Dianne Pickersgill

Dianne Pickersgill works on special projects at Federal Title & Escrow Company and contributes to the blog.

She received her Juris Doctor from Harvard Law School in 1992. She is also Of Counsel with Tobin, O'Connor & Ewing, where she represents clients on affordable housing matters, including HUD multifamily regulatory compliance issues.

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Post settlement occupancy agreements: A useful tool, but beware of potential pitfalls

A post settlement occupancy agreement allows a seller to continue to live in his home after settlement, under an arrangement where the seller is essentially renting the home back from the new purchaser.

This type of arrangement can be a life-saver for a seller who is purchasing another home but won’t be able to close on that purchase until a few days or weeks after he sells his current home. Joe wrote a very informative blog post about post settlement occupancy agreements and how they can be a solution to settlement timing issues. 

I thought I would take a look at things from a different perspective and point out some potential pitfalls of such arrangements. In order to be protected, both purchasers and sellers need to prepare for the worst.

What do I mean by the worst? Imagine a case where a seller who is renting back catches the house on fire, and the house burns down to the ground. There are a lot of tricky issues in such a situation.

One thing we know for sure is that the purchaser now has no home to move into, which is obviously a problem, no matter how the liability issues get resolved.

In the normal case of a house fire, there is a homeowner’s insurance policy that would provide coverage. Here, presumably the purchaser obtained a homeowner’s policy with an effective date of the date of the settlement.

The GCAAR standard post settlement occupancy form states: "From the date of settlement the Buyer shall obtain and maintain insurance on the Property with the Buyer’s policy being primary in the event of other available insurance." (Form #1309, paragraph 6.)

The trouble is that despite this provision, the purchaser’s insurance company might have a different opinion.

For example, it is possible that the purchaser’s insurance would not cover the fire, under an exclusion based on the fact that the policy holder was not living in the property at the time of the fire?

Even if the purchaser thought ahead and got coverage for someone renting property, the typical post settlement occupancy agreement will say that the arrangement is not a landlord/tenant relationship, which might cause complications for insurance coverage.
For example, the GCAAR form states, "Nothing in this Agreement shall constitute a Landlord/Tenant relationship between Buyer and Seller." (Form #1309, paragraph 8.)

It also may be that the seller continued his/her homeowner’s policy through the rent-back period, but it is possible that this insurance would not cover the fire damage, due to the fact that the seller no longer owned the home at the time of the fire. The seller may have also gotten renter’s insurance for the rent-back period (the GCAAR form requires it), but typically that will cover only belongings, not damage to the house itself.

Even something less extreme than a whole house burning down can pose some tricky questions in a post settlement occupancy situation.

The buyer now owns the house, along with the appliances, HVAC, etc. If the seller negligently breaks the door off of the refrigerator during the rent-back period, one would think that the seller should be held responsible, and, normally, that would be the case, at least under the GCAAR standard form, which provides for a deposit by the seller to be applied to any damages to the property caused by the seller in excess of ordinary wear and tear. (Form #1309, paragraph 2.)

But what if the refrigerator simply stops working 2 weeks after the closing, during the rent-back period? Whose responsibility would that be?

Since the refrigerator is now the buyer’s, generally one might think the buyer would be responsible, but paragraph 3 of the GCAAR form provides that the seller is to deliver the property (i.e., deliver it at the end of the rent-back period) in the condition specified in the sales contract. The sales contract provides that the condition of the property at delivery is to be in substantially the same condition as of the date of the contract, the home inspection or some other date to be specified. If the refrigerator was working at the specified date, then the seller is responsible if it is not working at the end of the rent-back.

The bottom line is that both buyers and sellers should carefully review any post settlement occupancy agreement to see what the agreement provides concerning liability for issues that arise during the rent-back period and concerning the responsibility for obtaining insurance.

They then should make any revisions to that agreement that are necessary to protect their interests, in consultation with an attorney, if possible. They should also contact their insurance agent to discuss insurance coverage for the rent-back period.

One other thing that a buyer should do before agreeing to allow the seller to rent back after closing is to check with his lender to see whether the lender will permit it.
Typically lenders will allow a short rent back. For anything longer, the buyer could be in violation of the covenant in the loan documents that states that the property will be owner-occupied.

