Well, Rochester, NY Realtor Kyle Hiscock shows he has a similar initial perception of the USDA as we did — that they grade meat and other farm products. But they are also a major mortgage lender nationwide, and their product is an excellent option for many borrowers.
Read his informative “Insane but True Facts About the USDA Mortgage” here.
It is in our human nature to trust other people. We assume, for example, that if a seller is selling us a house, that he would not sell us a “bill of goods” and convey a house full of defects. It is also in our nature that, when things go wrong, we look for someone other than ourselves to blame. It is further in our nature to expect when we hire a professional to do a job, he will do it thoroughly and properly.
But in the case of purchasing real property, all of these instincts are just dead wrong.
First, people can and do fail to disclose material defects in real property when they sell it. It happens all the time.
Second, as we explore here, the law of Ohio is firmly established as caveat emptor, or “buyer beware.” This means that the burden unquestionably is on the buyer to “kick the tires” and confirm the condition of real property before buying it.
Third, be careful of even relying on your home inspector, as he likely will not stand behind his work.
Now, here are some tips that will try the patience of even the heartiest homebuyer:
1) Even if you do everything right: Ask all the right questions, and hire a home inspector, he might still miss something. Massachusetts Realtor Bill Gassett, here, has a good blog entry today on things home inspectors — despite their best efforts — miss.
2) Let’s assume the home inspector missed something — something big! Surely he will stand behind his work. Unlikely. Most home inspectors have a contractual provision that if they make a mistake, the limit of their liability is the amount you paid them. And generally that is enforceable in Ohio.
3) If you are buying a foreclosure, or from a bank or an estate, they both (i) have no obligation to complete the Ohio residential property disclosure form, and (ii) they usually disclaim liability for home defects. If you pursue them you are going to be mostly out of luck.
4) If a seller agrees to make repairs to a home before the closing, it is incumbent upon the buyer to check — before the closing — that the work was in fact done and done correctly. The closing is an act of finality, and a buyer will claim a “waiver” of claims. So, confirm all obligations are fulfilled before closing.
5) Finally, even if a buyer has a meritorious claim against a seller, a Realtor or an inspector arising from property defects, the odds are pretty good that he cannot afford to pursue those claims in litigation.
What all this means is that a buyer must really, really check out the property, the structure — from footer and foundation to roof, the mechanical systems — HVAC, plumbing, and electrical, and all appliances. For, once he closes, he has bought the property and it’s his. The likelihood of him pursuing post-closing claims profitably is minimal.
Nationally, one of the premier bloggers on real estate topics is Bill Gassett of Re/Max in Massachusetts. You may read his blog here.
He has a nice piece on the differences between buying a single family home and a condominium, here.
Of particular interest to me is his explanation of “Control.” In terms of legal issues associated with condominiums, this is one area that I try to explain to my clients who are considering buying a unit. Also of interest are financing issues on condominiums, as that has become a problem area for many condo buyers of late.
If you are thinking about buying a condominium, I’d strongly recommend it for a read.
Cincinnati Realtor Paul Sian of HER Realtors has an excellent blog on real estate topics here. This month, he put out a podcast with Cincinnati insurance agent Ray Rivera of Allstate Insurance here on property and casualty insurance.
Thanks to Paul for providing this informative audio production on insurance issues.
This article is the eighth in a series on new construction. The contents of this series of articles apply to commercial as well as residential projects.
This blog entry addresses documenting change orders in new construction projects, commercial and residential. But before we get there, let’s re-visit the fundamentals of new construction contracting.
As is set forth in this prior blog entry:
the starting point is a clear starting point. At the time of the signing of the contract, it is important to know what the builder has committed to build — and what he has not committed to — and what the buyer has agreed to pay for that product. Once we have that foundation, we can address the construction changes and price changes from that point.
As a bad foundation of a house will undermine the entire project, a poor starting point for a new construction contract is not a good foundation for the construction process.
Then, once the initial scope, price and timing are clear, as change orders become necessary or appropriate, every single time a change order is agreed upon in a construction project, that change order should be crisply documented. That documentation should be a written change order signed by both parties to the contract, which includes, in each instance, all of the following:
1) The change to the scope of the project. The parties should detail what is being eliminated from the construction and what is being added.
2) The change in the price as a result of the change order.
3) The change in the construction schedule as a result of the change order.
Even if one or more of the foregoing are not changing at all, that should be detailed and documented as well.
I tell clients that the point of a contract is twofold: (i) to flesh out the issues between the parties and eliminate confusion as to what is being agreed upon and (ii) to create a document of the commitment of each party to the other that, yes, can be enforced in a court of law.
