Agent on the Street

Real questions
Real agents

These periodic episodes present actual situations – we hope they will be helpful to other real estate professionals .

Episode 23 - How the CL-100 Contingency Works

Call from Agent

If the Wood Infestation Report paragraph says “contingent,” what does it actually mean?

The Response

Paragraph 11 (titled Wood Infestation Report) of the current version of the standard SCAR residential contract (Form 310) provides, as follows:

Note the highlighted words. The contingency is simply that the property be inspected (i.e. that a CL-100 be done) – period. Many seem to believe “contingent” means, if the buyer isn’t satisfied with the CL-100, he can immediately terminate the contract -- that is not so (unless Due Diligence has not yet expired). In reality, if a CL-100 reveals damage and/or infestation, the second para within para 11 requires the seller repair the damage and/or treat the infestation – this is true regardless of whether “contingent” or “not contingent” is selected. If the seller repairs/treats, the buyer remains obligated to complete the purchase. If the seller does not repair/treat, the buyer may 1) buy the property anyway; 2) negotiate for payment of repairs and/or treat; or 3) terminate the contract. Expressed more plainly, the buyer has the right to terminate only if the seller refuses to make repairs and/or treat the infestation.

The following questions and answers help to illuminate the point:

Q. If “contingent” is selected, what does it mean?

A. If it is contingent on the seller having a CL-100 done and the seller does not do so, the buyer can terminate (and does not have to pay a termination fee) – this is a true contingency. If it is contingent on the buyer having a CL-100 done, the sentence is almost completely meaningless – this is an unintended drafting error by SCAR.

Q. If “not contingent” is selected, what does it mean?

A. This is usually selected if the parties do not wish to require a CL-100. Nevertheless, if a CL-100 is done, the seller is obligated to repair/treat pursuant to the second para of para 11.

Q. If a “bad” CL-100 is received during Due Diligence, can the buyer immediately terminate and does he have to pay a termination fee?

A. The buyer can immediately terminate, but must pay the termination fee.

Q. If a “bad” CL-100 comes back after Due Diligence, is the seller still obligated to repair/treat?

A. Yes.

Q. If a “bad” CL-100 comes back after Due Diligence and the seller does not repair/treat and the buyer wants to terminate, does the buyer have to pay a termination fee?

A. No, the seller’s failure to repair/treat is a breach of contract. Therefore, no termination fee is due regardless of whether the termination is within or beyond the Due Diligence period.

Q. In preparing the contract, if the parties do not want the seller to be required to repair/treat even if a “bad” CL100 is received, what should be done in para 11?

A. You would select “not contingent” in the first para of para 11 and the second para of para 11 should be stricken.

NOTE: The time limits contained in paragraph 11 are plain and, for that reason, are not discussed here.

Episode 22 - The Threat of Imposter Sellers

Call from Agent

I’m hearing more an more about “imposter sellers.” Can you explain it and also explain what is being done and can be done to protect my clients?

The Response

Those of you who have been in the real estate business for a few years remember when wire fraud was just talk, but it didn’t take long for it to become a reality here on the Grand Strand. Now we have a new and rapidly emerging criminal threat: Imposter Sellers. The US Secret Service has declared “seller identity fraud” (a/k/a “imposter sellers”) the newest and fastest growing fraud in the real estate industry. The risk is especially keen along the Grand Strand because of the great number of non-owner-occupied properties in the area.

An imposter seller is, of course, a criminal. This brand of criminal spends a short time on the county website identifying a target property, then contacts and retains a listing agent; the property is then listed on MLS and soon under contract. From this point, completing the transaction involves a couple forgeries, a fake ID and a crooked notary (or someone impersonating a notary). If no steps are taken to verify the identity of the seller, the transaction closes and the sale proceeds are sent to the criminal. As a consequence, the buyer loses his purchase money and the true property owner no longer holds title. The true owner can recover title, but this will likely require an expensive lawsuit seeking to have the court declare the fraudulent deed void. Impersonating a property owner does not involve a data breach, so it might be considered “easier” to accomplish than wire fraud.

From among the differences between wire fraud and imposter sellers, I point to the fact that imposter sellers expose real estate agents to civil liability.

Let’s move now to a real life example and one I know about personally. A listing agent (Agent #1) receives a call from a seller who says he and his wife own a parcel of land and would like to list it for sale. Agent #1 does a work-up on the property and recommends a list price. The seller agrees, signs the listing agreement and the property is listed on MLS. A couple days later, Agent #1 is contacted by another local agent (Agent #2). Agent #2 informs Agent #1 the listed property is not for sale. The true owners are personal friends of Agent #2 and neither is the person with whom Agent #1 spoke. Agent #2 further informs that a criminal made a previous attempt to fraudulently sell the same parcel. Agent #2 then forwards the counterfeit New York driver’s licenses presented during the previous attempt along with the bogus phone numbers and email addresses. The driver’s licenses are pictured here – in that the information (not the pictures) is that of the true owners, enough has been redacted to protect their privacy.

Though these driver’s licenses appear perfectly legitimate, they are counterfeits. Counterfeits like these are easy to procure on the dark web.

The listing was, of course, terminated immediately and the experience rightly served as a conditioning experience for Agent #1 and those of us who knew about it.

This occurred a few months ago and, in the intervening time, the industry warned attorneys of this emerging criminal threat. The primary risk group was said to be unimproved land with no mortgage. This group was small enough that most attorneys were able to monitor it manually. In the months following, there were several similar occurrences in local law offices – some were successful (meaning the criminal received the sale proceeds) and some were not. They foreshadowed what would soon come …

Change came in a series of events occurring over a 2-3 week period.

The following three real life occurrences illustrate the change.

Occurrence #1: A close attorney friend happened to be representing both buyer and seller. The seller furnished the usual information and represented there was no mortgage on the property. When the title search revealed a mortgage, the attorney informed the seller and requested account information in order to procure a loan payoff. The seller casually replied saying he is aware there was formerly a mortgage, but it had been fully paid and the mortgage satisfaction simply had not been filed (this is not unusual). The seller said he was in possession of the “mortgage satisfaction,” which he then sent to the attorney for recordation at the courthouse. When the document arrived, the attorney felt it “didn’t look right” and after some further inquiries, realized the seller was, in fact, not the true owner and was, instead, a criminal. The transaction was immediately stopped, but something more happened in this would-be transaction that sent up a new alert. In the few short months prior to the occurrence, some attorneys had been sending letters to sellers at the address shown in the tax records – this allowed the true owner to verify the sale is legitimate (per the Rules of Ethics, this could be done only by the attorney representing the seller). In the transaction described here, the criminal had changed the tax mailing address to an address he controlled. Therefore, had a letter been sent to the tax mailing address asking for verification of the legitimacy of the sale, the criminal would have happily verified it. The use of a fraudulent mortgage satisfaction and the changing of the tax mailing address were extremely significant to those of us who knew of it – the threat deepened.

Occurrence #2: This occurred in the office of another attorney friend and, as with the first case, there was a mortgage. Strangely, the bank provided a mortgage payoff and the transaction closed with the mortgage being paid off and the criminal receiving the net proceeds. Those who believed only “no mortgage” properties were being targeted now realized the target group is much larger. In the weeks following the closing, a civil action was filed by the true property owner – both real estate brokerages (among others) are named as defendants.

Occurrence #3: An agent was contacted by a seller who owns property jointly with a friend. The property was listed, went under contract and was presented to my office to represent the sellers. Seller #1 had signed the contract himself and, on the strength of a Power of Attorney, had also signed as “agent” (f/k/a “attorney in fact”) for Seller #2. Seller #2 is an inmate in a New Jersey prison, hence the need for a POA. The agent had asked Seller #1 for a copy of the POA and was surprised when that Seller immediately sent two (2) POA’s. In each one, Seller #2 had clearly appointed Seller #1 to act on his behalf in all matters, including the sale. As the contract was presented to my office, the agent told me something felt slightly off because the seller “had a convenient answer for everything.” We received the contract and POA’s on February 7^th – both POA’s were signed on January 31^st. We first noted the signatures on the two POA’s didn’t seem to match, despite their having been signed in the same moment of the same day. Seller #1 furnished us with a phone number for the New Jersey notary and I spoke with her the same day; she (just as had been said of the seller) “had an answer for everything.” With suspicions increasing, we next spoke with the administrators of the New Jersey prison in which Seller #2 is incarcerated. They assured us the notary had not been to the prison and, even more, told us the notarization of an inmate’s signature requires a court order. I related this to Seller #1 and, of course, he had a story for it -- a story I wasn’t buying, but a story. He agreed to join me in a call to the prison in which I asked to speak with the inmate – my inmate interview was scheduled for the next day. Following this conversation with prison administrators, Seller #1 directed an email to my office in which he said Seller #2 “will screw me over any chance he gets” and will “tie the matter up in court for the next 5 years” (and more to a similar effect). He ended with an angry lecture on our duties as his attorney and demanded we close the transaction. In my reply, I pointed out “you ask me to believe your friend wants to screw you and, at the same time, ask me to also believe he appointed you to handle all of his affairs a mere 7 days ago.” I concluded with a reminder that his friend will have the opportunity to verify everything tomorrow [this exchange is only significant in showing criminals will sometimes try intimidation and, at other times, flattery – it is important to remain courteous, but clinical]. At this point (meaning prior to my interview with the inmate), the criminal finally capitulated and the transaction stopped. In the ensuing days, I exchanged personal letters with the inmate and learned the two POA’s and the two prior deeds are all forgeries.** The important part of this occurrence is that the criminal wasn’t actually impersonating a property owner – instead, he presented himself as the legal agent of the owner. The threat had taken a different form – now every POA and at least the last deed in the chain of title (possibly the last two) must be independently verified. An article about this situation has already been published by a title insurance company we represent -- it warns attorneys across our state and beyond of this new criminal method of recording forged transfer deeds (those not involving an attorney) as well as forged POA’s.