If the seller is paying a security deposit and/or "rent" at closing, these numbers will appear on the closing statement, which the lender needs to review and sign off on.

You don’t want the lender learning about the rent-back for the first time when they receive the draft closing statement from the title company and see those numbers.

Lenders, be careful when calculating income for D.C. Tax Abatement

The D.C. Tax Abatement Program is a great program for those homebuyers who qualify. Qualifying homebuyers are exempt from paying transfer and recordation taxes at closing and will also be exempt from paying real property taxes for 5 years beginning the next full tax year after filing. It is understandable that lenders want their clients to qualify for the program wherever possible.

One of the key qualifications is income. The household must have an income under a certain limit.

Often, lenders will use the income they have calculated for their client for underwriting purposes as a basis for determining whether their client will qualify for the Tax Abatement Program. Lenders will usually take a conservative approach when calculating income for underwriting purposes, because this approach reduces their risk.

Lenders need to be aware that the D.C. government will do its own, independent calculation of income (looking at tax returns and W-2’s for the past two years as well as the applicant’s last two pay stubs) when determining an applicant’s qualification for the Tax Abatement Program. D.C.’s approach may not be as conservative as the lender’s.

We have seen some cases recently where the lender’s determination of income for underwriting purposes was low enough for a homebuyer to qualify for the Tax Abatement Program, but when the D.C. government did its own calculation, the homebuyer did not qualify.

If lenders have any questions about Tax Abatement income qualifications, they should ask the title company.

Sellers should consider an appraisal addendum

As we are again finding ourselves in a competitive market, with sellers in many cases receiving multiple offers, one issue that has re-surfaced is the concept of “waiving the appraisal contingency.”   What does this mean to a buyer and seller?    First, a little history.

History of the GCAAR Appraisal Contingency

The concept of an appraisal contingency has been contained in the various versions of the GCAAR contracts, but the language has been revised – and moved around – over the years.

In the 1999 GCAAR contract, the appraisal contingency was automatically part of the contract as an element of the conventional financing paragraph (Paragraph 8) unless a purchaser specifically eliminated it.  Back in the bidding war days of the early 2000’s, this was often done.  Purchasers struck through the language contained in that paragraph.  Hence the origin of the phrase, “waiving the appraisal contingency.”  

In the 2006 revision of the GCAAR contract, the purchaser was required to select between two options listed under Paragraph 10, Conventional Financing Terms.  Under Option 1, the contract was contingent on an appraisal not less than the sales price, and under Option 2, it was not contingent.   Under Option 2, “Purchaser shall complete Settlement without regard to the value of the Property set forth in any Appraisal and acknowledges that this may reduce the amount of financing available from lender and may require Purchaser to tender additional funds at Settlement.  If Purchaser fails to settle except due to any Default by Seller, then the provisions of paragraph #26 (Default) shall apply.”  This language was continued in the 2009 version of the contract.

In the 2012 revisions to the GCAAR contract, two of the big changes were to move the financing contingency to a separate addendum of its own and to move the appraisal contingency to the Addendum of Clauses.  Also, the language of the appraisal contingency was revised.

Appraisal contingency in addendum of clauses Rev. 2012

When sellers and their agents are reviewing offers today and evaluating what the offers say on the question of an appraisal contingency, they first look to see whether Paragraph 10 of the Addendum of Clauses is checked off, because this is where the appraisal contingency is now located. 

If this paragraph is checked off, the contract is contingent on appraisal not less than the sales price.  For example, if the offer is for a sales price of $1,000,000 with financing of $800,000, and the appraisal comes back at $900,000, the purchaser is not obligated to proceed with the contract and can instead negotiate with the seller to lower the sales price.  That much is clear.    

The bigger question is what if this paragraph is NOT checked off?  A seller might think that because there is no specific appraisal contingency, he or she would be protected against the contract falling through based on a low appraisal.  But that is not necessarily the case, if the contract includes a financing contingency.

