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Real Estate Law
Hosted by Benny L. Kass
Washington Post Columnist
Monday, June 18, 2001; 1 p.m. EST
Only after entering into the process of buying real estate do many consumers realize just how little they know about real estate law. What are the legal obligations of both the buyer and the seller? Are there different legal ramifications for buying a home or a condominium, and what are they? What are the buyer's and seller's legal obligations to condo and homeowner's associations?
Benny L. Kass writes the "Housing Counsel" column in The Washington Post, navigating the legal issues and responsibilities of both buying and selling real estate. How do you plan for capital gains, or what can you do if you're faced with a buyer who's dragging his or her feet? Kass has the answers. He was online Wednesday, March 28.
Kass is a Washington, D.C., attorney with the law firm of Kass & Skalet, PLLC. Prior to his private practice, he worked as counsel to both Senate (1965-69) and House (1962-65) subcommittees, and was an attorney with the U.S. Maritime Administration (1969-71). Kass holds a Bachelor of Science degree in journalism from Northwestern University in Evanston, Ill., a law degree from the University of Michigan Law School and a Master of Laws degree from George Washington University Law School. In addition, he has also served on various legal and consumer-related counsels and commissions in the District of Columbia.
The transcript follows.
Editor's Note: Washingtonpost.com moderators retain editorial control
over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
Washington, D.C.: Do tax laws penalize selling a home shortly after buying the home?
Benny Kass: Not really. The tax laws I assume you are talking about are the ones which allow up to $250,000 exemption from capital gain ($500,000 for persons filing joint tax returns) if you have owned and use your house as your primary residence for two or more years.
That's perhaps the greatest tax break the american homeowner ever got. Keep in mind that the tax laws were not -- and should not -- be aimed to help investors save tax dollars.
If you recently purchased a house and are transferred out of the area, the tax laws also assist you in this case.
Thus, my answer is NO.
Greenbelt, Md.: What determines how much a person's interest and points will be? Does it vary by lender? How can a buyer negotiate the rates down, which will benefit me? I have been told the lender is charging me a lot for the rates quoted. I have good credit, and am a first-time homebuyer. I was offered 7 percent and 1.25 points on 6/15; was this high? I think it was, when I called around and was quoted 6 1/2 -- 1 point, by several lenders, including a friend's company. I don't want to go to another lender because I am going with the development's lender, which is offering $8,000 in closing help. My lender gave me a good faith estimate, and for # 805 lenders inspection, he wrote over inspection and put commit ($400) on a $151,000 house. Is this legal, and what does "commit" mean?
Benny Kass: That's a very long question which will probably have an even longer answer. While I do not know for sure (and make no allegations) I wonder whether your developer is getting some kind of "kickback" from the lender they want you to use.
Each point you will have to pay is the equivalent to an eighth of an interest rate. Thus, you may get a rate of 7 percent with one point, but if you pay two points, your rate should go down to at least 6-7/8ths.
You must shop around; although you may not want to go to some other lender (because of the credit you get by going to the developer's lender) you certainly should compare rates. If you can get a lower rate somewhere else (l) talk to the designated lender to see if there is any flexibility; (2) if not, do the numbers. Are you really going to save $8,000 over the long haul if you are paying a much higher rate for the next several years?
Finally, I haven't the foggiest idea of what is meant by "commit"? Ask your lender and let me know. I am curious. Good luck.
Largo, Md.: What can I do to report my buyer-broker agent? The reason is because I just bought a new house under construction. My agent lied to the listing agent stating he introduced me to the development, which he didn't, and we have already signed the contract stating he did, but he told me he wasn't going to get commission, which he is. The big problem I have is that he isn't doing anything for the commission. He is not working for me. I have to call him time and time again to get info, and he never returns my calls, and he tells me to do take what is offered to me regarding interest rates, and points, he told me the same at the offering table. I think he should be trying to get me the best. I have excellent credit, beacon score of 756, and buying the house alone as a first time homeowner -- 26 years old. What can I do?
Benny Kass: Why, oh why, did you sign up with a buyer broker in the first place? I know its legal, but face it: The buyer broker only gets paid if you buy a house and then the commission comes from the seller. In my opinion, that's a potential -- or actual -- conflict. I don't care what real estate agents say about buyer brokers; I just do not believe in the concept.