What happens when one or more of these issues are left unaddressed is that both issues are at play: (i) the parties may have a misunderstanding of the impact of the change order on timing or price, and (ii) it creates a murky situation when it comes time to enforce that contract.
When a seller acts in the role of financing the sale of real property, residential or commercial, there are significant potential downsides for the seller.
In this article, we explore the three primary vehicles for seller financing in the sale of real property: (i) lease with option or obligation to purchase, (ii) land installment contract, and (iii) deed with note and mortgage back from the buyer. In each of these three vehicles, the seller risks non-payment by the buyer. That blog entry then explores the legal paths to recovering clear title and possession of the property, and collecting on the indebtedness.
But beyond the simple action to collect on the debt, seller financing situations frequently involve further complications for the seller:
1) First, with the seller’s security for payment of the debt being recovering possession of and title to the property, the “security” of the seller is getting the property “back.” But the buyer could in the interim, significantly impair the condition of the property. Commercial buyers could environmentally contaminate the property or make modifications that impair the structure. Residential buyers may make “improvements” to the property that impair its marketability.
2) Second, we have experienced all too-frequently that the buyer tends to assert claims against the seller as a defense to the payment of the seller financing. These claims range from fraud in failure to disclose claimed defects in the real property to misrepresentation as to the rent roll and the P&L statement provided before the closing.
3) Seller can encounter significant legal complications due to unpaid contractors for work on the property (giving rise to mechanics lien claims), unpaid taxes, and unpaid utility bills.
And taking a second mortgage position for a portion of the purchase price (where a deed is exchanged for a portion of the purchase price) can be even more precarious. A second mortgage holds all of the risks set forth above, and in addition, second mortgagees are, obviously, subordinate, to a first mortgage. To the extent that the value of the property to a foreclosure sale is inadequate to pay the first mortgage, the second mortgage is valueless.
Thus, seller should carefully weigh the risks associated with seller financing of real property.
There is a creative children’s song called “The song that doesn’t end,” and through its circular lyrics, according to the song, “it just goes on and on my friend.” Listen here.
For some unfortunate sellers of real estate (usually commercial real estate), there are contracts that don’t end, either. They just go on and on, tying up the seller from selling the property to a third party.
There are some unscrupulous buyers who use a form of commercial real estate purchase contract — on retail space, raw land, offices, apartment buildings, warehouses, and various and other sundry commercial properties — that puts the seller in a terrible box. This form of contract, through some creative and circular language — referencing, for example, 180 days from a date that never occurs– never requires buyer to close, but it also never puts an end to his due diligence period, so neither does he have to terminate.
Thus, forever and ever, under this form of contract, the buyer can sit and wait — preventing seller from selling the property to another party. This allows the buyer to both (i) without cost, to wait until the property becomes “hot” and then someday sell it at a profit to a third party or (ii) to extort a payment from the seller to just dry up and blow away.
Now, because the buyer never has to perform and never has to terminate, it is likely the contract could be defeated in litigation as unenforceable for lack of consideration. The problem is that the buyer can tie the matter up in Courts for a year or two even after the seller commits to litigate, at great cost, of course, to the seller.
The net result is the same — the seller can neither shake the buyer nor force him to close.
Thus, seller beware of the contract that doesn’t end. Read every contract thoroughly before signing.
The statute of frauds exists in some form in all 50 states as a part of the body of real estate law. It says, in essence, that all promises made for the purchase and sale of real property must be in writing to be enforceable.
Ohio’s version, for example, is in O.R.C. Section 1305.05:
No action shall be brought whereby to charge the defendant … upon a contract or sale of lands, tenements, or hereditaments, or interest in or concerning them, or upon an agreement that is not to be performed within one year from the making thereof; unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or some other person thereunto by him or her lawfully authorized.
In Kentucky, it looks like this at K.R.S. Section 371.010:
No action shall be brought to charge any person:
(6) Upon any contract for the sale of real estate, or any lease thereof for longer than one year;
unless the promise, contract, agreement, representation, assurance, or ratification, or some memorandum or note thereof, be in writing and signed by the party to be charged therewith, or by his authorized agent.
Those are two mouthsful, but they in essence say that if you are going to go to Court to enforce a contract for the sale of real estate, or for a tenancy in excess of one year, the promise(s) you want to enforce simply must be in writing and signed by the other party.
In practice, this means at least several things:
1) First, it does not matter if you have it on video tape, audio recording, unsigned emails, or ten witnesses to an oral conversation. If you do not have the promise in writing, it simply — as far as the Court will be concerned — did not happen.