If the contract contains a financing contingency, and if the lender denies the loan within the timeframe of the financing contingency based on the appraisal, the contract will become void if the buyer delivers a copy of the written rejection to the seller, and the buyer will not be in default, notwithstanding the fact that the buyer did not even check off Paragraph 10.  The buyer is protected.  

The Conventional Financing Addendum specifically states:

In the event Buyer’s financing described herein is declined based upon the Appraised Valuation of the Property, Buyer will not be in Default.  This provision will apply even if the Contract contains a separate Appraisal Contingency and that Appraisal Contingency has expired or has been removed.

(Paragraph E.)

The appraisal contingency itself contains the following language:  



This language would apply most directly in a situation where Paragraph 10 had been checked off, but the purchaser subsequently delivered to the seller a notice that the appraisal contingency had been removed (e.g., GCAAR form #1333).   In this case, as well as in the case where the paragraph had never been checked off, the seller would not be protected in a situation where a low appraisal resulted in the buyer’s financing being denied.

Obtaining a separate addendum

So what’s a seller to do?  The best way for a seller to be sure that they are protected in the case of a low appraisal, where there is a financing contingency, is to not only make sure that there is no appraisal contingency contained in the contract (i.e.,  make sure that Paragraph 10 in the Addendum of Clauses is not checked off) but also to include an addendum to the contract that specifically states that if the appraisal comes back low, the purchaser will complete settlement and make up the difference in cash.  This would be very similar to the language contained in the 2009 version of the GCAAR contract.     

The following is some suggested language for an addendum:

THIS CONTRACT IS NOT CONTINGENT ON AN APPRAISAL.  Purchaser shall proceed with this Contract at the stated Sales Price without regard to the Appraised Valuation of the Property.  In the event that the Appraisal reduces the amount of financing available from the Lender, Purchaser shall tender additional funds in cash at Settlement.  

Of course, from the buyer’s perspective, the buyer needs to be certain that he or she has the necessary cash to cover such a shortfall before including a provision like this in an offer.

New law will eliminate subordination agreement requirements for some Maryland residential refinances

A homeowner who wants to refinance his or her first mortgage when there are two mortgages on the property is typically required to obtain a subordination agreement for the existing second mortgage.

This is because without such an agreement, when the existing first mortgage is paid off, the existing second mortgage would move up to "first lien" position, which would mean that the refinance first mortgage would end up in "second lien" position, which would not be okay with the refinance lender.

A subordination agreement is an agreement from the existing second mortgage-holder that they will be in second place, behind the refinance first mortgage. 

There is a new law in Maryland that will go into effect on October 1, 2013 that will eliminate the need to obtain a subordination agreement for a second mortgage for certain residential refinances. If the requirements of the law are satisfied, upon recordation, a refinance first mortgage will automatically have the same priority as the existing first mortgage that it replaces.

The requirements are:

  1. The interest rate for the refinance first mortgage must be lower than the interest rate for the existing first mortgage;
  2. The principal amount secured by the refinance first mortgage must be no more than the unpaid outstanding principal balance of the existing first mortgage plus an amount to pay closing costs of up to $5,000;
  3. The principal amount secured by the existing second mortgage must be no more than $150,000; and
  4. The refinance first mortgage must contain in bold or capital letters specific language that is set forth in the law.

Virginia already has a similar law.

Is DC's $5,000 first-time homebuyer tax credit making a come back?

**This $5,000 credit no longer exists however you can find the LATEST information here on DC's Newly Enacted First-Time Homebuyers Recordation Tax Reduction program.**    

Congresswoman Eleanor Holmes Norton (D-DC) introduced the District of Columbia Incentives for Business and Individual Investment Act yesterday, which would reauthorize the $5,000 first-time homebuyer tax credit in DC

"The DC. tax incentives have been an essential ingredient in stabilizing and reinvigorating the District following the near collapse of its economy in the late 1990s," according to a statement on Norton's website. "Until the D.C. first-time homebuyer tax credit was enacted by Congress in 1997, the city's tax base was rapidly dissipating."

The tax credit that has made homebuying affordable for thousands of DC residents since it was first introduced nearly 15 years ago was axed from legislation during negotiations over the fiscal cliff and was not included in the American Taxpayer Relief Act signed by President Barack Obama last week, a Norton spokesman said earlier this year. 