You should first confront your buyer broker and tell him that unless he backs away from the deal -- and demands no commission -- you will (l) discuss the situation with the builder and (2) file a grievance with the Maryland Real Estate Commission (in Baltimore, I believe). If the buyer broker backs down, ask your seller if he will give you a credit in the amount of the commission he does not have to pay.
Washington, D.C.: I'm selling a condo after having lived there for only one year. I've read a lot about the homeowner exemption to capital gains tax on the sale of one's home for up to $250,000 for a single person ($500,000 for marrieds filing jointly). Statements I've read invariably say you have to have lived there for two of the last five years to get the exemption. However, having read the tax code and worksheet provided at the IRS Web site, it seems to me I'm entitled to a prorated amount of the exemption. Thus for my one year of residence I get a $125,000 exemption (one-half the maximal exemption for a single filer) from capital gains on the sale of my condo. Is this correct?
Benny Kass: unfortunately, you are in a never-never land right now, since the IRS has not yet published its regulations. Fortunately, however, I suspect that you have made a lot of money on the sale of your condo -- considering the market conditions (the crazy market conditions).
The tax law provides that there is a pro-ration of gain if you have not owned and used the property for two years. However, the tax law makes it clear that this is "hardship" relief -- in other words you have to have been transferred out of the area by your employer, or have a health-related problem causing you to sell. The law also says that "other unforseen circumstances" will permit a proration -- but the IRS has to come up with these circumstances.
You may have to pay the full capital gains tax. Be happy; you still probably made a lot of money. Alternative, hang on to the condo for another year and then you will absolutely be entitled to the full exemption from gain.
Washington, D.C.: Do I need an attorney when buying a house (can you tell I've never done this before?), or can I just work directly with a broker/agent/realtor?
Benny Kass: at the risk of giving you what you might consider to be a "self-serving" answer, my answer is categorically yes. You need to retain a lawyer well versed in real estate. Keep in mind that your broker really is interested in one thing -- making the sale and getting his/her commission. (I know I will get a lot of angry brokers responding to this comment, but that's my personal opinion).
Your broker is not a lawyer. Your broker may or may not draft contract language which will protect you.
Thus, while you certainly should work with a broker/agent, you should also have an attorney on your side -- who will be interested in representing you and you alone.
Alexandria, Va.: I am buying a series of condos -- three to be exact. The first will be finished by the builder and delivered June 28. The second, by the same builder, will be delivered at the end of July, and the third at the end of August.
They are in a very desirable new community, and my plan is to buy and flip the first two, then put those profits in the third one which I plan to live in long term. Nonetheless, I will be occupying the first two until they sell, so for my lender's purposes, the first two are owner occupied.
Now, how do I delay paying tax on the sales of the first two condos so I have more down payment for the third? Can I qualify for a Stryker tax-deferred exchange with two purchases and sales in quick succession?
Advise, please. I am new to real estate.
Benny Kass: Interesting question. But let me pose a preliminary question of my own: is it a good idea to put all of your "eggs in one basket"? the area and the property may be hot today, but will it continue? If there are warranty problems, will all three houses have the same problems?
If you decide to go forward with your plan, you certainly can do a Starker (1031) exchange. However, the Starker requires that the property be investment property -- not your personal residence. I suspect that the IRS will be looking closing at the numerous Starker exchanges which have been taking place in the last few years.
Here's my problem: Will you occupy the first (and the second) condo before you sell it? Will you get an owner occupied rate from your lender or an investor rate? If the former, how then will you be able to justify that this is investment property.
The concept makes sense; you can do as many 1031 (Starker) exchanges as you want. But the devil (as they say) is in the details and there's where you need competent legal and financial counseling.
Washington, D.C.: Is it legal for a broker/agent to recommend a home inspector and/or lawyer? If so, they will be on their side (and commission).
Benny Kass: Is it legal? Absolutely. Is it a good idea? Probably not. I counsel my broker friends that if they have to give names (of inspectors, lenders, lawyers, etc.) that to the extent possible they give three names for each category. this way, the broker cannot be accused of favoritism.
Take the names submitted by your broker and call those individuals. Discuss their experience and their fees. But definitely call some others, just to be sure that the names given you by the broker will truly represent your interest and will not be helping the broker make a sale.
I suspect that the broker/agent knows that any attorney or home inspector may tell you things that will discourage you from buying. That's the price of doing business.
