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Fraud Is Real: Don’t fall for it

Author By Christopher P. FinneyPosted on

Fraudsters — both high-tech and old school — daily attempt to use real estate and other transactions to scam our law firm, our title company and our clients out of money and property.  To date, we have not been hit (some of our client have been), but we are always on guard.  Fraudsters forever keep trying.

As you are growing your business — and these tips apply to businesses large and small, old and new — it is a good idea — from time to time — to gather your financial team and key executives, along with your IT professionals, and simply have a conversation about “tightening things up” and avoiding common scams.

  • Are your checks (and cash) — incoming, outgoing and blank checkbooks — tightly secured and under watchful eyes?
  • Are your systems too open and accessible (a simple question such as automatic screen savers with passwords that trigger when an employee is away from his desk)?
  • Do you have proper insurance to protect your real risks?
  • Do you have proper training and systems in place to avoid common and emerging risks?

In the end, we all have some exposure.  So, eternal vigilance, the latest technology protection and training of employees new and old, is the only answer.  Part of this caution is constantly “tightening up” and “changing up” your transactional practices and security procedures to avoid the latest scam.

Here are some common scams we and our clients have seen:

  1. In the low-tech world, fraudsters simply borrow money based upon false promises and representations.  This is a time-tested and common scam.  It is borne of two human instincts: (a) we want to trust people and (b) we are lured by the promise of a better-then market return on investment (if it’s “too good to be true,” it’s probably fraud).  Many of these fraudsters have the appearance of business stability and financial success, but are willing to offer above-market interest rates for a personal or business loan.  In the end, these loans are not properly secured and are not properly guaranteed, and the fraudster never had the ability or intent to pay back the monies.
  2. Similarly, we have seen clients purchase assets or entire businesses that are subject to liens or governmental enforcement actions, or the purchase price is based upon false financial documents or hidden property condition.  In a business transaction, be careful of slippery buyers, sellers and attorneys who can make fraudulent closing adjustments as the numbers are flying about in a closing.
  3. Another low-tech fraud is thieves who rifle U.S. Postal Service mail boxes (both the blue drop boxes and mailboxes at your home or business), steal checks, and then change the payee and amount on the check and cash it.
  4. Pay attention here: In the high-tech world, fraudsters hack into a Realtor, investor or title company email system, and steal their email signature and logo, and the details of an imminent transaction.  Then, they establish a similar email domain (with maybe one letter changed or a “dot” added).  Using the new domain, they send an email to the party who is to originate a wire with false wire instructions — instructions straight into the fraudster’s overseas wire address.  The email by all appearances looks entirely legitimate and it’s from a name you know and with whom you actively are dealing.
  5. We have written about sellers who don’t own actually property attempting to mortgage or sell the same.  Read here and here.
  6. Finally, fraudsters use sophisticated hacking and ransomware viruses to invade your critical computer systems.  They corrupt your data and hijack control of your systems, relenting only when an exorbitant ransom has been paid.  Extortionists have taken over critical infrastructure such as oil pipelines, hospitals, and municipalities.  Most recently, the vendor running the Cincinnati Multiple Listing Service and dozens of MLSes nationwide was the victim of a weeks-long ransomware attack that was costly and disruptive.

So, how can you protect yourself in this world increasingly fraught with risk of theft of your valuable data, money and time by those with malintent?

Here are a few ideas:

  • Stay in your lane.  Let lenders lend.  In most cases, they are good at it.  If a borrower is coming to you for a loan, it’s likely because he’s not eligible for conventional financing, and that ineligibility is for a good reason — he’s either lying, broke or both.
  • Carefully use due diligence and proper documentation.  If you are going to lend money or buy assets or a business, perform the kind of due diligence a prudent and sophisticated buyer or lender would undertake and obtain appropriate security and guarantees of a loan.  We discuss some of the pitfalls of private lending here.  Similar risks can exist in buying assets and buying whole operating businesses.  Part of this process is assuring that the borrower actually owns the assets he is selling or pledging (free and clear) and that your security interest is properly and timely perfected as against that asset.  In a real estate-based loan, title insurance is a key way to assure this is so.  In purchasing a business, the risk is even greater in that the corporate entity may have significant residual undisclosed liabilities or governmental enforcement problems. That seller — and your purchase monies — will completely disappear by the time you learn of the fraud.  Finally, the #1 “due diligence item” is to know your employees, know your borrowers, know your sellers.  The internet (and now artificial intelligence tools) is an incredibly powerful way to do background on parties to a business transaction,  Use it.  Cautiously heed the lessons of what you find.
  • Properly perfect security interests and document guarantees.  When banks lend money, they want proper security for their loans and appropriate guarantors for their repayment.  In most cases, banks are over-protected, and they want it that way.  You do too.  In both real estate and equipment-based transactions, we have seen borrowers pledge the same assets to different lenders as security for two or more loans.  Obviously, in that circumstance someone is going to be left holding the bag.  (Yes, fraudsters are that shameless.)  Using proper real and personal property title examinations and lien searches and using appropriate documentation for loans and guarantees is critical.  For example, in Kentucky, in order for a personal guarantee of debt to be enforceable, it must follow specific statutory requirements.  Without that, it’s worthless.
  • Don’t put checks or other key financial documents in blue U.S. Post Office boxes on the streets and don’t have checks sent to a mail box at your business or residence that is accessible by others.
  • As to wire fraud, you can’t be careful enough.
    • The sender of a wire should assume everything you see is a lie, the fax, the email, the logo, the wire instructions, the sender web site, the sender.  Everything.  Always verify everything via voice using a trusted and known telephone number for the wire recipient.
    • If you smell a rat, don’t initiate the wire.  Wait and check some more.  Urgency — especially inappropriate urgency — is a key indicator of fraud.
    • Read carefully the sender email addresses and the email.  Many times the email domain of a fraudster does not exactly match the domain name with which you have been dealing.  Note misspellings and grammatical errors in the text of an email that may come from a foreign sender or one unfamiliar with the parties and the transaction.
    • Note last-minute changes, especially of wiring instructions.
    • Note changes made on the Friday before a holiday weekend or before another holiday, and before the end-of-month, when Realtors and title company employees are more likely to be busy and careless.
  • Buy cyber insurance.  Your property and casualty insurance agent can offer your business cyber protection.  It requires you to use good practices for the insurance to invoke, but both the coverage and the required procedures are a critical part of best practices protection.
  • As to ransomware attacks, we have two pieces of advice:
    • First, according to the Harvard Business Review (citing IBM), 60% of cyber attacks originate inside your organization.  Either a malevolent employee or ex-employee intent on theft or vandalism (75% of attacks) or a negligent employee (25% of incidents) who falls for a phishing attack scam cause most losses.  So, hire and retain employees of good character, monitor their activities, and carefully, comprehensively and quickly cut off computer access of former employees.  Segregate access to data in your organization to those who need that data, and no one else.
    • Second, every computer system is vulnerable.  Every one.  But homegrown (premises-based and self-maintained) servers are more vulnerable to a hack (in my opinion).  As a result, we (a) have migrated the vast majority of our data into the Microsoft cloud (other providers are also available) (heaven help the world if they hack the Microsoft cloud!), (b) have segregated access to data to employees who need that access, and (c) have make serial backups of data that is not in the cloud.
  • Understand the risks, develop training and systems to avoid the risk, and train all of your employees on cyber security procedures.

As our attorneys can assist with due diligence and proper documentation (including title insurance) of your transactions, call us!

More on upcoming property tax valuation increases

Author By Christopher P. FinneyPosted on

For both commercial properties as well as single family homes, owners have flooded us with inquiries about their notices from County Auditors in Hamilton, Butler, Clermont and Montgomery Counties as to new property valuations.  We can’t imagine the number of calls the County Auditors must be getting.