We'll bring more details as we get them. In the meantime, you can view the congresswoman's statement and more information on the proposed legislation on Norton's website.

Marketing Service Agreements may be more dangerous than Affiliated Business Arrangements

Federal Title is an independent title company, which means that, unlike most of our competitors, we do not enter into Affiliated Business Arrangements ("ABAs") or Marketing Service Agreements ("MSAs") with lenders and/or real estate agents. 

An ABA is an arrangement where someone who is in a position to refer settlement business has an affiliate relationship with or an ownership interest in a provider of settlement services and refers business to that provider. An example of this would be a real estate brokerage that has part ownership of a title company and refers business to the title company.

ABAs are permitted under the Real Estate Settlement Procedures Act of 1974 ("RESPA") as long as certain requirements are met.

An MSA is an arrangement under which a settlement service provider, such as a real estate broker, agrees to market and promote another provider’s services, such as that of a title company, in exchange for payment. MSAs are viewed as falling under a provision in RESPA that allows for "the payment to any person . . . for services actually performed."

MSAs are becoming more and more popular amongst real estate brokerages and title companies here in the DC area.

We think that these types of arrangements are bad for consumers. Many times homebuyers are not adequately made aware that choosing a title company is their choice. Second, when a Realtor refers their client to the "in-house" affiliate title company, chances are good the client will pay more in settlement fees, since they are not shopping for title services. Third, the affiliate title company is more likely to turn a blind eye and insure over potential title or marketability issues relating to the property, because the affiliate title company’s allegiance extends to the referral source.

We are not alone in our belief that these arrangements are bad for consumers. Consumer advocate groups, such as CAARE, have spoken out against ABAs.

Moreover, the Consumer Financial Protection Bureau ("CFPB"), the government agency that is now responsible for policing RESPA violations on behalf of consumers, has been focusing on ABAs. It recently entered into a settlement agreement with a Texas homebuilder and lender regarding the alleged violation of RESPA rules with respect to ABAs.

In many cases, ABAs are merely shams that operate to allow for payment for the referral of business, which is illegal under RESPA.

What about MSAs? How do they fit under RESPA? In some ways, they may be even more dangerous for the consumer than ABAs. One of the requirements for ABAs under RESPA is that the consumer must be informed in writing of an affiliated business arrangement. In contrast, there is no requirement under RESPA that an MSA be disclosed to the consumer. And MSAs, just like ABAs, can operate as shams that allow for the improper funneling of referral fees.

A federal class action lawsuit filed in March of this year in the U.S. District Court for the District of Maryland sheds some light on these arrangements.

In that lawsuit the plaintiffs allege that a title company paid a real estate brokerage as much as $12,000 a month in exchange for referrals under a sham MSA that was not disclosed to the plaintiffs, which resulted in depriving the plaintiffs of competition between settlement providers.

The plaintiffs were referred to the title company by their real estate agent and used the title company for their home purchase closing. The lawsuit seeks $11.2 million in damages against the real estate company, the real estate brokerage, the real estate agent, the title company and the president of the title company.

With all of the potential dangers of MSAs, you can expect that they will be reviewed by the CFPB in the near future. If you are a Realtor, would your broker’s MSA survive the CFPB’s scrutiny? If you are a homebuyer, did your Realtor just refer you to a title company with whom they have an MSA?

A warning to recent homebuyers: Watch out for deed scam

When you purchase a property, the deed transferring the title of the property to you is recorded in the public land records. This deed contains your name and the property address, or at least enough information for someone to figure out the property address.

There are companies that troll these public land records for new property transfers in order to use that information for marketing purposes.

I recently bought a property in Maryland, and a few weeks later, I received a strange letter. It was from a somewhat official sounding company, and it said that it was very important that I obtain a copy of my property deed and that if I sent $80 to the company, they would send it to me.

I quickly realized what this was: a complete waste of money.

In fact, I already had the original deed to my property, which I had received from Federal Title, who had handled my closing.

It looks like this scam is not limited to our area. There are reports of the same type of deed scam is happening in Alabama, for example.

