a fair and reasonable fee for a given service is.  Whatever it is, clients frequently think it is too much.  Sometime before 1972, the Massachusetts Bar Association sought to remove the mystery of legal fees and published a “Suggested Fee Schedule for Lawyers.”  Sounds like a good idea.  It took the guess work out of the equation and kept everything on an even keel.  Not so.  The suggested fee schedule was quickly determined to be in violation of anti-trust laws and bordered on price fixing.  The schedules were quickly withdrawn and we have been on our own ever since.

5. District Court Judges.  It seems pretty clear that being a judge one day and advocating as a lawyer the next day could result in some serious conflicts of interest.  The Commonwealth of Massachusetts in 1972 didn’t think so.  It was common practice for District Court judges to maintain a full law practice while serving as, essentially, a part time judge.  Apparently, this system had been in place for decades.  Some time, I think in the 80’s, someone recognized the absurdity of this practice, and it was stopped.  Today, district court judges are judges only, not practicing attorneys.

Robert Feline (his friends knew him as Bob Kat) was very stubborn and some may have called him a curmudgeon. He grew up in a large family, having five siblings. Interestingly, neither Bob, nor any of the siblings had children. They all grew up in a house in one of Boston’s nicer neighborhoods. Bob’s parents weren’t much into legal stuff. They never bothered to do wills. They didn’t have many assets, but they did have the house, which they wanted their children to inherit.

Rather than go to the expense and bother of doing wills and related documents, they simply transferred title of the house to all six of their children. Things progressed as expected and Bob’s parents eventually died with title of the house in the names of their six children.

The house was located on land that many years ago had been subdivided into many lots, but they didn’t comply with subsequent zoning restrictions. They were just too small. So, lots had to be combined to allow construction of homes. Bob’s parents’ property actually consisted of six small parcels, each one taxed separately but comprising a single property. Somehow, the six lots surrounded two parcels owned by the City of Boston. No one quite knows how this happened, but the City seems to have taken the lots for nonpayment of taxes at some point in this saga.

Anyway, all of Bob’s siblings had their own homes. Only Bob continued to live in his parent’s house. Everyone was comfortable with this situation and at some point, they all signed a deed transferring title of the various parcels to Bob.

Shortly after the transfer, the archaic septic system servicing the property failed. The property was located in an area that does not make connection to the City sewer system feasible. A new system had to be installed.

Bob knew people. He even knew people who were capable of installing a cess pool. No need to bother City officials with requests for permits, etc. It was a simple thing for Bob’s friend to install a system without involving the City. Who would know, and who would care?

Bob couldn’t believe his luck. He was going to save a fortune. This was good because not only was Bob stubborn, but he was also pretty cheap. He did spring for a will in which he left all his property to any sibling surviving him. By the time he died, only one sister remained. She got the house. Was this a blessing? No.

Bob’s friend built the cess pool on one of the lots owned by the City!

Bob’s sister, who is elderly and not really equipped to deal with matters of this type, just wants to sell the house. But who is going to buy it? And for how much? The value is undoubtedly seriously impacted by the cess pool situation. A buyer will have to find a way to buy the lot the cess pool is on from the City. Chances are very good the cess pool does not measure up to current standards for septic systems, so will have to be removed and replaced with a whole new system, not an inexpensive undertaking.

Once again, had Bob simply done the right thing and consulted, and paid professionals to handle the matter, his sister would not be in such a predicament today. Sometimes inheriting property is not the windfall we think it will be.

Sam and Ella lived in a nice Boston suburb on a quiet street where every house lot was at least an acre. They were good friends with their next-door neighbors, Phil and Rhoda Dendron. Sam and Ella’s daughter babysat for Phil and Rhoda’s children and looked after their pets when they were away. It is good they were always on good, friendly terms considering what was to transpire.

Sam and Ella decided they wanted an in-ground swimming pool in their backyard. They had plenty of room, and their yard backed up to empty woods. It was an ideal setting, and a pool would transform a very nice property to an even nicer one. 

Knowing the construction process would be unsettling, noisy and disruptive, Sam very courteously informed Phil and Rhoda of his intentions. His neighbors had no problem with the plan and congratulated him on such an exciting development in the lives of his family. Phil, however, who was a lawyer, told Sam, who was not a lawyer, that he should have his property surveyed before construction began to avoid any possible encroachment on his neighbor’s land, on either side of his property. Sam said he didn’t have to do that because his friend, Vinnie, knew all about stuff like this and he would place the pool completely on Sam’s property. Phil reiterated the danger involved but Sam chose to rely on Vinnie rather than take Phil’s advice. Sam built the pool where Vinnie said it should go.

All was fine for a few years. The pool was beautiful. Sam, Ella and their children enjoyed it every summer. And although it seemed close to Phil and Rhoda’s property, it was not intrusive or offensive as it was used responsibly and considerately as far as neighbors were concerned.

No one will be surprised what happened when Sam and Ella decided to re-finance their home five years later.