Lanham, Md.: I am a homeowner who is trying to sell myself. A book I recently read entitled "How to Sell Your Home in Five Days" suggests that you advertise your home about $50,000 less then you want for it and state that you "will" sell it that Sunday, after a weekend open house, to the highest bidder. If I do this and the highest bid is still unacceptable to us, do I "have" to sell to this person? (Please consider Maryland law) If I do not sell, do you foresee any legal problems with this type of sale? It is all open bidding, meaning anyone can know the highest bid at any time.
Benny Kass: I don't like the approach -- regardless of the legal consequences. And don't think that because the market was hot last month, you will sell your house within five days. Many years ago, I was on a TV show critiquing several of these book authors. My comment then -- and now -- is that if they were so good, they wouldn't write a book to tell others how to make money. (Incidentally, all three of the authors I analyzed several years ago ultimately went broke.
I don't think that your statement "I will sell to the highest bidder" would be binding in a court of law. However, if I were representing the highest bidder and you refused to accept our offer, I might seriously consider filing suit, claiming reliance. I would, of course, have to review Maryland law on this issue. normally, contracts for real estate have to be in writing -- oral contracts are not enforceable. however, if I relied to my detriment on your oral statement that you would sell to the highest bidder, I might have a case.
I wouldn't take a chance and do not recommend that you make that promise.
Arlington, Va.: Hello,
What does it mean when a mortgage broker "locks in" a rate for the borrower? What does the broker actually do to lock in the rate, and what is required of the borrower at that time? This whole process is rather confusing.
Thanks.
Benny Kass: I have written about "lock-ins" on several occasions. Basically, it means that the lender will "lock in" your mortgage interest rate for a period of time (usually not more than 30-60 days) and if you can go to settlement within that time period, you are guaranteed that locked in interest rate.
If you have to go this route, make sure that the lender gives you a written statement spelling out the terms and conditions of the lock-in.
You should not have to pay anything extra for this lock in.
However, since rates appear to falling -- or at least holding steady -- I really question why you have to bother (or worry) about locking in the rate. Generally, if you are locked-in, and if rates should fall below the lock, most lenders will not be willing to reduce the rate below the locked in rate.
Thus, I don't think you have to worry about this issue. just shop around and get the best possible rate. ask the lender what their position will be should rates go down between the time you made your application and settlement.
Arlington, Va.: My sister was asking my advice about purchasing a multi-family home -- either duplex or triplex and the resulting tax implications.
My understanding is that if she purchases a multifamily home (let's say two units), lives in one side for two years and then the other side for two years, she and her partner will be able to claim the exemption for both sides, regardless whether it is a duplex with one title or separately titled (but both by her) halves of one duplex. I told her to consult tax/real estate attorney re: this, but I wanted to make sure I didn't lead her far astray.
Or would they be better off living in one side the two years, and getting the exemption for that, and using a Starker exchange for the other for another rental house that they then convert to personal use?
Benny Kass: I love creative thinking. Without knowing all of the facts (and thus hesitant to give you a categoric legal opinion) my sense is that either of the scenarios you presented would work.
There is no limit to the number of up to $250,000 ($500,000 if filing jointly) exemptions you can take. The only limitation is that you must own and use the property for two out of the last five years. Thus, your sister can live in one side for two years, move into the other side and live there for two years. If they can sell the property within one additional year (i.e., five years in all) all their gain (up to $250,000 or $500,000) will be exempt.
However, who knows what the market will be four years from now. Perhaps the starker alternative makes more sense.
One other solution: live in one side for two years, and rent the other side. Keep careful records for both sides and file appropriate tax returns. At the end of the two years, sell the property. They can do a Starker to purchase another investment property (using the rented half for this purpose) and they can also buy another property to use as their own principal residence.
Sounds interesting; good luck.
Alexandria, Va.: I have a nothing down VA loan with PMI. I seemed to remember reading somewhere that once your equity gets to a certain point in the house, that PMI is no longer required. Is this true? We have been in the house for eight years. If so, do we simply contact the lender and say we want to stop paying PMI? Could it be that simple? Thanks.
Benny Kass: First, PMI stands for Private Mortgage insurance. It is available (i.e., required) when you borrow less than 20 percent of the purchase price of your house.
The VA insurance program is really not PMI. I don't know that much about the VA program, and suggest that you contact the VA (or check their Web site), and get the answer.
A simpler alternative: if there is more than 20 percent equity in the house now, why not just refinance and get a conventional loan without having to be concerned about PMI?