If you get one of these letters, please remember that you will be receiving the original deed from the title company that handled your closing, as soon as they receive it back from the jurisdiction where it was recorded.

If you want a copy before you receive the original, in most jurisdictions, you can find it online, possibly for free, but definitely for much less than $80.

Understanding 4 types of property surveys

To determine the exact location of her property lines, Dianne hired a surveyor to

At Federal Title and Escrow, we require a property survey for single family home purchase closings. Homebuyers frequently ask us why it is necessary to have a survey.

The main reason we obtain a survey is that the lender providing the purchase financing requires that we issue a lender’s title insurance policy that does not take exception to survey matters, and in order to do that, we need to review a survey.

My recent post discussing encroachments onto neighboring property is an example of how important obtaining a survey can be from a homebuyer’s perspective.

There are several different types of surveys. Click beyond the jump to read about each one.

DC zoning changes in the works

Did you know that the District of Columbia is changing its zoning regulations? The process started almost five years ago and has been somewhat contentious.

This article in the Washington Post discusses some of the most controversial issues, like “accessory” apartments and off-street parking requirements. DC has set up a website to provide the public with information about the zoning change efforts, including the text of the proposed changes.

The current Zoning Ordinance was approved in 1958. While the Zoning Ordinance has been amended numerous times over the years, the regulations still contain outdated terms, and putting amendments on top of amendments has become very cumbersome. So DC is doing a complete overhaul.

According to the Washington Post article, the DC Zoning Commission will be presented with more than 700 pages of revised zoning regulations at a meeting on July 29, 2013, and a formal review of the revisions is set to begin in September.

We will keep you posted...

Big change for Maryland refinances involving non-principal residences

Until recently, Maryland treated refinances of principal residences and other properties differently.

A borrower refinancing a principal residence paid recordation taxes on the difference between the outstanding principal balance of the existing loan and the face amount of the new loan. However, for non-primary residences (and for commercial property) a borrower paid recordation taxes on the full amount of the new loan.

A new law removes that distinction. All refinances are treated the same, with recordation tax assessed only on the difference between the outstanding principal balance of the existing loan and the face amount of the new loan. The law is effective for all mortgages recorded on or after July 1, 2013.

Attention buyers and refinancers: Don't acquire new debt!

If you apply for a loan to buy or refinance a property, your lender will tell you not to acquire new debt before closing. What does this mean? It means, don’t buy a car with a car loan. Don’t get a new credit card. Don’t increase your credit line on existing credit cards. Don’t buy furniture for your new home on store credit.

This recent article in the Washington Post has a good discussion about why this is important and what the ramifications are if you ignore the warning from the lender.

Encroachments onto a neighbor's property - A question of marketability of title

At Federal Title, we order location surveys for all purchases except for condominiums and cooperatives. When the survey is received, it is reviewed to determine whether there are any potential issues. If a potential issue is identified, that issue is communicated to the purchaser and his or her agent. 

One of the issues that we look for is whether there are any encroachments of improvements either onto the subject real property or onto the neighbor’s real property – i.e., things that are over the property lines.

Let’s take an example of a property in Maryland under contract to be sold where the improvements consist of a house with a front porch, a brick patio on the right side, and an asphalt driveway on the left side. And let’s say that the survey that comes back after the parties are under contract (but prior to settlement) shows that the entire patio is located on the right-side neighbor’s land, and a portion of the driveway is located on the left-side neighbor’s land. What are the rights and remedies of the buyer and seller under the contract?

This discussion will focus on situations where the neighbors are private parties, not municipalities. And let’s assume that the neighbors have not granted easements for the encroachments and that the encroachments have not existed long enough to raise the possibility that the seller has acquired the encroached-upon property by adverse possession, which, in Maryland, is 20 years.

Paragraph 16 of the GCAAR regional contract provides: “Title is to be good and marketable, and insurable by a licensed title insurance company with no additional risk premium. Title may be subject to commonly acceptable easements, covenants, conditions and restrictions of record, if any; otherwise, Purchaser may declare this Contract void, unless the defects are of such character that they may be remedied within 30 Days beyond the Settlement Date.” (Emphasis added.)