A few guideposts for you:

  • First, read this important blog entry that essentially tells you that the first 30% of the valuation increases in southwest Ohio will not result in an increase (or at least not a significant increase) in your actual tax bill.
  • Second, Auditor’s property valuation is not some magical number — for the January 2024 tax bill, it is to be the fair market value as of January 1, 2023.  Thus, if your property was worth more then than in the prior valuation period, you should expect a valuation increase — perhaps one even above average for all properties in the marketplace.  Some clients seem to think that since valuations were less than what they thought the property was actually worth in the past, the Auditor’s valuation process is supposed to yield a lower number.  Well, it’s not.
  • Third, if your property was purchased since the last triennial valuation date (January 1, 2020), the sale price likely will be reflected in the valuation.  As this blog entry addresses, a recent arm’s length sale essentially — and largely irrebuttably — IS the value by law.
  • Fourth, if your property falls in one of the gazelle categories of properties whose values have leaped ahead of the market — single family homes, warehouse and industrial properties, and apartment buildings — you should both celebrate your good fortune and expect a bigger tax bill as a result.
  • Fifth, on the flip side, if you are a victim of the weak office market or the mall or downtown retail market weaknesses, you should should see some tax relief in the January tax bills.
  • Sixth, gas prices are up, grocery prices are up, car prices are up.  You have not had a valuation increase in three years.  Wouldn’t you expect your tax bill would rise some, at least modestly?
  • Seventh, for both buyers and sellers in today’s market, the looming valuation increases create both a possible problem and an opportunity as to contractual tax prorations for sales between now and January when the new — very different — valuations come out.  Read here for more detail on this.
  • Eighth, remember, the Board of Revision process to challenge property valuations is a two-way street.  If your property truly is undervalued, you risk an increase.  Cautiously keep in mind the upward dynamics of the real estate market over the past three years.  You could wind up with an increased valuation as opposed to the sought reduction if you overplay your hand.
  • Finally, I had a client recently ask me “why would single family home valuations be increasing in Cincinnati?” and I swear he must live under a rock.  I responded, “haven’t you seen newspaper articles explaining that Cincinnati has had one of the hottest housing markets in the nation since the start of COVID?”  The response, “ummm, no.”  It is surprising since we deal with this every day, and to some extent it is just denial of the obvious fact that we are blessed in Cincinnati with a fantastic housing and commercial real estate market.  Enjoy it while it lasts!

If, after reading this and the prior blog entry on the new valuations coming out in January, you still have tax valuation questions, please contact me (513.943.6655) or another member of our tax team.  We are glad to help.

Alarm Tax Class Action Update: Checks have been mailed

Author By Christopher P. FinneyPosted on

As we reported here, Finney Law Firm participated in a successful class action to force the City of Cincinnati to stop collecting alarm registration fees and to refund illegally-collected fees for years past.

Those refund checks were dropped in the mail over the past few weeks and the final batch is to be mailed this week.

In the event that you did not properly receive a refund check due to you, contact the City’s False Alarm Reduction Unit at (513) 352-1272.

If you continue to have problems, do let Chris Finney (513.943.6655) know.

Our firm’s racketeering suit (certified as a class action) against Build Realty is featured in this story on WCPO

Author By Christopher P. FinneyPosted on

Reporter Paula Christian of WCPO features here the racketeering lawsuit recently certified by Federal District Court Judge Douglas Cole as a class action.  The case is against a bevy of defendants, including Build Realty, Edgar Construction, First Title, Gary Bailey and George Triantafilou (among others) for a sinister and complex real estate scheme that defrauded hundreds of local investors out of millions of hard-earned dollars.

Matters remain tied up on stays and motion work, but we hope to move the case along soon.  Watch this blog for regular updates.

Ohio Employment Law: When does a “Hostile Work Environment” violate an Employee’s Rights?

Author By Stephen E. ImmPosted on

The term “hostile work environment“ is thrown around a lot these days. It is not just a phrase used by employment lawyers and judges. It has become a part of the lexicon of the general public. In the same context, one often hears references to a “toxic work environment,“ or to “bullying“ in the workplace.

A lot of folks are under the assumption – not an unreasonable one – that it is illegal for employers to create a “hostile work environment“ for one or more employees, or to allow such an environment to exist in the workplace, or to not eliminate such an environment once an employee complains about it.

It surprises a lot of people to find out that a hostile or toxic work environment is not always illegal, or something with which the law concerns itself. In fact, a work environment can be very “hostile“ or “toxic“ without being against the law. Furthermore, whether or not a hostile work environment is illegal does not depend on exactly how hostile the work environment is. It is not that “mildly“ hostile environments are not illegal, but “severely“ hostile environments are.