Washington, D.C.: I recently made an offer on a house in D.C. I received a verbal message through my broker that the offer was rejected, but that the buyer was willing to work with me. A month went by and I received a letter from my broker that she represented to me as a counter offer. The letter was from the trust attorney, addressed to the seller's agent stating "I have been authorized to counter offer with a firm and final offer of $X, subject to inspection, financing and a mutually agreed upon purchase and sale agreement. Within one business day, I wrote on the letter, that I accept the conditions of the counter offer, signed the bottom of the letter and faxed it to the trust attorney. I was told by the trust attorney the next day that the house was sold to a buyer with a higher offer price. I feel that I have been wronged because I was told I had an open offer with no time limitation and I accepted it forming a contract, prior to the signing of the other buyer's contract. What kind of recourse is available to me?
Benny Kass: First, I assume you meant "seller" instead of "buyer" was willing to work with you.
You probably don't have much recourse. However,you should try to find out when you accepted their counter offer and when the house went under contract to the third party. If you accepted the counter before they signed a contract with a third party, you may have grounds to sue.
Is it worth it? probably not. Litigation is time consuming and expensive. You probably won't go to trial for at least one year, and in the meantime will not be able to buy another property, unless you can afford two house should you ultimately prevail.
I truly believe that all those potential buyers who lost out during the real estate frenzy may ultimately be happier than the successful buyers. I hope real estate won't start declining, but we have to remember that many parts of the area drastically declined in the early '90s.
Washington, D.C.: I am currently renting a townhouse while waiting for my house to be built. My broker who sold me the house also rented me the townhouse. My home was supposed to be done at the end of June, and my broker pressured me to sign that I would be vacating the townhouse July 1, so that she could rent it to another couple. This broker knew that the current status of my being-built home yet still pressured me. When I told her that as of now, the dry-wall wasn't done, and that the house would not be done until August, she freaked out and now I am worried that I will have no place to go in the interim (I am also seven months pregnant). Does my broker have any liability to me considering she was aware of the situation the whole time and was my broker for both the townhouse and my new home? What would you suggest I do next?
Thanks!
Benny Kass: I wish I could give you a more positive answer, but unless you can prove that your broker knew that your newly built house would not be ready when she pressured you into stating that you would move out, there really isn't much you can do. In the District (where I assume you rent) if a tenant states that he/she will move out by a certain date -- and does not -- the landlord is entitled to double rent for the time that the tenant holds over.
I suggest the following: (l) get a lawyer to represent you; (2) have the lawyer write a friendly letter to all parties (current landlord, broker and seller of new house) and explain your predicament. Perhaps someone will come up with a solution (either temporary or permanent) which will solve your problem.
I suspect that the contract to buy your newly built house does not require the seller to convey by a date certain. most of these contracts contain all sorts of clauses relieving the seller from fixing a firm settlement date.
perhaps your broker, when confronted with the facts, will at least volunteer to pick up some (or all) of your moving and transitory lodging costs.
Perhaps your landlord will be sympathetic and allow you to stay on a little longer. After all, the rental market is strong and when you vacate, your landlord should not have any problems finding a new tenant.
Silver Spring, Md.: I am about to sell my house and I want to include a contingency clause in the contract to the buyer stating that the sale is dependent upon me finding a "suitable" home to purchase. If I get a contract and after a certain time period, I can not find an acceptable home to purchase, can I then just cancel the contract? Also, any info/tips on rent backs would be appreciated.
Benny Kass: Yes, this is possible. However, your contract must be absolutely specific. Make sure that you have a time period -- for example three months -- that if you cannot find a suitable (in your sole discretion) house, you have the right to terminate the contract. Alternatively, you can give your purchaser the option to terminate the contract at the end of this time period -- or stay on until you do find the right house for you.
I like the idea of a seller renting back the property, if you can find a buyer willing to go along with the deal. Most brokers have a form called "post settlement occupancy" agreement, and it is written to protect sellers (although you and your attorney should read it carefully before you sign). This way, you can sell your house and have all the seller's proceeds (other than some money which will be held in escrow as a security deposit). You will pay the buyer rent in the amount to be negotiated -- usually you will have to pay the buyer what he/she pays in mortgage,insurance and real estate taxes (PITI).
This could be a win-win situation for you if done properly.
washingtonpost.com: That was our last question today. Thanks so much to Benny Kass, and to everyone who joined us.
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