From a title company perspective, the main question when an encroachment issue arises is whether the title is uninsurable. In most cases, even where there are encroachment issues, the title is insurable, including in the above hypothetical. As is customary, the final owner’s title insurance policy would take exception the two encroachments.

From the buyer and seller’s perspective, the main question in evaluating an encroachment issue is whether the title is rendered unmarketable by the encroachment. Under the GCAAR contract, if the title is not marketable, the buyer has the right to declare the contract void unless the seller can remedy the defects within 30 days of settlement.

Whether title to a property is marketable is a question of law for the court, and Maryland, like other states, has a body of case law that analyzes this issue. The basic framework for determining whether title is marketable has been stated as follows:

A marketable title is a title free from encumbrances and any reasonable doubt as to its validity. No specific rule can be laid down as to what doubts will be sufficient to make a title unmarketable. The general rule is that that the purchaser is entitled to a deed which will enable him to hold the land in peace and, if he wishes to sell it, to be reasonably certain that no flaw will appear to disturb its market value. However, a title, in order to be marketable, need not be free from every conceivable technical criticism. It is not every possibility of defect or even threat of suit that will be sufficient to make a title unmarketable. Objections based on frivolous and captious niceties are not sufficient. In other words, a marketable title is one which a reasonable purchaser, who is well informed as to the facts and their legal bearings, and ready and willing to perform his contract, would be willing to accept in the exercise of that prudence which business men ordinarily use in such transactions. Zulver Realty Co. v. Snyder, 191 Md. 374, 384, 62 A. 2d 276, 280-81 (1948).

There are several Maryland cases that look at marketability specifically in the context of encroachments of improvements onto a neighbor’s property. There is no per se rule that such an encroachment makes title unmarketable. Instead, each case is decided on its own particular set of facts.

In Azat v. Farruggio, a building encroached onto an adjacent lot by a depth of two and a half feet, for a length of fifty-five feet. 162 Md. App. 539, 875 A.2d 778 (1995). There the trial court concluded that the title was unmarketable, considering a number of factors, such as the fact that the adjacent landowner was demanding $15,000 to grant a temporary easement for the encroachment.

Another case where the title was found to be unmarketable due to an encroachment was Klavens v. Siegel, 256 Md. 476, 260 A.2d 637 (1970). In that case a driveway encroached on an adjoining lot. The encroachment was 4.9 feet wide at one end; extended for a length of 28 feet; and gradually narrowed in width. After a trial, the jury concluded that the encroachment rendered the title unmarketable.

Because of a procedural issue, the court was unable to review the jury’s verdict, but the court noted that there was evidence from which the jury probably found that the driveway was the only means of vehicular access to the house and that if the neighbor had denied the use of the encroaching part of the driveway, the remaining driveway width would have been too narrow for the purchaser’s cars.

On the other hand, consider the case of Senick v. Lucas, where the issue was that several inches of an inexpensive tool shed encroached onto a neighbor’s property. In that case, the court held that the purchaser was not entitled to rescind the contract based on the tool shed’s encroachment, but that he was entitled to an abatement of the purchase price in the amount of the value of that portion of the tool shed used as a tool shed. 234 Md. 373, 381, 1999 A.2d 375 (1964). The court looked at the value of the tool shed at issue compared with value of the entire property and the fact that the tool shed was still usable even after the seller had taken matters into his own hands and resolved the encroachment by having the offending portion sawed off.

However, it is important to note that in this case, the court was not analyzing marketability of title, because there was no provision in the sale contract such as that contained in paragraph 16 of the GCAAR contract. The court was instead analyzing the general contract law principle of whether the partial failure to comply with the terms of the contract defeated the object of the contract so as to entitle the purchaser to rescind the contract.

Going back to our hypothetical situation, it seems to me that a purchaser would be able to reasonably argue that the title was unmarketable based upon the encroachments and resulting risk of potential litigation with the neighbors and/or forced removal of the improvements. He or she would therefore be able to void the contract or possibly negotiate with the seller to get a reduction in the purchase price of the property.

Condominium rider: What is it, why does my lender require me to sign it?