As far as the law is concerned, the determination of whether or not a hostile or toxic work environment is illegal depends upon the motivation for the hostility or toxicity. If the employer or supervisor creating the unpleasant environment is motivated by factors like an employee’s race, sex, sexual orientation, age, religion, or disability, it may very well be unlawful, and grounds for a lawsuit.

If, however, the hostility comes from another source – such as a personality conflict or personal disagreement – the resulting work environment, no matter how toxic or unfair it may be, it’s not legally significant.

This can seem very unfair, but the law sometimes tells an employee who is being subjected to a hostile or toxic work environment, “Hey, you don’t have to keep working there. You can always go find another job.“

A smart employer, of course, is always going to want to create a good working environment for its employees, for a wide variety of reasons. So regardless of the legalities, addressing issues of hostility or toxicity in the workplace is always a good idea.

If you are an employer or employee confronted with issues relating to a hostile or toxic work environment, it would be wise to get advice from a qualified employment lawyer.

Clermont property buyer gets tagged with $682,000 extra tax bill; litigation ensues

Author By Christopher P. FinneyPosted on

The purchaser of an apartment building Clermont County and his counsel are learning the lessons of real property taxes — and the ways to handle tax prorations —  the hard way.  Because neither the seller nor his attorney thought through the transaction carefully, the purchaser (a) lost $682,000 in tax proration negotiations and (b) has suffered what appears to be an entirely unnecessary increase in the same amount in his annual real estate taxes, essentially forever.

How can outcomes between savvy and clumsy real estate transactional work vary so dramatically?

Underlying facts

On December 28, 2021, RS Fairways, LLC closed on the purchase of Fairways at Royal Oaks, an apartment complex in Pierce Township on Clermont County for $32,600,000.  The Auditor’s valuation at the time of the sale was $6,622,000.  The difference between the sale price and the Auditor’s valuation was $25,977,700, a whopping 500% increase.

Following the sale, our former Associate, Brian Shrive — who now heads the civil division of the Clermont County Prosecutor’s office — on behalf of the Prosecutor, saw the conveyance fee form filed with the deed reporting the whopping sale price-compared-to-Auditor’s-valuation and filed \a Board of Revision Complaint to increase the valuation — retroactively to January 1, 2021 — to the sales price.

Almost inexorably, the Board of Revision would have so increased the value, so the owner, the Prosecutor and the School Board later entered into a Stipulation as to the new valuation at $32,600,000.

Tax proration language

As we have written about here (just one month before this buyer closed; he should have read our blog!), standard tax proration language in use in the Cincinnati area calls for a tax proration to be based upon the most recent available tax duplicate.  Since the Auditor and School Board will not know about the sale until after the deed is recorded, current taxes can’t possibly be based upon the sale price.  Here, the Auditor obviously had a grossly outdated and inaccurate valuation.

In other words, standard and customary contract language in use in greater Cincinnati simply does not adequately protect the purchaser in a situation where it is paying much higher than the Auditor’s present valuation.

The Contract in question provided:

If the 2021 tax bill is not available as of the Closing Date, then the proration described in clause (b) above shall be based on the 2020 tax bill for the property.

Why do we prorate taxes in Ohio?  Taxes in Ohio are paid “six months in arrears at the end of the period.”  What does that mean?

It means that the first half 2021 tax bill is issued in January of 2022 and the second half 2021 tax bill is issued in July of 2022.  Therefore as of the date of closing (here, the end of December 2021), the seller owned the property for all of 2021, but hadn’t paid the taxes for 2021.  Therefore, at closing (under local contract form and custom) the seller prorates to the buyer the taxes for the period it had owned the property, but at existing tax and valuation rates.

The dual problems are: (i) if there is a change in the tax rate for 2021 (such as with the passage of a school or other levy), the proration will be wrong as to the 2021 rate and (b) if there is a change in the tax valuation in the normal triennial cycle, the valuation (and thus the taxes) will change, and, here’s the kicker, (c) well after the closing, a school board or the County Prosecutor have the right to ask the Board of Revision to retroactively, back to the beginning of the prior tax year, change the valuation to a reported sales price.

And, as Casey Jones of our office blogged here, a recent arm’s length sale is uncontestably the valuation for tax purposes.