Most agents reading this article know the MLS currently contains fraudulent listings – we just don’t yet know which ones.

The question presented is this: How do we protect our clients from the criminals lurking behind fraudulent listings?

Rest assured, we can stop them if we’re all doing our part. Before continuing, allow me to point out that, while stopping a criminal closing prior to its completion is the central goal, we need to stop it before the buyer spends time and money in preparing for the purchase (i.e. travel, bank fees, inspections, title search, etc.). I will now explain what my office is doing, but will not explain every aspect of our protocol because this article is not meant to serve as an instruction manual for criminals.

At the start of each transaction, the identity of each seller is tested through Knowledge Based Authentication (KBA). This is a relatively new term to many, but we’ve all participated in KBA without knowing what it is called. The user (client) logs into our Adobe product and enters his name, address, last 4 of SSN, etc. He is then presented with three (3) multiple choice questions. For example, a question might ask “which of the following cars did you purchase in 2014?” -- six (6) possible answers are presented. The questions are computer-generated by Adobe (there are other KBA providers) and my office sees neither the questions nor the answers. Obviously, the questions are unique to each person. While the user is logging his personal information and answering the questions, Adobe automatically employs geo-location markers to track the user’s digital footprint (i.e. IP address, physical location, geo-masking VPN’s, etc.) The geo-location markers evaluate risk separately from the answered questions. The experience takes roughly 20 seconds. At the conclusion, we are automatically provided with a printout stating “identity verified” or “identity could not be verified.”

We do this for our own seller clients as well as non-client sellers. In that attorneys are ethically prohibited from contacting a non-client seller, Adobe created a special program at our request. Through it, we send a transmission to the seller’s attorney and that attorney then “delegates” the KBA to their client. When the client completes the KBA, both offices are automatically sent the identity verification printout.

In case you happen to be interested, the chance of a criminal guessing correctly to all three (3) questions is 1/6 x 1/6 x 1/6. In other words, they have a 1 in 216 chance of guessing correctly and, while they’re guessing, they are also being geo-tracked.

All of our fellow attorneys have embraced the system and many are already using a system of their own (we’re lucky to have so many fine offices here in Horry County). KBA, though, only works for US citizens, so where we have a foreign seller, we choose from among our other identity verification methods. In some cases, we require the production of specific documents only the true property owner would have. In addition, we may send a “coded letter” to an independently verified address (if we do not represent the seller, this requires permission from the seller’s attorney). We have other methods, but they are intentionally omitted from mention in order to retain their effectiveness.

The methods used by my office and some of the other leading offices protect everyone -- buyers, true owners, both real estate agents and both attorneys. The attorneys along the Grand Strand take these matters seriously and have a special need to do so in that our area has so many non-owner-occupied properties.

OBVIOUS QUESTIONS:

What types of property are at risk?

Response: All non-owner-occupied properties – this includes second homes and rental properties. Unimproved land remains the greatest risk in that it doesn’t involve access to a structure.

How do clients feel about participating in KBA?

Response: They love it. We get compliments all the time – people appreciate knowing their transaction is being handled with the seriousness it deserves.

Where an imposter seller is successful, why would an agent be sued?

Response: In a current lawsuit against the agents, the cause of action is “Negligence” and primary allegation is: “Failing to Take Reasonable Steps to Verify the Seller’s Identity.”

Does an Owner’s Title Insurance Policy cover the buyer’s loss?

Response: To the extent of the purchase price, a title policy should cover the buyer. This, though, will almost certainly not fully compensate the buyer because he has also paid inspection fees, bank fees, closing costs, HOA transfer fees and prepaid dues, travel costs and, in addition, has been put to personal inconvenience. Therefore, even if the purchase price is refunded to the buyer, he may turn to the attorneys and agents to recoup these additional losses.

Does the Owner’s Title Insurance Policy held by the true owner of the property help him recover title?

Response: No, the title policy of the true owner does not cover him for events that occur after closing. The policy only covers events that occurred prior to closing, but are discovered after closing.

What can an agent do to protect his client against an imposter seller?

Response: The agent’s brokerage can get a KBA program. Also, the listing agent can require the seller produce items only the true owner would have (carefully consider what they are). A buyer’s agent can include a document stipulation as part of the offer requiring various “true owner items” be produced within 48 hours of contract ratification. Driver’s licenses should be required because they are an indication of identity, but counterfeits are abundant, so they are no longer actual proof of identity. And finally, where an imposter seller is unsuccessful, the agent can contact CCAR by email (CCARinfo@ccarsc.org). The property will then appear on a list of properties on which fraud attempts have been made. This will be a valuable tool and thanks is owed to CCAR.

Can the Register of Deeds stop the recording of fraudulent deeds, fraudulent mortgage satisfactions and fraudulent POA’s?

Response: The role of the ROD is to ensure each document meets the recording requirements (witnesses, notary, etc.), but is not responsible to test the legitimacy of the documents nor the identity of the signer. However, Horry County ROD is preparing to launch a program that will greatly aid property owners in the protection of their title. The privilege of introducing the program resides with that office in that they, with the distinct leadership of the Register of Deeds (Marion Foxworth) have developed the program.

** The two prior forged deeds were both recorded in April of last year. In the first, title was conveyed from the inmate’s wife to the inmate and, in the second, a 50% interest was transferred to Seller #1 (the criminal). The title should still have resided with the inmate’s wife. Through the prompting of the inmate, we later verified Seller #1 is affiliated with a Philadelphia crime family and, in fact, his deceased father was one of the crime family kingpins.

Episode 21 - Early Occupancy

Call from Agent

The buyer has asked for early occupancy – should my seller allow it?

The Response

This is a very common question, but the situations are different from one another, so let’s run down the things to know and the things to consider. The question almost always arises just before closing when one party or the other is unable to perform the contract on the date of closing (ex. the buyer’s lender is delayed, the seller is trying to resolve a title issue, etc.). The advice given to a seller first hinges on which party is causing the delay – most commonly, the delay is outside either party’s control, but the delay is nevertheless laid at the feet of one party or the other. If the delay is on the seller’s side, that seller will be more likely to grant early occupancy and do so on favorable terms. If the delay is on the buyer’s side, a seller is usually less inclined to grant early occupancy and, if it is granted, the terms are more strict.

We are all familiar with the SCAR form now in use, but for the sake of convenience, here is a list of the elements:

Allows for (does not require) an “occupancy fee” to the date of closing and contemplates payment in advance;
Allows for a separate “occupancy fee” if closing is delayed beyond the agreed-upon closing date;
Choice between utilities being in the name of the seller or buyer;
If closing does not occur, buyer promises to vacate;
Buyer cannot alter/improve the property;
Buyer inspects the property before occupancy and waives any later claims of deficiencies other than as may be agreed upon between the parties in advance (ex. if the seller has promised to replace the HVAC and it hasn’t yet been done, it should be noted before the buyer occupies in order to avoid potential disagreement later);
Buyer is responsible for insuring his own belongings (not required); and
Attorney’s fees are recoverable in some (but not all) situations (more on this below).

In truth, most agents present the SCAR form and the parties either sign it or not, but it is important to know the state form does not have to be used and, where it is used, it can be modified in any way the parties wish.

The most obvious risk in early occupancy is the buyer’s failure to close – this can be due to inability, unwillingness or the failure of a contract contingency (ex. loan is denied in the final moments). In very general terms, the failure of a contract contingency excuses the buyer from his purchase obligations, while a simple refusal to close constitutes a breach of contract. Breach or not, a fall-through is an undesirable result for the seller.