One night, Phil received a phone call from Sam. The bank doing the re-financing had a plot plan done on his property and, lo and behold, about ten feet of his pool is actually on Phil’s property. Thanks Vinnie.

Phil reminded Sam of their conversation years ago regarding a survey. Strangely, Sam had no recollection of the conversation.

Sam’s options are not great, but there are options. He can remove the pool and build another, all on his own land. Obviously, this would be a financial disaster. Had Phil and Rhoda been vindictive, or if relations between the neighbors had been strained, they could have insisted the pool be removed.

A more palatable option for Sam and Ella was to trade sections of land with Phil and Rhoda. Sam and Ella would convey a small parcel of land in the front of their lot to Phil and Rhoda and Phil and Rhoda would transfer a parcel of land in the rear of their lot to Sam and Ella so the pool would be completely on their land. This would require the survey that should have been done in the first place, as well as drafting new plans for each property, and deeds, all of which will have to be recorded with the registry of deeds.

This could still have been a financial disaster for Sam and Ella. Phil and Rhoda could have demanded an outrageous amount of money to do the suggested transaction. They had all of the leverage but they didn’t. Being the good neighbors they were, they agreed to the transfer for no consideration, providing Sam and Ella paid for all expenses including surveying expenses and legal fees.

But Sam and Ella were not out of the woods yet. Any transfer of land had to comply with zoning requirements. The size of the respective lots had to remain in compliance with the applicable zoning laws and, more risky, the frontage along the road had to be enough to satisfy the zoning requirements. This was particularly relevant to Sam and Ella’s situation since they were transferring some of their front area to Phil and Rhoda.

Sam and Ella lived a charmed life. They made a huge mistake, even though they were warned about the possibility, but they got out of it relatively unscathed. It cost them some money, but it all worked out. Zoning did not prohibit the land transfers and it was done.

A very different, and financially devasting, result could have occurred if these neighbors had not been on good terms, or if greed had governed the actions of Phil and Rhoda.

Two lessons to be learned here. 1. Don’t try to cut corners when undertaking a major project. Get and follow the advice of professionals who have experience in the matter you are pursuing. 2. Stay on good terms with your neighbors!

The legal process begins when you sign an offer which is accepted by the seller. It is important that the terms of the offer are exactly what you want since they will eventually be part of the more comprehensive purchase and sale agreement. If a real estate broker is involved, that person will usually draft the offer. Critical provisions in an offer include the purchase price, the amount of deposit to be made (remember, the deposit could be at risk if something goes wrong), the date by which a full purchase and sale agreement is to be signed, the amount of financing to be obtained and the date the closing is to occur.

Once the offer is accepted, the attorneys for each side will negotiate the terms, and draft a purchase and sale agreement. The agreement will contain all of the terms and conditions of the sale. Although much of the language is boiler plate, there are some clauses that can be tipped in favor of one party or the other. As a buyer, you want to keep the deposit as low as possible and you want to give yourself sufficient time to secure financing.

Once the Agreement is signed, you will submit at least one application for financing. It is the buyer’s obligation to make a good faith and diligent effort to secure financing. If you change your mind about buying the property, you will not get your deposit back if you do not try to get a mortgage.

If the buyer does make a diligent effort and is unable to obtain financing, the deposit will be refunded in full.

The Agreement will contain a date by which financing must be secured. If a written commitment (verbal is not good enough) from a lender is not received on or before that date, the buyer can withdraw from the Agreement and get the deposit back or ask the seller if an extension of the contingency date can be granted. It is very important that one of these two things happen on that day. If the buyer does not have a commitment, and does not get an extension of the contingency date, they will be expected to go through with the purchase anyway and if they are unable to do so because of lack of financing, they will lose their deposit.

Once a lender has committed to provide financing, the matter will be turned over to the lender’s conveyancing attorney to have the title work done and the closing conducted (occasionally a lender will allow a buyer to use their own attorney for this). The attorney will have a title examination done to be sure there are no encumbrances on the title of the property. A plot plan will be done to be sure the property complies with zoning requirements and that it is not in a flood zone. A municipal lien certificate will be obtained from the city or town in which the property is located to be sure all estate taxes and betterment assessments have been paid.

When all of this is done and the agreed closing date approaches, the closing attorney will prepare a disclosure statement which will reflect all of the charges to be assessed to the buyer, such as recording fees, escrowed amounts, title insurance premium and legal fees as well as all credits to which the buyer is entitled such as the amount of the deposit already paid and the amount of the mortgage. Items such as real estate taxes, or in the case of condominiums, common charges, will be pro-rated as of the day of the closing. A bottom line will result which will be the amount the buyer needs at the closing.

After the closing, the lender’s attorney will record the deed, mortgage and perhaps other documents with the appropriate registry of deeds and pay any outstanding mortgage or other liabilities relating to the property.