Thus, under the law, a purchaser is liable for taxes calculated at the tax amount for the taxes for the periods from the date prior to the sale (based upon the next tax bill to be issued) and into the future.  And this new tax rate calculates in “unknowns” at the time of the closing, which are a change in rate and a change in valuation.  Both of these can be both assessed, and as to the valuation, can be contested and litigated, well after the sale, but the retroactive liability for those taxes falls on the new property owner.

“Forever” increase in taxes

The tax proration flub — a $682,000 mistake — was bad enough, but worse is that the reported sale will result in a new baseline valuation for future taxes of $32,600,000 for a property that previously was valued and taxed at just $6.2 million.  Every three years the County will start with the $32 million number and make (likely) increases from there, so this owner will have $700,000 in higher taxes (than likely he anticipated) forever.

Could the massive increase have been prevented?

Two fairly sophisticated legal techniques could have been employed by this purchaser to avoid these massive “surprise” tax bills.  One would have spared them the cost of the under-proration, and the second could have resulted in a permanent savings — tens of millions to the purchaser’s bottom line.  They employed neither.

First, when a purchaser pays an amount significantly above Auditor’s valuation for property (this is a simple task of comparing the sale price to Auditor’s valuation [a quick on-line check]) before the contract is negotiated and signed, a purchaser will want the tax proration language to include a re-proration after the final taxes for the year prorated are known.  [By the way, when we get into an environment of declining values, the inverse rules as to tax proration can apply — the purchaser will have an advantage in the proration process — an over-proration —  if the contract language is not modified.]

Second, a technique is available in Ohio (but not Kentucky) to have the seller first transfer the property into an LLC that he owns exclusively (by deed, but with an “exempt conveyance fee form,” so that no sales price is reported) and then, at the closing between seller and purchaser, the seller transfers his interest in the LLC to the purchaser — and thus there is no recorded deed.  These transfers are referred to as “drop and swaps” or “entity transfers.”  In this situation — with some possible exceptions, the Auditor and school board are not put on notice of the sale or the sale price, and thus the increase in value could slip by unnoticed.

Here, the purchaser employed neither technique resulting in a bad proration and “forever” tax liability.

Ensuing litigation

Despite terrible tax proration language that we see as “fatal” to the purchaser’s claims (see above, they agreed to base the proration on the 2020 tax bill, period), the purchaser has sued the seller for a re-proration based upon the post-closing tax “surprise.”  Good luck with that.  See the Complaint here.

Conclusion

Smart advance legal planning by a purchaser or seller can dramatically change the outcome as to taxes in a real estate transaction.  Contact Isaac T. Heintz (513.943.6654) or Eli Krafte-Jacobs (513-797-2853) for assistance on your real estate transactions to avoid these disastrous outcomes.

Tea Party groups move to unseal Lois Lerner and Holly Paz depositions

Author By Christopher P. FinneyPosted on

As we previously wrote about, here, Finney Law Firm was honored to serve as co-counsel to Tea Party groups throughout the nation in what we believe was the only certified class action ever against the Internal Revenue Service for its targeted discrimination against the plaintiffs resulting in protracted delays in processing and granting tax exemption status due to their political viewpoints. The targeting was led by Obama administration IRS official Lois Lerner and her chief deputy at the IRS, Holly Paz.

After years of pitched legal battles, that litigation ended with a dramatic settlement in which the IRS paid damages to Tea Party groups, the IRS paid the Tea Parties’ attorneys fees, and then-US Attorney General Jeff Sessions issued a personal apology on behalf of the United States of America that included this unequivocal statement about the IRS intentional wrongdoing: “this abuse of power will not be tolerated.”

In that litigation, plaintiffs succeeded in obtaining the depositions of Lerner and Paz, but the transcripts of the depositions — finally revealing their own testimony about the origins and implementation of the outrageous policies and practices — have remain sealed under a temporary emergency Order by Judge Michael Barrett. (Even US House and Senate Committees investigating the wrongdoing were stymied in getting that testimony when Lerner and Paz each invoked their 5th Amendment right against self-incrimination.)  That Order bottling up the deposition transcripts was never made final, and thus it could not be appealed.  Thus, to this day — more than three years later — the deposition transcripts remain hidden from public scrutiny.