In the contractual world, there is no such thing as absolute protection, but through effective contract provisions, the parties covenant to conduct themselves in a certain manner and agree to consequences if they fail to do so. The state form provisions are listed above and, depending upon the relative bargaining position of the parties, a seller may wish to add some contractual contour. If so, the following additional provisions might be considered:

Require the earnest money be declared non-refundable.
Require a security deposit for the occupancy over and above the ”occupancy fee.” The occupancy fee might be thought of as rent, while the security deposit can cover damage, refusal to leave, etc. A security deposit provision can easily include a convenient sub-provision stating the security deposit will be credited toward the purchase price at closing.
Require a waiver of all contract contingencies by the buyer. IMPORTANT: Where the SCAR form is used without amendment, the contract contingencies are still active during early occupancy.
Enhance the attorney’s fees provision to include fees and costs incurred in removing the buyer if the closing does not occur and the buyer does not leave. (the attorney’s fees provision in the SCAR early occupancy agreement covers damage and/or the collection of an unpaid occupancy fee, but nothing else).

Early occupancy typically goes well because, in my experience, most people are good-hearted and fair-minded, but allowing a non-owner to occupy a property is no small matter and is very often seen as an unacceptable risk. It can be refused and, in many cases, should be refused. The provisions described above can help bridge a buyer’s need to occupy and a seller’s unwillingess to allow it. If used, it is best to have an attorney handle the drafting.

As a final thought, some sellers will want to know how the buyer can be removed from the property in the event the closing falls through and the buyer does not leave. The proper course would be to have the local police remove the buyer from the property, but as a practical matter, police typically do not wish to become involved and, instead, tell the owner “it’s a civil matter.” More than likely, the seller will have to serve a Notice to Quit and, if the occupant does not leave, proceed to magistrate’s court to seek removal by the sheriff.

Episode 20 - When the owner of real property dies, can the property be sold?

Call from Agent

My client and her deceased husband are the joint owners of real property. How can the property be sold?

The Response

When a property owner dies, the property can certainly be sold, but it is possible an estate will first have to be opened and just as possible the sale won’t be immediate. In that your question involves jointly owned property, the situation will almost surely fall into one of the following categories:

Joint Tenancy – If your client (the wife) and her deceased husband owned the property as “joint tenants with the right of survivorship,” the husband’s 50% interest passed to the wife upon the husband’s death and she (the wife) is now the sole owner of the property. To memorialize this event, an original death certificate must be filed at the county courthouse – this can be done “now” or at the time of closing. In this situation, the wife is free to sell the property.

Horry County estate where the decedent had a Will – If the decedent had a valid Will and it is admitted to Probate Court here in Horry County, the Personal Representative of the estate will be able to sell the property if the Will contains what is called a “power of sale” provision. A “power of sale” provision doesn’t require specific language; it is sufficient so long as it is clear the decedent intended to give the Personal Representative the authority to sell the property. If the Will does not contain a “power of sale” provision, the property can only be sold if a) the Personal Representative successfully petitions the probate court for permission to sell; or b) the property is distributed to the designated beneficiaries and they independently decide to sell the property (which is easiest if the wife is the sole beneficiary). Both of the preceding options should be discussed with the estate attorney. If the Personal Representative decides to petition the probate court for permission to sell, all “interested parties” (i.e. creditors and beneficiaries) are entitled to formal notice and, at the court hearing, the Personal Representative will be required to present proof of the value of the property.

Horry County estate where the decedent did not have a Will – If the decedent did not have a Will and an Horry County estate is opened, the property will be distributed to the legal heirs during or at the conclusion of the administration of the estate. In that there is not a Will, there is obviously no “power of sale” provision. Therefore (similar to the preceding section), the property can only be sold if a) the Personal Representative successfully petitions the probate court for permission to sell; or b) the property is distributed to the legal heirs and they independently decide to sell the property (as in the preceding situation, this is easiest of the wife is the sole legal heir). Still, both of the preceding options should be discussed with the estate attorney. If the Personal Representative decides to petition the probate court for permission to sell, all “interested parties” (i.e. creditors and legal heirs) are entitled to formal notice and, at the court hearing, the Personal Representative will be required to present proof of the value of the property.

Estate is open in another South Carolina County – Here, the situation is the same as the situations described in the two preceding sections. The only additional requirement is that an exemplified copy of the probate documents be filed in Horry County.

Estate is open in another state – In order to sell or distribute South Carolina property, an exemplified copy of all probate filings in the foreign state must be filed in Horry County. If the decedent had a Will, the provisions of that Will control the ability of the Personal Representative to sell or distribute the property. If the decedent did not have a Will, the applicable Probate Code determines the ability of the Personal Representative to sell or distribute the property. In either case, nothing should be done without the direct involvement of the estate attorney.

General Notes:

If property is owned jointly, an estate must be opened unless the title has a survivorship feature (i.e. “joint tenancy with right of survivorship” or “life tenancy with remainder interest”).
If the title is only in the name of the decedent, an estate must be opened.
If an estate was opened, but was closed without the property being distributed, the estate must be re-opened.
If property is sold directly from the estate, the estate must have a federal tax ID #.
This article is not intended to address property owned by a Trust.

Episode 19 - I'll See You in Court!!

Call from Agent

The other party has breached and my client has been damaged — should we file a lawsuit?

The Response

Following the recent episodes discussing remedies for buyers and sellers where the other party breaches a real estate contract, the reasons to file or not file naturally follow. A decision to initiate a lawsuit is unique to each situation and should be made only after calm thought. While there is no substitute for consulting with a skilled and experienced litigation attorney, here are few things to know:

Release: The standard Termination of Contract and Release of Earnest Money currently circulated by the SC Association of Realtors releases the earnest money and the other party. Once it is signed by both parties, neither party can sue. End of story. Therefore, if a party intends to file a lawsuit, that party should not sign the Termination of Contract and Release of Earnest Money.

Path to Recovery: Especially where money damages are sought (as opposed to specific performance), even where the buyer wins the lawsuit and a monetary judgment is entered, the matter of actually collecting on the judgment may (and likely will) be painful and uncertain. Prior to filing a lawsuit, a good litigation attorney will do his or her best to evaluate the chances of actually collecting money for their client. A shocking number of judgments are never collected, so the notion of a lawsuit should be evaluated very carefully with an attorney prior to its commencement. In the world of litigation, there are few certainties.

The Proper Court: Magistrate’s Court is far less formal than the Court of Common Pleas (usually called “Circuit Court”) and that has its attractions for many. Keep in mind, Magistrate’s Court has a jurisdictional limit of $7,500 – in other words, no matter what, the judgment cannot exceed $7,500. Further, Magistrate’s Court cannot order equitable relief. A party seeking damages in excess of $7,500 or seeking specific performance must file in Circuit Court. As said, Circuit Court is much more formal than Magistrate’s Court (greater formality generally means greater cost) and it takes a lot longer for the case to reach trial.

Attorney:

Each party should be represented by an attorney. Your claim or your defense should be presented as skillfully as possible – attorneys do it for a living. Individuals are allowed to represent themselves if they wish to do so, but an entity (LLC, corporation, etc.) cannot represent itself in court and, therefore, must have an attorney.
In cases such as this, most attorneys will charge by the hour as opposed to a contingency fee. This can get expensive quickly. In the previous episodes, I pointed out the court can award attorney’s fees and costs to the winner, but bear in mind that award is just part of the monetary damages award and may or may not be collected.

Intangibles: A lawsuit can be unpleasant, expensive and can take awhile. When a party breaches, it is typical (and very human) for the other party to be angry, but this is not a reason to file a lawsuit. If a dispute can be worked out, it is usually best to do so.

Episode 18 - What Happens when a Buyer Breaches the Contract?

Call from Agent

The buyer has defaulted on the contract — what remedies does my seller have?

The Response

It's worth noting that it isn't always clear whether or not a party has breached. For this question/answer, we will assume the buyer did breach and the seller was ready to perform. In the last episode (Agent on the Street #15), we discussed the remedies available to a buyer when a seller breaches. Now we address the seller’s remedies when a buyer breaches. Happily, the law reflects a general symmetry between remedies available to buyers and sellers where a contract is breached.

The current SC Real Estate Commission contract in use in Horry County contains the following provision:

If the seller defaults in the performance of any of the buyer’s obligations under the contract, the buyer may:

1. Deliver “notice of default” to the buyer and terminate the contract; and
2. Pursue any remedies available to the seller at law or in equity; and
3. Recover attorney’s fees and all other direct costs of litigation if the buyer is found in default/breach of contract

Agent on the Street #15 explained remedies “at law or in equity.” To recap, a remedy “at law” is an action to collect monetary damages for the seller’s losses emanating from the buyer’s breach. The remedy “in equity” is primarily “specific performance.” For the most part, the seller’s remedies where a buyer breaches are equivalent to the buyer’s remedies where a seller breaches.