A question often asked is whether a buyer needs their own attorney at the closing since the lender’s attorney is doing all the work. In most cases, buyers can rely on the lender’s attorney and things work out fine. Keep in mind, however, that the lender’s attorney is representing the lender, not the buyer. If it appears you have a lender’s attorney who is not attentive or is difficult to work with, or if you anticipate a problem with the seller at the closing, you should have your own attorney.

Two final considerations. The manner in which title is held can have a dramatic effect on who might eventually own the property. If title is held as “joint tenants”, if one owner dies, the other succeeds to full ownership of the property. If it is held as “tenants in common”, if one owner dies, that owner’s heirs succeed to that owner’s interest. If the property is being purchased by spouses, the preferred option is “tenants by the entirety”. This is a joint tenancy but with additional protection from creditors.

Finally, it makes sense to record a homestead declaration at the time you purchase a home. This is not a panacea against all risks to the house, but it does prohibit the house from ever being sold to satisfy a debt as long as the buyer and family are residing in it. It can’t hurt and it might help some day.

This month we will focus on what to expect if you are selling your home.

If you are using a real estate broker, you will likely be asked to sign a listing agreement giving the broker the exclusive right to list and sell your home for a specified period of time. It is probably best not to exceed three months. Once a purchaser is found, the next document you will have to sign is an offer form. This form sets forth the basic terms of the sale including price, deposit to be made, financing contingency and date of closing, among other things. It is important you are comfortable with the terms set out in the offer as they will be the same terms as in the more comprehensive purchase and sale agreement to be subsequently signed. In the past, these documents have been prepared by the real estate broker and reviewed by attorneys for the respective parties. However, it is becoming more frequent that brokers do not want to prepare the purchase and sale agreement and that job is left to the attorneys.

When the agreement is signed, there is relatively little for the seller to do. It is the seller’s responsibility to prepare a deed transferring legal title of the property to the buyer. If the property is held in a trust, there will be one or two additional documents that will be needed. These are all generally done by seller’s attorney. The seller must also obtain a smoke and carbon monoxide certificate from the local fire department and, as the closing date nears, obtain, and pay, if possible, a final water and sewer bill from the town or city. It is good to be able to have receipted bills at the closing or just prior to it. If the property is heated by oil, the seller should also have their oil company take a reading of the amount of oil in the tank and provide a statement of its value. This is so seller can receive a credit at closing. If a real estate broker is involved, he or she will generally obtain these things but seller should verify that it will be done. If the property is a condominium, the seller will also have to provide a 6d certificate which is a statement from the governing body of the condominium indicating that all condo fees have been paid.

If the buyer is obtaining financing to assist in the purchase, the purchase and sale agreement will contain a mortgage contingency clause. This clause will establish the date by which the buyer must have a written commitment from a financial institution committing to provide financing for the purchase. When that date arrives, one of three things will happen. If seller hears nothing it is usually an indication that a written commitment has been obtained and the transaction will proceed as planned. Buyer may contact seller indicating that a verbal commitment has been made but it will take a few days for the lender to generate a written commitment and buyer would like an extension of the mortgage contingency date. Seller’s options at this point are to grant an extension or refuse. If the latter, buyer can withdraw from the agreement on the basis that financing cannot be secured and all deposits paid will have to be returned and a new buyer found. Finally, the buyer can notify seller that they have been unable to secure financing and have to back out of the deal. Providing buyer has documentary evidence of being denied financing, the deal is terminated and all deposits refunded.

Assuming all goes smoothly and financing is secured, the lender’s attorney will conduct a title examination of the property, to be sure there are no encumbrances on the title, obtain a municipal lien certificate from the city or town to confirm that all real estate taxes and betterment assessments have been paid, and have a plot plan done to confirm that the property is in compliance with zoning restrictions and that it is not in a flood zone. If problems surface as result of this research, it is the seller’s responsibility to clear up any problems found. Usually there are no problems that cannot be easily resolved. As the closing date approaches, the closing attorney will produce a settlement statement reflecting the credits and charges relating to the sale. This should be obtained and reviewed at least a day before the closing.

Once everyone is comfortable with the settlement statement, the closing attorney will schedule and conduct a closing. Distribution of proceeds will be delayed until the new deed is actually recorded at the registry of deeds. This usually happens the same day but can be deferred to the following day if the closing is held late in the day. Although sellers usually attend closings, it is not necessary they do so. If you do not want to attend, or cannot attend, you can sign the deed in advance along with a limited power of attorney giving someone (most often your attorney) the power to sign other documents for you at the closing.

Proceeds from the sale will either come in the form of a client’s account check from lender’s attorney or, if you prefer, they can be wired to your account by the lender’s attorney. There are some attorneys who do not wire funds, however, so this should be addressed well before the closing.

As far as costs are concerned, the greatest expense a seller will have is the real estate broker’s commission, this is usually 5% of the selling price. The second highest expense for the seller is the transfer tax. This is based on the value of the property transferred, at $4.56 per $1,000.00 in value transferred. A house selling for $550,000.00 will incur a tax of $2,508.00. There may be other costs such a recording fees for a mortgage discharge, but these should be minor.