As a result, this week, Plaintiff’s counsel filed a Motion for Writ of Mandamus before the 6th Circuit Court of Appeals seeking to have the depositions unsealed.  You may read the Motion here.

Another public interest class action win — Cincinnati Alarm Tax

Author By Christopher P. FinneyPosted on

As we wrote here, in November the Ohio First District Court of Appeals in White v. Cincinnati unanimously ruled in favor of clients of the 1851 Center for Constitutional Law and Finney Law Firm in a challenge to the City of Cincinnati’s alarm tax scheme. The City of Cincinnati asked the Ohio Supreme Court to review that decision, a discretionary call by Court.  Historically, Ohio’s top Court accepts only about 5% of such cases for consideration.

Today, the Ohio Supreme Court declined to accept for review the First District decision.  Since that was the last stop on the railroad for the City, the inevitable next legal steps are injunction against further collection of the tax, class certification and an order of restitution before Common Pleas Court Judge Wende Cross.

Amazingly, even after the First District ruled that the tax was illegal, through today the City of Cincinnati insisted on continued collection of the tax. So, an injunction by the trial court now will be necessary.

If you are a Cincinnati alarm fee payor, you should be expecting a refund once the amount has been calculated and the procedural hurdles cleared, perhaps later this year.  If the City continues to attempt to extract alarm charges from you, respectfully decline and send them this blog entry!

9 tips for real estate buyers, sellers, landlords and tenants to protect themselves in inflationary times

Author By Christopher P. FinneyPosted on

The business buzzword for 2022 is: Inflation.

The inflation rate in 2021 was 7.5%, a rate that the the Federal Reserve says took them completely by surprise.  And 2022?  Many prognosticators (this author included) believe inflation will hit double digits for the first time in more than 30 years.  This comes after rates of inflation consistently at or below 2% for the past decade.  As a result, many marketplace participants simply are not aware of strategies that will enable them to navigate the shoals of an inflationary environment.

This blog entry may pivot between references to rates of inflation and rates of interest for borrowing.  These two concepts, while different, are addressed interchangeably as (a) inflation is a widely accepted indicator of an over-stimulated economy and (b) the predictable response to inflation is raising interest rates charged to banks by the Fed to dampen that economic activity.  In turn, banks will then raise the rates charged to consumer and commercial borrowers.  So, higher inflation inevitably begets higher interest rates.  The Fed has forecasted both (i) the possibility of front-loaded rate increases, meaning sharp rises in the coming months (as opposed to sequential rate hikes being stretched out over months and years) and (ii) as many as seven rate hikes in 2022 alone.  This means interest rates could rise by a full 2% or more from today’s rates before January of 2023.  How high can rates go? In March of 1980 the prime rate of interest peaked at 19.5%.  Imagine the impact of interest rate adjustments on your business model at those exorbitant rates.

Here are a few things to consider to protect yourself in inflationary times:

  1. Utilize commercial rent adjustments to your advantage.  During low inflationary times, landlords and tenants have commonly avoided complex periodic calculations for rent increases based upon Consumer Price Increases (CPI) increases, in favor of either fixed rent rates during the term of a lease or rent increases only pursuant  to a fixed schedule (say, for example 5% increases every 3 years).  As inflation accelerates and persists at high levels, landlords will hope they had full CPI adjustments built into their leases past and will start demanding then in leases in the future.  Conversely, tenants will cherish fixed-rate, longer-term leases that create a benefit to them of inflation (but the rapidly-changing office and retail markets might cause devaluation of spaces that previous saw decades of stability and strength).  As always, we recommend that tenants consider asking for an early termination provision in all commercial leases.
  2. Anticipate and avoid mortgage interest rate surprises. Many residential mortgages and most commercial mortgages have fixed interest rates only for a few years.  As to residential rates, after the period of the fixed rate, frequently rate increases are capped, but will still be painful.  But for commercial borrowers, when the fixed term expires, the rate increase is typically unlimited.  As a result, commercial borrowers locked into mortgages that might not be paid off for a decade or more could have dramatic, uncapped and unanticipated increases in the interest portion of the mortgage payment that continues to escalate each adjustment period.  To mitigate these impacts, consider refinancing into a new fixed-rate term that gives you breathing room before the impact of higher rates hits with full force.  Also, the sale of parts of your portfolio to pay down debt could lift your P&L from the greatest impacts of interest rate hikes.
  3. Be careful of fixed-rate pricing.  Home builders, contractors and manufacturers are experiencing difficulties fulfilling obligations under fixed-price contracts for matters that have a delivery date well into the future, shrinking their profit margins or turning winning contracts into losers.  Our office then is seeing instances of home builders trying to walk away from contracts and contractors seeking to convert fixed-price contracts into cost-plus agreements, shifting material and subcontractor pricing increases to buyers.  If you are that builder or contractor, consider adding an automatic or negotiated inflation adjustment in the contract and as a buyer, you want to lock in that fixed pricing firmly.
  4. Anticipate suppliers walking away from contracts. Similarly, we have seen manufacturers and distributors of certain products avoiding their obligations to supply certain goods or equipment.  As a buyer, do you have your supply contracts documented correctly and have you diversified your supply pipeline to protect yourself if a supplier lets you down?  Is the party with whom you are contracting sufficiently capitalized to stand behind their contractual obligations?
  5. Consider inflation and interest-rate contingencies.  The Cincinnati Area Board of Realtors/Dayton Area Board of Realtors form residential purchase contract allows a buyer to state the specific terms of the mortgage it is seeking as a contingency to ia buyer’s performance under the contract.  If you specify a “fixed rate loan for 80% of the purchase price at a rate below 3.5% per annum fixed for a period of 30 years,” and interest rates rise before the closing, the buyer has a perfect out.  Similarly, buyers and sellers can include in any contract an “out” for high rates of inflation and higher interest rates.
  6. Be wary of options.  Options to renew leases and options to purchase may seem innocuous and predictable in stable times.  But in a dynamic high-interest rate marketplace, an option acquired today to buy a property at a fixed price three, five or ten years into the future (say under a long-term commercial lease) can unexpectedly enrich the option holder.  Options can be a way a way to leverage dramatic profits to the option holder.
  7. Be prepared to offer seller financing.  A close partner to higher interest rates are tighter lending standards.  Fewer and fewer buyers can afford to buy at inflated interest rates, and lenders also frequently tighten their loan eligibility standards.  As a result, a eligible buyers — abundant today — become frighteningly scarce.  In the worst of the inflationary period at the end of 1977 to 1981, sellers had to offer loan assumptions, land contracts, leases with options (or obligations) to purchase (with the warning noted above) and simple notes with accompanying mortgages to get any property sold.
  8. Be prepared to buy at foreclosure sales.  Foreclosure sales, which have virtually disappeared for the past two years, could come roaring back as commercial and residential owners cannot afford their new, higher mortgage payments, and, of course, mortgage foreclosure moratoria have been lifted.
  9. Be prepared to offer seller financing.  A close partner to higher interest rates are frequently tighter lending standards.  Fewer and fewer buyers can afford to buy at inflated interest rates, and lenders also frequently tighten their loan eligibility standards.  As a result, a eligible buyers — abundant today — become frighteningly scarce.  When lending is loose (as today), it seems readily available to anyone.  And when it tightens, it seems to strangle the marketplaces.  In the worst of the inflationary period at the end of 1977 to 1981, sellers had to offer loan assumptions, land contracts, leases with options (or obligations) to purchase and simple notes with accompanying mortgages to get almost any property sold.

We saw with the rapid deterioration of the real estate market from 2006 to 2010 that buyers many times would willfully breach their contractual obligations to buy or rent.  In this process, they would search for a contingency or loophole — any argument whatsoever — to evade their contractual promises.  And in other instances, they would just outright walk away.  Accompanying these contractual breaches were also insolvency and bankruptcy, making collection impractical or impossible.  Similarly, as the real estate marketplace has heated up over the past five years, we have seen sellers work to evade their contractual obligations so they could retain an appreciating investment or simply realize a higher price from a second buyer.

How can you protect yourself in this type of dynamic market to assure performance by a buyer or seller?