2) Second, it means that every single promise — not just the core promise to sell and buy — must be in writing and signed by the party against whom you want to enforce the contract. So, if a seller makes “side” promises to replace the HVAC system or to give the buyer a credit at the closing, or if the buyer is going to pay extra for early occupancy of the property, these additional promises — all of them — should be memorialized in a written agreement signed by both parties. So, even after a contract is signed, the later agreements — to extend closing dates, make property repairs, or make price concessions at the closing, should be put in writing and signed by the parties to the transaction.
3) Third, lease agreements, residential and commercial, that extend beyond 12 months should be reduced to writing as well, and signed by all parties. Again, all promises relative to that agreement should be included in that document.
There are historical reasons for this rule, some of them explored and explained here, but suffice it to say that it is the law and no amount of teeth gnashing and wailing after the fact is going to change that analysis .
Buyers, sellers, Realtors, tenants, and lenders should all internalize this concept and make a habit of memorializing the contract terms accurately, and completely, in writing and with signatures of the parties to the contract in order to see contractual obligations through to their conclusion.
When a commercial tenant occupies a building pursuant to a lease, he wants and expects to stay throughout the lease term. He invests in tenant improvements, and he is growing a business at that location. It would be expensive — indeed sometimes financially catastrophic — for his business to be forced to move.
So, he pays his rent and abides by all of the covenants in the Lease. He should be allowed to stay until the end of the lease term, right?
Well, no, not necessarily. If the landlord defaults in his mortgage payments, then the mortgagee — or a receiver appointed by him — may have the right to eject the tenant from the premises. Ouch!
This is so because a tenant’s rights under a lease are, in an illustration I utilize, like popping a balloon. The balloon represents the landlord’s rights in the property. If the balloon pops, the landlord’s rights are extinguished, then the tenant’s rights in and to the property — which are derived solely from the landlord — immediately and automatically go away as well.
Thus, in addition to getting a lease from the Landlord, there are three additional steps a commercial tenant must take if he wants to assure that he has the absolute right to continue to occupy the leased premises in the case that tenant rights would be superseded by a superior right:
1) The tenant should conduct a title examination to ascertain any mortgagees or other parties (such as the holder of a recorded purchase option) that would have rights superior to those of the tenant under the lease. Any recorded interest that precedes the execution of the lease may have priority over the lease.
2) The tenant should record his lease, or a memorandum memorializing the material terms thereof, signed by the landlord and tenant in the county recorder’s office. This protects him from interests in the real estate arising after the date of recording of his lease.
3) The tenant should obtain “a non-disturbance agreement” with the lender or other party with a superior priority position, stating that should the holder of the mortgage or other rights come into title of the property, the lender will respect the lease that is in place (or “not disturb” the tenant’s occupancy).
Finally, if the tenant wants to insure his right to remain in a premises for the term, he can also purchase a tenant’s title insurance policy, designed specifically for that purpose.
Investments in commercial real estate by a tenant (such as by tenant improvements) and investments in the business inside real estate (such as building the presence of a retail store, restaurant or bar) at a specific location carry significant risks for a tenant unless the tenant first takes the three steps outlined above. A third party may be able to strip away the tenant’s investment overnight.
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Read more Advanced Commercial Real Estate topics below:
Advanced commercial real estate: Can Ohio commercial landlords lock out a tenant in default? >>
The blog entry is a little difficult to write, because the topic makes laymen cringe, and think that lawyers deal in a parallel reality. But our job is not to justify why Courts and lawyers look at issues a certain way, but to simply report “as it is.”
The proposition of law we share today is:
We don’t actually mean the deadlines set forth in contracts unless we use the magic words “Time is of the essence.”
Mays v. Hartman, 81 Ohio App. 40877 N.E.2d 93 (1st Dist, 1947).
Let’s re-visit that proposition again. When a contract sets forth dates for the performance of obligations of parties to the contract, we don’t mean those dates — but rather “on or about those dates” — unless the contract expressly states, using these magic words, that “time is of the essence.”
So, extending this principle to both residential and commercial real estate contracts, if we say the seller will close on June 30, we mean “on a date reasonably close to June 30.” If we say that a buyer has 90 days to complete his due diligence inspections of real estate, we mean “a date roughly in proximity to 90 days from contract signing.”
Now, as to the standard Cincinnati Area Board of Realtors purchase contract form in general use for residential transactions in the greater Cincinnati marketplace today (read your own form to be sure), time is NOT generally of the essence, as to closing date and certain other deadlines, but it IS of the essence as to (i) the inspection contingency deadline (Section 13) and (ii) surrender of possession of the real estate (Section 20).
Contrary to much of contract law, which generally applies a practical common sense interpretation to contract language, as to deadlines in contracts, “time is not of the essence,” unless the contract expressly says it is.
These words, “time is of the essence,” are some of the few “magic words” to which courts give special meaning.