Remedy in Equity: This is an action for “specific performance” – in such an action the court is asked to compel the buyer to buy. To award “specific performance,” a court must first find there is no adequate remedy at law. This means the court must find monetary damages will not compensate the plaintiff and, in that a sale involves the payment of money to the seller, a seller will have a very difficult time convincing a court that a monetary award is now somehow inadequate. I won’t say it can’t be or hasn’t been done, but the degree of difficulty increases to the extreme. If a seller can get past that first question, the court would then move to determining whether: (1) there is clear evidence of a valid agreement; and (2) the agreement had been partly carried into execution on one side with the approbation of the other; and (3) the party who seeks specific performance has performed his part of the contract or has been and remains able to perform his part.

An action seeking to compel a buyer to buy is a far different matter than one compelling a seller to sell. The beauty of a specific performance action against a seller is that the property itself is held (through the filing of a Lis Pendens) pending the court outcome. Where a buyer breaches, though, nothing (other than the earnest money) can be similarly “held.” And even if a court enters an order requiring the buyer to buy, the court typically cannot, as a practical matter, enforce the order against an unwilling buyer. The buyer may need a loan – the court cannot force a lender to lend. In fact, it seems hardly possible to force the buyer to even apply for a loan, much less do all the things necessary to consummate it. Where the buyer lives out of state, the court’s grip on the buyer slips away fairly completely where “specific performance” is sought and ordered.

In fact, the notion of a court being able to enforce an order of “specific performance” against a buyer is so remote and unlikely that it is seldom sought. Instead, sellers who pursue buyer’s in court almost always limit their claim to monetary damages.

Remedy at Law: Again, this an action seeking monetary damages. The purpose of an award of damages for breach of contract is to put the plaintiff in as good a position as he would have been in if the contract had been performed. The proper measure of compensation is the loss actually suffered by the plaintiff as a result of the breach. An action can consist of a claim for both general damages and special damages.

General Damages: General damages are those the law infers because they are the proper and necessary result of the wrong. General damages logically fall into three categories: First, damages specifically tied to the transaction (real estate attorney’s fees/costs, inspections paid for by the seller, etc.). Second, continuing costs of ownership between the time of the breach and the eventual sale of the property (mortgage payments, taxes, insurance, HOA dues, etc.). This is a good time to briefly explain the duty to mitigate damages. The law imposes this duty pretty much anytime unliquidated monetary damages are sought. Simply put, where a buyer does not close, the seller must do what is reasonably necessary to minimize his damages. It would seem re-listing and actively marketing the property is a must (please note the mitigation/offset paragraph below). Whether a party has mitigated his damages or has done so to a reasonable extent is decided in court. Third, South Carolina case law also views the difference between the contract price and the fair market value of the property at the time of the breach. If the property value has decreased, the seller may seek to collect the amount of the decrease. In many cases, general damages will make the seller whole. In other cases, though, the seller be financially harmed far more extensively and “special damages” may be appropriate.

Tender: When a buyer breaches, a wise seller will “tender” title. This essentially means the seller states he is “ready, willing and able” to deliver title under the terms of the contract. While this is generally considered a legal prerequisite to a lawsuit, at least one South Carolina case says the “tender” to be made in the lawsuit pleading itself, at least where equitable (as opposed to legal) relief is sought. Also, tender can be excused if the other party has made it clear the tender would be futile.

Notice of Termination: Allow me to remark upon what I see as a flaw in the contract language quoted at the top. The language says the seller may send notice of termination and pursue equitable remedies. If the seller terminates the contract, the seller will likely be precluded from seeking equitable relief (specific performance). While I noted the doubtfulness of a seller being awarded specific performance against a buyer, it is very important to note specific performance seeks to enforce the contract, so if the seller has already terminated the contract, he cannot later seek to have it enforced. Therefore, if the seller intends to pursue an equitable remedy (specific performance) as opposed to a legal remedy (money damages), I suggest a “tender” followed by a “notice of default,” but not a “notice of termination.” If, though, the seller only intends to seek money damages, the seller should “tender” and, following same, serve a “notice of default and termination.”

Mitigation/Offset: I again emphasize the seller’s duty to mitigate (attempt to reduce) his damages. Alongside what is said above, let’s consider an example: If the value of the property has increased and it sells for a greater price, the increase is offset against the seller’s damages. For example, if the seller files an action seeking $20,000 in damages and, during the lawsuit, the property sells for $12,000 more than the original price, the seller’s damages are reduced by $12,000. Obviously, if the increased sale price exceeds the seller’s damages, it is unlikely the seller will recover damages against the original buyer.

Attorney’s Fees/Costs: In the contract language quoted at the top, the seller in a successful lawsuit may be awarded attorney’s fees and costs incurred in litigation.

Oftentimes, the mere existence of these remedies is enough to convince a buyer to buy or to forfeit some or all the earnest money or, in more extreme situations, pay even more. In short, life is better for both parties without a lawsuit, so working out a resolution should be the goal.

[In the next episode, I will discuss some of the practical considerations underlying a decision to litigate.]

Ask Scott a Question - Click here

Episode 17 - In the “Repair Procedure” part of the contract, what does “Make Improvements Structurally Sound” mean?

Call from Agent

I just received a home inspection report from the buyer. The buyer says the inspection shows the home “isn’t structurally sound” – I see that phrase in the contract, but what does it actually mean?

The Response

The oft-used “Repair Procedure” in the current SC Real Estate Commission contract requires the seller honor:

“all [buyer] requests necessary to place the heating systems, air conditioning systems, electrical systems, plumbing systems, waste water systems to be conveyed in operative (sic) condition, to make the roof free of leaks, to address environmental concerns and to make the improvements structurally sound.”

Placing the “major systems” (i.e. heating plumbing, etc.) in operating condition and making the roof free of leaks is self-explanatory, but the term “structurally sound” is, by comparison, subjective. Therefore, it often becomes the topic of dispute between the parties.

When asked about a particular property condition, I typically approach it as follows::

Does the condition affect a are the structural element of the home? The structural elements are the foundation, crawl space, slab or basement, framing, roof and walls. “Framing” obviously means all framing – floor joists, roof timbers, etc.

Does the condition render the structural element unsound? “Structural soundness” is acceptably defined as follows:

- has the ability to withstand normal forces, is in good condition, solid, strong and substantially free from defect.

- is substantially free from flaw, defect, decay or deterioration to the extent that the structure is capable of adequately or safely accomplishing the purpose for which it was intended

If the condition doesn’t obviously make the structure unsound, is it the kind of thing that might indicate structural unsoundness? Here are a few circumstances which, while not making a home structurally unsound in and of themselves, may point to a structural issue:

- - Cracks in plaster, brickwork or mortar that are more than superficial
  - Cracks in the chimney
  - Uneven floors
  - Sticking windows and/or doors
  - Bulging or leaning walls
  - Sagging roof and/or roof leaks
  - Uneven or sagging floors
  - Crawlspace dampness, leaks or cracks

This list is by no means exclusive, but it is a very common list and, to a good home inspector, these things are obvious. To emphasize, though, these are merely indicators of possible structural unsoundness. A window that sticks hardly renders a home structurally unsound, but it may prompt further investigation by a professional and, if that investigation demonstrates structural unsoundness, the buyer may demand repairs.

_____________________________________________________

This approach tends to improve the conversation between the parties and helps lead to a reasonable resolution. Most of us have now seen the new state contract reportedly going into effect in June – the “Repair Procedure” is not a part of it.

Episode 16 - A Seemingly Innocent Marketing Fee

Call from Agent

I was approached by a person who “markets” to find properties. Once he finds a property, he says he’ll refer it to me to list. The sales are to close like normal sales, but I am to pay him a “marketing fee” after closing. The person is not a licensed real estate agent. Is it okay for me to do this?

The Response

Before getting to substance, let me add that the person told the agent that “another agent is doing it.” That’s a cunning attempt to make it sound to the agent as though it’s deemed to be perfectly alright or that, by failing to do it, this agent will be falling behind her competitors. Dangerous allure.

Both state and federal law apply to the matter. They blend pretty nicely, but I’ll separate them for clarity:

Real Estate Settlement Procedures Act (RESPA):

Section 8(a) provides as follows:

“No person shall give and no person shall accept any fee, kickback or thing of value** pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person”

**”Thing of value” is defined in RESPA Section 3 as including “any payment, advance, funds, loan, service or other consideration.”