If you're buying a condominium, one of the documents you will be required to sign in connection with your loan is a "Condominium Rider." This rider is an attachment to the document recorded in the land records to secure your loan. In DC, Maryland and Virginia the recorded document is called the Deed of Trust. In Florida, it’s called the Mortgage. I will refer to both as the "Security Instrument." 

In very basic terms, think of the Security Instrument as a document where you're transferring rights in the property you're buying to the lender (or to a trustee for the benefit of the lender) as security for the loan.

The form used for the Security Instrument is geared toward single family homes, so it needs a few changes when the property being purchased is a condominium.

One of the most important items contained in the Condominium Rider is the information regarding condominium fees. You might remember from our post entitled Condo Fees and Closing – Why Do We Care? that lenders have an interest in making sure that condominium fees are paid.

In the Condominium Rider, you agree to comply with all of the condominium rules, including paying all dues and assessments imposed by the condominium. If you do not pay these dues and assessments, the lender may pay them, and any amounts that it pays on your behalf will be tacked on to the loan amount to be paid back by you, with interest.

Another key item contained in the Condominium Rider is a waiver of the property insurance requirements contained in the Security Instrument. Because the Security Instrument is designed for single family properties, it contains requirements regarding obtaining and maintaining property insurance, as those would normally be the homeowner’s responsibility.

In the case of a condominium, the condominium association is responsible for obtaining and maintaining a "master" or "blanket" policy on the condominium project. If this policy is satisfactory to the lender, the Condominium Rider waives the requirements: 1) that the borrower make monthly escrow payments to the lender for insurance and 2) that the borrower maintain property insurance.

Condo fees and closing: Why do we care?

If you're buying a condo, Federal Title needs to make sure condo fees are collected and paid current by the seller at closing.

This is because a new owner is personally liable for a prior owner's unpaid fees, and unpaid fees can even be a lien against the property. Condo associations in DC, Maryland, Virginia and Florida have the right to foreclose against these liens.

In Florida the practice is for the title company to obtain what is referred to as an "estoppel" certificate from the condo association prior to closing, setting forth all moneys owed by the unit owner. Any person (other than the owner) who relies on the certificate is protected by Florida law.

Did you know that in DC, unpaid condo fees are automatically a lien against the property? The condo association does not even have to file a lien in the property records.

In Maryland, Virginia, and Florida, a lien does need to be filed in order for it to become an encumbrance against the property.

From the new owner's perspective, whether or not there is a lien, if any amounts were owed at closing, the new owner would be responsible for those amounts, along with the prior owner. If there were a lien, the new owner would have to take title to the property subject to the lien, which lien would not be considered a commonly accepted restriction on title under the GCAAR Regional Sales Contract.

From the lender's perspective, a lender requires us to issue title insurance insuring that its loan is in first position. If there were a condo lien or there were amounts owed that created the risk of a lien, we could not be sure that the loan would be in first position, and we therefore could not insure the title.

Refinance appraisal: How you can prepare

Part 2 of 2

Now you’re doing a refinance, and your appraisal is scheduled for next week. We talked earlier about what you can expect from an appraisal. Now let’s discuss some things you can do to prepare.

The following are some thoughts, based on my own personal experiences with refinance appraisals, including a refinance appraisal of my DC condo that took place this month.  I’m not an appraiser, so this is not a professional opinion.    

You will probably have at least a few days notice of the appraisal.  You can’t do every last project on your to-do list in those days before the appraisal.  You probably don’t have time to clean every surface of your home.  So how do you decide what to do?  Pick the things that matter and the things that will have the most impact.

If you have time, you should clean your home.  No, you’re not getting graded on your housekeeping, but it is only natural that the appraiser’s opinion on how well your home has been maintained will be influenced by how clean it is.  The key places to clean are the kitchen (whole room), bathroom (whole room), floors, walls, and baseboards, because they reflect on the condition of your home.  The layer of dust on your coffee table?  Probably not as important.  Also, remember that the appraiser will be taking photographs, so make sure to clean up anything that you might be embarrassed about if it were photographed and included in the report, like a messy, unmade bed or a laundry rack full of drying clothes.  