  • Consider escrow deposits, guarantees and other security. Sellers can demand higher earnest money deposits, non-refundable deposits and short contingency periods. Buyers can use tools we have written about here and here of Affidavits of Facts Relating to Title and legal actions for specific performance. Further, consider adding personal guarantees to contractual promises from corporate and LLC buyers or sellers.  Additionally, the performance by buyers and sellers can be further secured with mortgages against real property and secured positions in other assets.
  • Add an attorneys fee provision.  Also, consider adding a contract provision shifting the expense of attorneys fees to the breaching party in a contract.  That can sometimes change the calculus of a prospective breaching party.
  • Tighten your contract language. To lock buyers and sellers into real estate and supply contracts and leases, carefully consider ways the other party might find a contingency or loophole in their performance. Contingencies (commonly for inspection or financing) are the tunnel through which most buyers drive to walk away from a contract.  Ohio law provides that a buyer must “reasonably” attempt to fulfill a contract contingency, but many still attempt to use contingencies to artificially and intentionally avoid their legal obligations.  Fraud on the part of a seller (such as an undisclosed material defect discovered before closing) can also arguably be the basis for a buyer not performing.  Conversely, typically there are no contingencies to a seller’s performance under a contract.  But consider everything in the instrument — the date, the property description, the parties’ names, the “acceptance” language and timing, in considering how the other party might try to squirm away from their promises.

As the economy becomes more unpredictable and more dynamic in terms of pricing, supply shortages and interest rates, market participants would be wise to carefully think about the impact of inflation and interest rate hikes on their contractual obligations and market positioning.

 

 

Fraud, fraud and cyber fraud!

Author By Christopher P. FinneyPosted on

We all know of creative and incessant attempts to defraud us of our hard-earned money, many (but not all) internet- and email-based.  But nonetheless (i) the efforts of snooker us never stop, and (ii) we must constantly tell others in our family and our organization to be wary.  Eternal vigilance is a business and personal requisite these days.  The criminals are absolutely relentless.

Just this last week, our firm and my family were “almost” taken in by two of these international criminals:

  • Our firm (because we have a great web site and use internet marketing tools) constantly gets “new client inquiries” (usually via our web portal or regular email) from fraudsters asking us “do you review contracts?” or “can you sue someone for us?,” pretty generic and bland (but transparently fraudulent) inquiries.  I generally just “delete,” but one of these made it to one of our newer associates.  It was a client from Dubai who wanted us to assert certain contractual claims against another party.  We did so, and the matter instantly settled with a $385,000 certified check payable to our firm escrow account.  The fraudulent client then wanted us to wire the escrowed monies to him and a third party, both overseas (major red flag there!).  Fortunately, our crack bookkeeping staff saw the certified check was dishonored before we wired out the funds — disaster averted!.  But it was a close call.

[Something to note about these fraudulent inquiries: (i) they never want to communicate via telephone (but rather by email), (ii) the phone number they provide is always bad, and (iii) they always have some bland *@Gmail address.”  I sometimes respond to the email address they provide “please call me,” and they never do.  I call the phone number and it is bad for one reason or another.]

  • Sunday, right before the Superbowl, I stopped to have lunch with my wife.  She related to me that a piece of furniture she had for sale in Facebook Marketplace had sold to a buyer in California.  He was going to send us “certified funds” and then wanted us to pay his moving company to bring the piece to California.  “Wait a minute,” I said.  “why would we pay his mover,” and it vaguely reminded me of a fraud scheme I had heard from a client or read about on the internet.  Sure enough, I Googled “pay the mover” and found out this is a common scam.  You wire or pay funds to a mover, and later the “certified funds” are dishonored.  The victim is “out” the moving fee and the scammer never intended to pay for your furniture!  My wife told the would-be buyer that we would hold the “certified funds” for 10 days before shipping the goods, and he went radio silent immediately.  Fraudster!

Our firms, and our title company in particular, are attacked by fraudsters almost daily.  Fortunately, we are alert to the most common scams, and have avoided them all (we have clients who have not been so lucky).  But these two close calls — at the office and at home – remind us that vigilance is required and gullibility, and trust, in the internet era are simply foolish!

Be cautious with your funds and your property.  There are loads of fraudsters — some anonymous on the internet and some that you think are your friends — who will gladly and shamelessly steal your money and leave you wondering why you fell for their scam!

Be cautious!  Be aware!  Trust very few.

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