RESPA Section 8(b) provides as follows:

“No person shall give and no person shall accept any portion, split or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

These sections forbid many things – some obvious and some not – but within the topic of “agents giving gifts to clients,” the proscriptions of 8(a) and 8(b) might be effectively paraphrased as follows: An agent may not give or transfer a fee, kickback, payment, gift, tangible item, special privilege or any other thing of value to any other person in exchange for a referral of business.

South Carolina Code:

SC Code 40-57-145 provides, in pertinent part, as follows:

“The Commission* may take disciplinary action against a licensee who pays a commission or compensation to an unlicensed individual for activities requiring a license under this chapter.** A licensee may not pay or offer to pay a referral fee or finder’s fee to an unlicensed individual that is not a party to the real estate transaction.

*the Real Estate Commission created by LLR

** “chapter” refers to the chapter within the “Professions Article” of the SC Code spelling out licensing requirements and rules pertaining to the real estate profession. The actual chapter is called “Real Estate Brokers, Brokers in Charge, Salespersons and Property Managers

Conclusion: The proposal this agent received violates both state and federal law. Federal law allows severe monetary sanctions – state law allows discipline up to and including loss of license. Notice the prohibitions are wall-to-wall – disclosure of the fee does not protect the agent because the fee itself is the violation, not just the concealment of it (though I’m sure we can all agree concealment makes the violation more egregious).

Ask Scott a Question - Click here

Episode 15 - What Happens when a Seller Breaches the Contract?

Call from Agent

It’s 2 days before closing and the seller says he refuses to close. What remedies does my buyer have?

The Response

A seller breach can take many forms (e.g. failure to allow inspections, failure to make required repairs, failure to deliver vacant premises, failure to deliver marketable title, etc.). The question above concerns a seller’s absolute refusal to close – this form of breach brings the transaction to a complete stop and best illustrates the options available to the buyer.

The current SC Real Estate Commission contract contains the following provision:

If the seller defaults in the performance of any of the seller’s obligations under the contract, the buyer may:
(i) Deliver “notice of default” to the seller and terminate the contract; and
(ii) Pursue any remedies available to the buyer at law or in equity; and
(iii) Recover attorney’s fees and all other direct costs of litigation if the seller is found in default/breach of contract

But what are remedies “at law or in equity?” A remedy “at law” is an action to collect monetary damages for the buyer’s losses emanating from the seller’s breach. This stands in contrast to the remedy “in equity” of “specific performance” in which the buyer seeks to have the court compel the seller to sell. Stated another way, an action for “specific performance” seeks to secure title to the property, whereas an action at law for damages proposes to leave title with the other party and, instead, have money damages. Neither remedy is necessarily better than the other – the choice between them is unique to each circumstance and I’ll come back to this below. First, though, let’s look at each remedy in more detail.

General Damages: General damages are those the law infers because they are the proper and necessary result of the wrong. For example: loan fees, title search fees, inspection fees, real estate attorney’s fees/costs, etc. South Carolina case law also views the difference between the contract price and the fair market value of the property at the time of the breach (note: sellers who refuse to close because they think they can get a higher price should beware of this “difference in value” element). This is a good time to touch on the duty to mitigate damages. The law imposes this duty pretty much anytime unliquidated monetary damages are sought. Simply, put, where a seller does not close, the buyer must do what is reasonably necessary to minimize his damages. In many cases, general damages will make the buyer whole. In other cases, though, the buyer may be financially harmed far more extensively and “special damages” may be appropriate.

Special Damages: Special damages aren’t always present; instead, they are occasioned by facts unique to the situation. Unlike “general damages” (those every contracting party knows are likely to ensue in the event of a seller breach), special damages are only recoverable only if, when the contract was formed, the seller had reason to foresee or was clearly warned of their consequence. It is not necessary that the seller foresee the exact dollar amount of the loss, but he must know or have reason to know the special circumstances so as to be able to judge the degree of probability that damage would result. Let’s say, for example, the buyer intended to occupy the home as his primary residence and, in preparation for this, sold his current home, moved out of his home and the moving trucks are barreling toward Myrtle Beach. Here, the buyer will almost certainly incur rent payments and storage fees and, beyond this, might have to pay more for a similar home and might, as well, end up with a higher interest rate on his purchase loan. Then there’s the cost of moving his belongings from storage into the home he eventually purchases. Frequently, a buyer will demand reimbursement for his travel expenses to view the home – not so easy. After all, if the buyer came to town to look at many properties or even just this one prior to entering into the contract, those travel expenses cannot be said to have been occasioned by the seller’s breach because no contract existed at the time they were incurred. If, though, after the contract was signed, the buyer flew to town to inspect, take measurements, etc., he will have a better chance of recovering those expenses. There is no formula for knowing what damages may be compensated and, for this reason, no respectable litigation attorney will make promises along those lines. Consider, too, the seller’s attorney will challenge the damages and, where a jury trial is held, the jury will decide them. As with nearly all litigation, it is a matter of advancing a position without any guaranteed outcome.

Remedy in Equity: At its core, this is an action in “specific performance” – in such an action the court is asked to compel the seller to sell. To award “specific performance,” a court must first find there is no adequate remedy at law. This means the court must find monetary damages will not compensate the plaintiff and courts seem inclined to this belief where a buyer seeks to enforce a real estate contract. Once the court makes this initial finding, the court can award specific performance if it also finds: (1) there is clear evidence of a valid agreement; and (2) the agreement had been partly carried into execution on one side with the approbation of the other; and (3) the party who seeks specific performance has performed his part of the contract or has been and remains able to perform his part.

If done correctly, an action for “specific performance” is accompanied by the filing of a Lis Pendens. This document puts the public on notice that a lawsuit concerning the property has been commenced. While a Lis Pendens does not legally prevent the sale of the property, in practical terms, the seller will not be able to sell the property because almost no purchaser will be willing to take title subject to the lawsuit.

The recovery of real estate under “specific performance” excludes the recovery of “general damages” (because those expenses would have been incurred anyway). Nevertheless, a party seeking “specific performance” may recover “special damages” to which he may be entitled if those damages are specifically pled in the action.

It is worth noting, if the court compels the sale, the decree will order the transaction be performed as nearly as possible according to its terms – one of those terms is the closing date. In that the closing date will have passed, the court relates the performance back to it – in other words, it equalizes any losses occasioned by the delay by offsetting them with money. This portion of the award is often more like an accounting between the parties than an assessment of damages.

Tender: When a seller breaches, a wise buyer will “tender” performance. This essentially means the buyer states he is “ready, willing and able” to immediately pay the entire purchase price pursuant to the contract. While this is sometimes said to be a prerequisite to a lawsuit, at least one South Carolina case says the “tender” to be made in the lawsuit pleading itself, at least where equitable (as opposed to legal) relief is sought. Also, tender can be excused if the other party has made it clear the tender would be futile.

Notice of Termination: Allow me to remark upon what I see as a flaw in the contract language quoted at the top. The language says the buyer may send notice of termination and pursue equitable remedies. If the contract is terminated, the buyer will likely be precluded from seeking equitable relief (specific performance). Remember, specific performance seeks to enforce the contract, so if the buyer has already terminated the contract, he cannot later seek to have it enforced. Therefore, if the buyer intends to pursue an equitable remedy (specific performance) as opposed to a legal remedy (money damages), I suggest a “tender” followed by a “notice of default,” but not a “notice of termination.” If, though, the buyer only intends to seek money damages, the buyer should “tender” and, following same, serve a “notice of default and termination.”

Attorney’s Fees/Costs: In the contract language quoted at the top, the buyer in a successful lawsuit may be award attorney’s fees and costs incurred in litigation.

________________________________________________________________________

NOTE:

Oftentimes, the mere existence of these remedies is enough to convince a seller to sell or voluntarily pay money to the buyer. Life is better for both parties without a lawsuit, so they should try to work it out.

Episode 14 - An Approach to Back-up Offers

Call from Agent

My buyer wants to terminate his back-up offer and get his earnest money back – can he do that?

The Response

I like this question! Here the back-up offer was made by checking the “back-up clause” on SC State Form 391. The clause reads exactly as follows:

“This Contract, if accepted by all Parties, shall be a Back-Up (Non-Primary) Contract. This Contract is contingent upon all presently pending contracts not being enforceable and no lawsuits resulting. If any presently pending contracts close or this Contract does not become the Primary Pending Contract by November 15^th (sample date), this Contract will become null and void with no action required by either Party. Any Back-Up Contract shall become the Primary Contract when its earliest date of fully negotiated terms is the earliest date of all pending contracts and all previously dated contracts have become null and void, unenforceable or released. The date this Contract is Primary and parties have Notice is the Back-Up/Primary Effective Date. If this Contract becomes the Primary Contract, the Parties agree that the Closing Date shall be adjusted by computing or adding 30 Calendar Days (sample time period) to the Back-Up/Primary Effective Date.”