Be prepared, because the appraiser is probably going to open your closets.  When I was getting ready for my recent appraisal, I had forgotten this, and I did what I normally do when I have to clean up clutter quickly – I stuffed things in closets.  Appraisers are looking in your closets not to evaluate storage space but because they can sometimes count the closet towards square footage.  It doesn’t really matter if the closet is crammed with junk, as long as the appraiser can fit their tape measure in there to measure, but you don’t want an embarrassing avalanche to happen when they open the door.  

Depending on how much notice you have of the appraiser’s visit, you might have time to complete some unfinished projects.  If you do have time, you should again focus on the things that can impact the appraiser’s evaluation of the condition of your home.  Using another coffee table example, if you have “fix wobbly coffee table leg” and “patch hole in wall” on your to-do list, and you only have time to do one of the two, you should patch the hole in the wall, or at least cover it up with something.  And remember that the appraiser isn’t a home inspector, so he probably isn’t going to be checking to see if something is working properly, unless there is something that he sees or that you say that calls his attention to the problem.  

This leads to a general comment.  Unless it’s in response to a question, there is no need for you to highlight the negatives about your property.  So, for example, if the appraiser looks at your shiny, new washer and dryer and asks you when it was installed, you should say, “In December 2012” and not finish the sentence with “but it doesn’t work because as soon as we bought it the hose ruptured and flooded the whole basement, and we still haven’t had it fixed.” 

Another important way that you can prepare for the appraisal is to walk through your home and make a list of all of the major improvements you have completed since you purchased the property, if you don’t already have a list put together.  Include on the list the date and the cost of the improvement.  The list should include things like bathroom and kitchen upgrades, building system improvements (e.g., new water heater, new furnace), energy-efficient changes, new light fixtures, crown molding, built-in shelving, a new deck, exterior painting, new roof, etc.  The appraiser might not be able to consider some things that you put on your list, but there is nothing wrong with being over-inclusive and letting him decide.  In some situations, it may be appropriate for you to give the appraiser a copy of the list you prepared.  Ask the appraiser if that’s something he would like to review.  

Refinance appraisal: What you can expect

Part 1 of 2

You’re refinancing the mortgage on your home, and your lender tells you there will be an appraisal. 

If this is your first refinance, you probably have only a vague memory of the last appraisal of your home, which would have been before you purchased the property.  Most likely, your real estate agent took care of scheduling it and meeting the appraiser at the property, and you weren’t involved in the process at all.  All you cared about was whether the property appraised at the number you needed it to in order for your financing to work out.  You probably did a quick review of the appraisal report if/when you received it and then filed it away with your closing documents.

Now you’re doing a refinance, and your appraisal is scheduled for next week.  What can you expect from the appraisal? 

The following are some thoughts, based on my own personal experiences with refinance appraisals, including a refinance appraisal of my DC condo that took place this month.  I’m not an appraiser, so this is not a professional opinion.    

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Condominium limited common elements: Know what you're buying

Condominium ownership is really popular in DC, Maryland, and Virginia. Here at Federal Title, condominium sales make up about 25% of our transactions.  

Most people buying a condominium understand the basics – you’re buying a unit, and you have to pay monthly dues to cover the general expenses of maintaining the building, and there are common areas (in legalese – "common elements") like the hallways and the elevators that all of the unit owners can use (in legalese, "have an undivided interest in"). But what a lot of people don’t understand is that in addition to buying the unit and the interest in the common elements, you may also be buying what is known as a "limited common element."

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Round-up of recent changes to DC metro area transfer, recordation taxes

As Todd mentioned in his blog post earlier this month, the biggest ticket item for closing costs for a real estate purchase in DC can be the transfer and recordation taxes collected by the DC government.

The same holds true for Maryland and Virginia transactions – with the added complication that in Maryland and Virginia, you can also pay a county transfer tax, and the rules and rates vary depending on your county. (See Todd’s post earlier this month about how complicated calculating these taxes can be in Montgomery County.)

I thought I’d sum up some recent changes to the rules on how these taxes are calculated in DC, Maryland, and Virginia for purchases and refinances.

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