In this situation, the buyer wanted to terminate the back-up offer before the contingency date of November 15^th. The seller refused to allow it and the agent emailed to ask if the buyer can terminate and receive a refund of his earnest money.

Many of the state forms are very good, but this particular clause in State Form 391 is less than perfect because it doesn’t address the ability to terminate prior to the contingency date. My answer to the agent pointed to this imperfection and outlined a position the buyer could take based upon other provisions in the contract itself (i.e. the definition of Effective Date and the possibly implied truth that any contract can be terminated prior to its Effective Date). The specifics of that answer were relevant to the inquiring agent and his client, but what is probably more relevant to the readers here is a broader consideration of how back-up offers can be structured with greater clarity.

Things like this hinge on the desires and concerns of each party, but we have to begin with a reminder that agents/parties aren’t required to use a “state form” in anything they do. The forms are oftentimes convenient, but the drafters neither imagined nor intended the forms would be ideal in each and every circumstance. Therefore, while not completely setting aside the form, it is probably helpful to consider two possible alternatives to approaching a back-up offer:

Prepare a back-up offer and present it (with earnest money) with an addendum stating (among other things) the buyer can terminate the back-up offer anytime prior to the back-up offer becoming the primary contract and, upon doing so, the earnest money shall be immediately refunded to the buyer.
Prepare a back-up offer and present it (without earnest money) with an addendum stating (among other things) that, upon the seller notifying the buyer that the back-up offer is positioned to become primary, the buyer has 24 hours to either pay the earnest money and move forward or withdraw the back-up offer. Admittedly, this might not be very enticing to a seller because it isn’t accompanied by an earnest money deposit – in other words, it lacks real commitment.

In case you feel it may be helpful to you, here is a link to a Back-Up Offer Addendum I prepared for an agent friend. While today’s question/answer is about the ability of a buyer to withdraw a back-up offer, you will notice the linked document deals with another knotty point by addressing how the time periods in the back-up offer are affected when the back-up offer becomes the primary contract. Here is the link:

Back-Up Offer Addendum

Where a back-up contract becomes the primary contract, the parties or the lender may wish to memorialize the change in writing along the following lines:

“The Parties acknowledge notice of termination of the Primary Contract to Buy and Sell Real Estate has been delivered to the Buyer and the Back-Up Offer now becomes the Primary Contract with an Effective Date of __________. The Parties agree the Closing Date shall be ________. All time periods for inspections, covenants and other obligations shall be calculated and re-stated based on their time relationship to the new Effective Date set forth above. All remaining terms and conditions of the Contract not inconsistent herewith shall remain in full force and effect.”

Or re-state each time period specifically as follows:

1. Para 4: The Closing Date shall be ______________.
2. Para 8: The Repair Inspections and Requests shall be delivered to the Seller on _____________.
3. All remaining terms and conditions of the Contract not inconsistent herewith shall remain in full force and effect.”

I wish each one of you the very best!

Ask Scott a Question - Click here

Episode 13 - Seller Financing Elements and Addendum Drafting

Call from Agent

How do I write a seller-financing addendum?

The Response

The actual question and answer are intentionally omitted as well as the actual terms discussed, but seller-financing conversations are frequent and this episode is offered for the general benefit of our readers. Preparing a seller-financing addendum isn’t difficult, but care should be taken to include all necessary terms or it may land the parties in an unpleasant squabble on the eve of closing. If a seller-financing addendum is incomplete or if the seller-financer later wishes he had included a certain requirement, most buyers aren’t going to be willing to see the forgotten term in the loan documents and the transaction train begins to screech along the rails.

I begin with a list of basic elements for standard seller-financing and continue below with elements the seller may wish to consider (which may interest even the more experienced agents):

The Basic Elements:

Loan amount – I like seeing this stated as a dollar amount (ex. $80,000) or at least as a percentage of the sale price (ex. “seller will finance 80% of the sale price”).

Interest rate – easy!

Amortization period/balloon payment – The amortization period is the period of time over which equal principal and interest payments are calculated. In a typical residential bank loan, the amortization period is 30 years. Most sellers won’t want to wait anywhere near that long, but monthly payments can be amortized over 30 years and a balloon can be required in a shorter period – this makes the monthly payments more affordable for the buyer. For example, where a seller is financing $80,000 and requires a balloon payment in 5 years, the monthly payments can be amortized over 30 years ($429.46/mo) or 15 years ($632.63/mo) or the amortization can be over the 5-year term itself ($1,509.70/mo – this 5-year amortization would mean there is no balloon because the monthly payments over 5 years would satisfy the loan completely).

Prepayment penalty – Typically, seller-financers waive a prepayment penalty because they’d be happy to get their money sooner, but where it is waived, state “no prepayment penalty” in the addendum. Obviously, if the seller wishes to impose a prepayment penalty, the amount of the penalty or the method for its calculation should be stated.

Who drafts loan documents and who pays for it – In episode 12, I pointed to the logic of having the seller’s attorney draft the loan documents and requiring that the buyer pay for the drafting. This makes a great deal of sense, but it isn’t required. Either way, the addendum should state who is to draft the documents and who is to pay for the drafting.

Grace Period/Late Fees – Any bank loan has a grace period and a late fee; seller-financing should have it, too. A typical grace period is 5 to 15 days and a typical late fee is either a dollar amount (ex. $50) or a percentage of the missed payment (ex. 5% of the amount of the late payment).

Title Insurance – If the seller will require the buyer to purchase “lender’s title insurance” insuring the seller’s collateral interest, state it in the addendum.

Lesser-Used Elements to Consider:

Default Interest Rate – Where a buyer/borrower is late on a payment, the interest rate can be increased if the increase is stated in the Note. This serves as an incentive for the buyer to keep the payments current and allows for some profit to the seller for having to put up with tardiness. For example, let’s say the loan rate is 5% with a 10-day grace period. The Note can provide that, if no payment is made within 15 days of its due date, the loan rate increases to 10% retroactive to the date of the missed payment. This would mean the interest rate stays at 10% for the life of the loan. I don’t necessarily believe every Note should have a default interest rate, but it is something to think about.

Method of Payment – Some sellers want the buyer to make payments electronically (i.e wire, auto-draft, ACH) as opposed to making payments by personal check. If the seller wishes to make a particular method of payment a requirement, it should be stated in the addendum.

Right to Cure – Some buyers may wish to be sent a “notice of right to cure” if a payment is missed. This “right to cure” gives them a period of time to bring the loan current and, if it is brought current within the cure period, the loan continues thereafter as if no tardiness had occurred. Even where a Note calls for a “right to cure,” it is typical that the buyer be entitled to only one (1) “notice of right to cure” – in other words, if the buyer is tardy a second time, the seller can proceed with loan enforcement without being required to send another “notice of right to cure.”

Personal Guaranty – If the buyer is an entity, the seller may wish to require the entity principal(s) sign a personal guaranty. This makes the principal(s) responsible for all loan obligations (meaning all obligations of both the Note and the Mortgage) if the entity does not meet the obligations. If you include a personal guaranty requirement, it’s best to personally name the guarantors in the addendum rather than referring to them generally as “entity principals.”

Every mortgage contains a homeowner’s insurance requirement, a “due on sale” clause, a requirement that property taxes be paid and, of course, foreclosure provisions. Therefore, these things generally do not need to be stated in the addendum.

Here’s a nice basic addendum:

The seller will finance the sum of $80,000 at 5% per annum. The loan will be secured by a first mortgage on the subject property. Monthly payments will be amortized over a 30-year term with a balloon payment of all principal and interest due 5 years from loan inception. Payments shall be considered late if not received within 10 days of their due date and a $50 late fee shall then be imposed. In the event any payment is not received within 20 days of the date it is due, the interest rate shall increase to 10% (default interest rate) retroactive to the date of the missed payment. There shall be no penalty for prepayments, whether in whole or in part. The loan documents shall be prepared by the seller’s attorney and the charge for said preparation shall be borne by the buyer at closing.

Or you may prefer this format:

Seller will finance $80,000 at 5%
Secured by first mortgage
Payments amortized over 30 years
Balloon payment in 5 years (full payoff)
10-day grace period for payments
$50 late fee
10% default rate if any payment is more than 20-days late
No prepayment penalty
Seller’s attorney to prepare loan documents at buyer’s expense

Here is some sample language for each of the lesser-used additional provisions mentioned above:

Default Interest Rate: If any payment is more than 20 days late, the interest rate shall thereupon be increased to 10% (default rate) and said increase shall be retroactive to the date of the missed/late payment. This is included in the sample addendum above, but the provision might not be considered standard, so I feel it belongs on the “lesser-used” list, as well.

Method of Payment: All payments shall be made by wire transfer to the seller. Contemporaneous with closing, the seller shall furnish the buyer all relevant wire information.

Right to Cure: In the event any payment is not received within the grace period, the buyer is entitled to one 15-day notice of right to cure. In the event of a second default, the buyer shall have no right to cure.

Personal Guaranty: The loan shall be personally guaranteed by Joe and Sally Schmidlap, jointly and severally.

If the seller-financing terms are “basic,” they usually fit on the standard state contract addendum form. If, though, the seller financing terms are more involved, consider creating your own addendum in order to ensure clarity and completeness; seller-financing terms are and should be of central importance to the parties because they govern the continuing relationship, so there is no virtue in abbreviating the seller-financing addendum (clarity tends to ensure smoothness and harmony).

In our closing, we provide our seller-financers with a tip sheet containing important things they need to know about seller-financing so they’re comfortable managing the debtor-creditor relationship after closing and know how to ensure their collateral interest (security interest) in the property is protected.

Episode 12 - Seller Financing Considerations

Call from Agent

I have been approached by a buyer who wants my seller to finance the purchase – can you help me understand what we should be thinking about?

The Response

Happy to -- I’m sure you know what seller-financing is, but it helps to always remember your client (the seller) is “the bank.” I oftentimes get asked by sellers what will happen if the buyer doesn’t pay the loan and the answer, at its core, is simple: you have the same remedies a bank has. At the most elemental level, the seller can foreclose the mortgage – this requires the filing of a foreclosure action and, at its conclusion, the Master-in-Equity will publicly auction off the property. I’ll skip discussing how the bidding works, but if the high bid is insufficient to pay the debt, the seller can enter a “deficiency judgment” against the buyer. A deficiency judgment is a judgment in the amount of the difference between the total debt then due and the auction price.

With the foregoing in mind, my recommendation to sellers (presuming they’re willing to entertain seller-financing) is to make sure the down payment is in an amount that will ensure a foreclosure sale will yield a sum sufficient to cover the debt. In discussions of this kind, we presume the worst will happen – the “worst” might be that the buyer doesn’t make a single payment or maybe the worst is the discontinuation of payments after a year and foreclosing in a down market. I’ll continue the discussion by using a couple examples:

Let’s say the sale price is $100,000 and the sale price represents fair market value (which is usually true). If the buyer puts down $40,000 and asks the for seller-financing of $60,000, the seller is probably in good shape. After all, if the buyer doesn’t make a single payment and the seller forecloses, the total debt will be $60,000, plus interest and plus foreclosure attorney’s fees/costs (while it’s possible the debt can climb a bit depending upon taxes and insurance, these are less common occurrences). So, in this example, the total debt might be $65,000. There’s a very good chance the high bid will exceed this amount and, if it does, the seller gets paid 100% of the debt (the seller doesn’t get to keep the excess).

For the next example, let’s again presume a sale price of 100%, but this time the buyer asks that the seller finance the entire price. From the seller’s standpoint, I don’t like this deal at all. If the buyer doesn’t make a payment, the debt will be at least $105,000 and a foreclosure auction probably isn’t going to bring enough to pay the debt. Foreclosure sales aren’t the “pennies on the dollar” some people still think they are, but a foreclosure sale price is usually some factor below the fair market value – for a standard property, I tend to use a 15% factor as a working figure. In this example, the seller would receive $85,000 – a full $20,000 shy of what is owed.

Some sellers like the idea of seller-financing because, in certain situations, it can give them a stream of income at an interest rate higher than what they can earn elsewhere and, so long as they’re “secure” (meaning the debt-to-value ratio is favorable), they don’t mind the possibility of foreclosure. Other sellers just want to get their sale proceeds at closing without involving themselves in a debtor-creditor relationship with a complete stranger – these sellers should not finance the buyer’s purchase.

So far, I’ve been talking about the wisdom and maybe the desire to enter or not enter into seller-financing. If the seller is interested in seller-financing, there are a few financing elements to consider:

In the seller-financing addendum, it is both smart and appropriate to state the seller’s attorney will prepare the loan documents at the buyer’s expense. For whatever reason, I see contracts in which the buyer’s attorney is to draft the documents – again, the seller is “the bank” and not one among us could go into a bank, ask for a loan and present the bank with our own loan documents for the bank to review. Very definitely, it makes sense to have the seller’s attorney prepare the documents at the buyer’s expense.
Seller-financing should not be considered if it will violate the Dodd-Frank Act. Good agents know to first ask “their attorney” if the particular seller-financing is subject to or excluded from the sinister sprawl of the Dodd-Frank Act. In my office, the minute a seller-financing contract is presented, it is given to me to determine whether it is subject to Dodd-Frank – the better offices make this a routine practice. As a matter of thoroughness, let me point out seller-financing that does fall under Dodd-Frank can still be done if it is handled by a “loan originator,” but this goes beyond the scope of the episode.
Based on some popular questions I’ve been asked over the years, here are some helpful truths: A) there cannot be a provision stating the property title automatically reverts to the seller if the loan isn’t paid; B) unlike a landlord-tenant relationship, the seller doesn’t have a right to periodically inspect the property during the course of the loan; C) escrowing taxes and insurance isn’t worth the trouble because there are other ways to make sure these things are paid and define consequences if they are not; and D) HOA dues is junior to the loan, so sellers really don’t need to worry about it.

The logical follow-up question has already been asked, so the next episode will explain the keys to a good seller-financing addendum and provide examples/guides for use on the street.

Ask Scott a Question - Click here

Episode 11 - Offer-Counteroffer – A Follow-Up Question to Episode 9

Call from Agent

The question actually went like this – the buyer’s offer states it will expire on Wednesday at 5pm. At 4pm, the seller counteroffers. The buyer accepts the counteroffer at 6pm. Do we have a contract?

The Response

To begin, it helps to remember a counteroffer operates as a rejection of the offer (this was discussed in Episode 9). At the moment a counteroffer is made, the original offer becomes a nullity along with its stated time of expiration. More plainly, once the seller made his counteroffer, the buyer’s “expires on” deadline of Wednesday at 4pm no longer had meaning. Instead, there was a new offer – it was from the seller and, when the buyer accepted it at 6pm, the contract was bound. Still, there are a few things to be observed that will definitely be handy to know:

Let’s say the seller counteroffered at 4pm (which he did) and the buyer remained silent. The seller might have become nervous at 4:30pm and decided to then accept the buyer’s original offer – technically, it is too late. Even though the buyer said his offer would expire at 5pm, the seller already rejected it and the buyer’s offer was thereby extinguished at 4pm – the seller cannot revive the buyer’s offer by accepting it, even if he does so before 5pm. As a practical matter, the parties in that circumstance would probably want to go forward with the contract, but it is beneficial to fully understand the fundamentals of offers and counteroffers because they can sometimes be ticklish.

In the real-life situation this agent asked about the seller’s counteroffer did not contain an “expires on” deadline. In the absence of a stated expiration date/time, the counteroffer remains open until: A) it is accepted; B) it is rejected; or C) it is revoked. With this in mind, let me conclude with a recommendation …

When a counteroffer is made, it is prudent to ensure it contains its own “expires on” deadline. And, of course, there might be a series of counteroffers, counter-counteroffers, etc. – try to make sure each contains an “expires on” deadline. This can be done with an initialed notation within the original contract or in an addendum. Even when involved in quick contract negotiations, you will find it pays to ensure perfect clarity in everything you do. The topmost “top producers” know a client will appreciate a patient, detailed approach – it protects your client, makes you look good and serves the transaction.

Episode 10 - An Inconvenient Easement

Call from Agent

My new client just discovered there is a drainage easement at his residence right where he wanted to have an in-ground pool – is there anything he can do?

The Response

To better explain, this agent is representing a client who is looking for investment property. In the course of a conversation unrelated to the agent’s task, the client complained he has a drainage easement in the backyard of his new residence – as luck would have it, it’s right where he and his wife want to build a pool. He has been informed he cannot build a pool within the drainage easement area and both he and his wife are noticeably unhappy about it. In fact, the client is in the mood to sue “everyone” (the seller, both agents, the closing attorney and anyone else he can get his hands on).

After-the-fact situations such as this are oftentimes the best teachers of what could have and should have been done beforehand …

If the client knew when he was buying the property that he wanted to have a pool, he should have told his agent and the agent could then have easily made the client’s ability to have a pool a contract contingency. With such a contingency in place, the client could then have done some pre-closing due diligence such as:

a. Review the Covenants and Restrictions – here he would find out if pools are allowed in the community. Governing documents usually identify certain easements and other areas of non-interference;
b. Examine any ARB/ARC guidelines – this would tell him of the applicable appearance and application requirements;
c. Order a survey – this would clearly show the existence of the drainage easement; and
d. If warranted, have a geotechnical engineer drill soil borings and provide data on soil properties.

Though outside my purpose today, here’s a short footnote about the couple’s plight. Naturally, I completely sympathize with their disappointment, but the easement wasn’t a secret – it was publicly recorded. Therefore, the notion of suing other contract participants for something the couple could have easily discovered themselves seems thin. They may wish to consult with the holder of the easement to determine whether the easement could possibly be waived or, failing that, whether the easement’s purpose might be fulfilled in some other way (i.e. satisfactorily altering the drainage course).

Ask Scott a Question - Click here

Episode 9 - Expiration of Offer

Call from Agent

My client’s offer was accepted after it expired, but the parties have been performing. Now the seller wants to back out – can anything be done?

The Response

For the benefit of the readers, let me explain para 31 of the contract offer stated it (the offer) would automatically expire at 5:00pm on May 1^st (a sample date). The seller accepted the offer by signing it on May 2nd. There is more than one principle at work here – it is worth an explanation.

First, it is definitely true the offer expired at exactly 5:00pm on May 1^st. The standard contract contains a provision stating “time is of the essence” with respect to all contract provisions. As everyone knows, “time is of the essence” means each time period is strict -- May 1^st means May 1^st and 5:00pm means 5:00pm. Therefore, when the seller got around to “accepting the offer” on May 2^nd, there actually was no offer to accept. It had vanished at 5:00pm the prior day and the courts hold, in case after case, a tardy acceptance in no way revives an expired offer.

If this question had been presented on May 2^nd, the answer would be “no contract” and that would be the end of that. Actually, the question was presented a full month later and, in that space of time, both parties behaved as though a contract existed (it’s very possible no one realized the offer had expired prior to its “acceptance”). In any event, the parties were performing – earnest money was paid and accepted and the parties presented the contract to their respective attorneys with instructions to close (my office was not engaged for the transaction at that point). The seller was contractually obligated to have the property surveyed and flagged – he did that and a few other things. The buyer was given the opportunity to perform a perc test and generally make land inspections – he did that and a few other things. The agents communicated the usual transaction essentials back and forth and the parties themselves spoke about the contract a week after it was signed. It was, therefore, a surprise when the seller announced a week before closing that he refused to sell and, as sellers sometimes do, he accompanied his withdrawal with the brave words “sue me.”

At that point, the buyer retained my office seeking contract enforcement against the seller – the contract closing date was a mere week away. The seller had given no reason for his refusal to close, but we had to suppose he knew the offer had expired before he accepted it (in fact, he probably just discovered it and decided to take advantage).

Despite the unmistakable expiration of the offer prior to acceptance, it seems an oral contract had possibly been formed and the terms of the oral contract were peculiarly memorialized in an expired writing. We know, of course, an oral contract concerning real estate is unenforceable in South Carolina (this precept is found in the “statute of frauds” – remember that?). Again, the question might seem to end there, but it does not end because the statute of frauds has some very meaningful exceptions. One exception is that “partial performance of an oral contract” excludes it from the statute – put another way, an oral contract to buy/sell property is enforceable if it has been partially performed by the parties.

This by no means forms a perfectly straight legal line – an enforcement lawsuit (“specific performance”) would require dealing with a series of contested facts and opposing theories about whether the “partial performance” was sufficient – in sum, the outcome for either party could not be guaranteed. Here, though, we prepared a letter to the seller and his attorney in which the forgoing concepts were fairly discussed and a formal “tender of performance” and “demand to close” were presented. The demand included a description of the mechanics of a specific performance action and included, as well (with believed persuasiveness), a reminder of the court’s power to award attorney’s fees/costs against the seller over and above a court-compelled sale.

Though the ultimate outcome of a lawsuit could not be regarded as certain (it almost never can), the blend of concepts favoring the buyer did seem formidable. Within a couple days, we received word the closing would proceed. It did, in fact, proceed – we closed it on time. Both agents seemed pleased.

As a post script, let me note that, in the event an offer is accepted after its expiration, it would be appropriate to make the date change in the contract itself (have it initialed by both parties) or perhaps deal with it in an addendum.

Episode 8 - Solar Panels

Call from Agent

My client is considering a few homes – one of them has solar panels. How are they handled at closing?

The Response

The existence of solar panels will probably not be found in a title search because solar panel agreements are not recorded at the courthouse. Solar panels very definitely should be addressed in the transaction because the after-effects of not doing so may become unpleasant to both parties. Solar panel agreements may take many forms (and more will likely be introduced over time), but the most common are as follows:

Lease of Panels: As with any other lease, the merchandise (panels) belongs to the leasing company and the homeowner makes periodic payments. When the lease ends or the homeowner stops paying, the panels are returned to the leasing company. Obviously, if a new owner of the property did not know about the lease or did not understand its terms, he/she may be faced with the expense and inconvenience of removing the panels. Depending upon how the panels are affixed, their removal might leave the home somewhat damaged. No homeowner will be in the mood for that.

Lease of Solar Power: Here, the solar panels are usually installed at no charge and the homeowner signs an agreement to purchase solar power for an extended period of time. If you see the term “PPA” (power purchase agreement), this is what they’re talking about. As with an ordinary lease of panels, discontinued payment comes with consequences no one wants.

Purchase of Panels: This seems to be a less popular arrangement because panels are expensive. If, though, panels are purchased, they can be purchased outright or financed over time. If they are financed, a “financing statement” (in legal parlance, a UCC-1) can be filed at the courthouse or with the Secretary of State – the creates a security interest in the panels such that, if payments are discontinued, the panels can be seized. Notice this is the only circumstance in which there is a courthouse filing. Even if the panels are purchased outright (rather than financed over time), the solar power is a separate commodity and is the topic of a separate agreement.

If a home has solar panels, a listing agent should undertake to find out the exact nature of the underlying agreement(s). This means the agent should obtain complete copies of any solar panel and/or solar power agreement. This should be broadly disclosed to prospective buyers and the documents should be furnished to any serious buyer. While it might be possible for a buyer to assume solar panel/power payments, this would require the involvement and approval of the solar panel/power company. No matter what type of solar agreement exists, the seller may be faced with having to remove the panels prior to sale because many buyers simply won’t want to deal with solar panels/power.

In that you say your buyer is considering a home with solar panels, he/she would do well to inquire thoroughly before making an offer or, at the very least, making his/her satisfaction with the solar panels a steep contingency.

Episode 7 - Service Dogs – a follow-up question

Call from Agent

In Episode #2, you answered a question about “service dogs.” Can you tell me a little about what the Fair Housing Act (FHA) says about “service dogs?”

The Response

Yes, of course. The Fair Housing Act (FHA) uses the term “assistance animal,” which is somewhat more inclusive than the ADA term “service dog.” It is important to know the FHA doesn’t apply to all situations, but where it does apply and a person seeks permission to have their dog allowed in a “no dogs” community, the eligibility test most commonly put forward is as follows:

Does the person seeking to use and live with the animal have a disability? (ie. a physical or mental impairment that substantially limits one or more major life activities)
Does the person have a disability-related need for an assistance animal? In other words, does the animal work, provide assistance, perform tasks or services for the person with a disability or provide emotional support that alleviates one or more identified symptoms or effects of a person’s existing disability?

If the answer to either question is “no,” the FHA does not require the animal be allowed and does not require a modification to a “no dogs” policy.

[I am a very serious dog lover – these answers to questions about service dogs gets slightly in the way of my feeling that I like seeing dogs everywhere!]

Episode 6 - Tenant Estoppel

Call from Agent

My client is buying a rented property (long-term lease) and is asking me about a “tenant estoppel” – can you explain what that means?

The Response

Sure, your client is asking a good question and I’m happy to answer it. A “tenant estoppel” is a document signed by an existing tenant in which the tenant acknowledges certain things about the status of the lease and the landlord-tenant relationship. It is significant because your client will step into the seller’s shoes and will inherit the seller’s landlord position. A thorough tenant estoppel would include the following covenants:

a) The lease (which should be attached to the estoppel document) is the complete lease, remains in effect and has not been modified or amended;

b) the landlord is not in breach of the lease; and

c) the tenant’s obligations are not subject to set-offs, defenses, etc.

In a commercial setting, “tenant estoppels” are the norm, but they are seen less frequently in residential settings.

If you’re at the pre-contract stage and your client wants a “tenant estoppel,” be sure to include the requirement as a contract contingency.

Episode 5 - Electronic Signatures

Call from Agent

The parties in my transaction signed the contract through DocuSign. Are electronic signatures legally binding?

Play Video

Things to know now....

Our
Location

Scott B. Umstead, P.A.

4226 Mayfair Street, Suite 100, Myrtle Beach, SC 29577

843-913-4610

Visit our website

Meet my Staff