Buyers, is your Seller a Foreign Person? The IRS and FIRPTA say you better know…

This post is not legal advice. For legal advice, consult an attorney, not a blog.

A few months ago I posted about the Foreign Investment in Real Property Tax Act (or FIRPTA, pronounced just like its spelled). I didn’t get nearly the response I imagined, only an exchange with Tim Kane, our own escrow contributor. The absence of responses, and the initial nature of Tim’s response, got me to wondering: Am I missing something? Surely other people must appreciate this issue if its as significant as I believe…

Well, I am here to report that IMHO I’m not missing anything. I ran the “Is FIRPTA compliance a big deal?” question by some other attorneys who routinely act as escrow agents. The universal response? “Yes! FIRPTA is a big deal.” Buyers must be aware of and insure compliance with FIRPTA, particularly because the other professionals who typically assist a buyer (the escrow company, the buyer’s real estate agent) either don’t know or apparently don’t care too much about the buyer and the exposure that results from ignoring this federal law.

Oh, and FIRPTA is getting to be bigger deal all the time. With the burst of the “housing bubble” U.S. real property has become an attractive investment to foreigners. “Investment” means that, at some point those houses will be sold; “foreigners” means that, when sold, the buyer had better withhold 10% of the sale price or the buyer may have to pay that tax bill himself. In other words, buyers, ignore — or even be ignorant of — FIRPTA at your peril.

Undisclosed SOC Bonus? There oughta be a law…

With the new year, I resolved to talk less and do more about the “stacked deck” faced by buyers in the traditional real estate broker system. And since it’s still January…

One of the great benefits of getting my broker’s license has been getting to see how the broker system operates “behind the curtain.” While I’ve seen and learned alot, there is one “sales” tactic that is particularly odious, at least to the exten that it takes place without the buyer’s knowledge. And what is this tactic?

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This is a clear-cut and unequivocal conflict of interest — can there be any reasonable argument to the contrary?

A conflict of interest is a fact of life, and that alone does not disqualify the broker from providing competent representation to the client. But a conflict must not be concealed from the client. Just the opposite: A conflict of interest must be disclosed, or the client is at serious risk of getting screwed. If the client knows about and agrees to this additional compensation, that’s fine. But if the buyer closes on a house that includes such an “SOC Bonus” without knowing of or consenting to it, the buyer has been done a tremendous disservice.

Needless to say, this type of SOC Bonus is relatively common and entirely consistent with MLS rules. No surprise there — the MLS was founded by “seller’s agents” because originally all brokers worked for the seller. So it should come as no shock that the system they developed seriously favors sellers. (Indeed, Ardell has noted previously that the “prime directive” of the NAR is to promote the value of property, and the only way you can do that consistently is by promoting the interests of sellers.)

So what can be done? Why, pass a law, of course! Ironically, an undisclosed SOC Bonus like this one is already arguably illegal under the current law (as a conflict of interest that must be disclosed). But I’d wager that an arguable interpretation of the existing statute doesn’t get much traction out in the real world, and the only solution is to amend the statute to specifically prohibit this practice.

Therefore, I propose an amendment to the relevant statute (RCW 18.86.080) that reads as follows:

(8) If a seller pays any compensation to a buyer’s agent or a dual agent, whether directly or indirectly, the full amount of the compensation must be disclosed to the buyer in writing before or at the time of signing an offer in the transaction.

Whaddya’ say, RCG Community — you got my back on this one?

Will Our State’s Regulations Kill Mortgage Blogs?

The Dodo - Didus ineptus Raphus cucullatusI recently had a local mortgage originator contact me because his company is requiring that he takes his mortgage blogs off-line.  His employer told the MLO that it was due to recent Washington State regulations.   In my opinion, his employer probably wants one less thing to worry about in this day and age of trying to operate a mortgage company so telling mortgage originators they cannot blog is much easier than making sure their blogs and outside websites are compliant.

Washington State mortgage originators, are you aware of these rules?  WAC 208-660-446 went into effect November 5, 2010.

When I advertise using the internet or any electronic form (including, but not limited to, text messages), is there specific content advertisements must contain?

Yes.  You must provide the following language, in addition to any another, on your web page or any medium where you hold yourself out as being able to provide the services…

(3) Loan originator web page.  If a loan originator maintains a separate home or main page, the URL address to the site must be a DBA of the licensee and the licensee’s name must appear on the web page.  The page must also contain the loan originators NMLS number and a link to the NMLS consumer access web page for the company….

(5) Oversight.  The company is responsible for the web site content displayed on all web pages used to solicit Washington consumers, including main, branch, and loan originator web pages.

I’m fortunate that my employer does allow me to blog.  Back in the Spring of 2010, during a scheduled audit with DFI declared my blog to be an unregistered trade name.   We did register my mortgage blog with the NMLS, which included paying additional licensing fees.

There is so much for consumers to be aware of and I find that blogging actually helps me to be a better mortgage originator.   When you write about various mortgage scenarios as a mortgage blogger, it causes you to research your underwriting guidelines and to stay current.  I’m constantly looking for “the latest” information for new content to share with my readers.  I seriously cannot imagine not being able to blog about mortgages.

I don’t blame this mortgage originators employer for not wanting to manage the content of their employee’s blogs.   However it’s a sad day when a good mortgage blog is removed from the internet.   I can’t tell you how many consumers thank me for writing and sharing reliable information about mortgages.  A quality mortgage blog provide current guidelines and trends to consumers and real estate professionals. 

If mortgage blogs in our state cease to exist, I suppose people will need to rely on what banks want them to think about mortgages, which I’ve found to be misleading on several occasions.

New Predatory Scam: Mortgage Litigation Services

The subprime lending industry barfed out hundreds if not thousands of loan originators in 2008 who had a taste of the six figure lifestyle and didn’t want it to end. The predators quickly swarmed into the loan modification industry and when state regulators started clamping down, they morphed into predatory short sale negotiators like parasites steadily evolving to bypass an organism’s defenses.

halo 3 plasma pistolSo where might they go now that the Federal Trade Commission is using the Halo plasma pistol on upfront fees Jan 31, 2011? Do you think they might crawl under a rock and die? Of course not.  The newest scam is called “mortgage litigation services” and the scammers are already swarming my inbox with email spam telling me that I can make six figures a year with no experience. All I have to do is refer people to their company. So what is the new scam?  From their email marketing:

“This is not a loan modification. Mortgages can become free and clear! XYZ Legal Services has put together a turnkey system that allows you to start offering mortgage litigation to your clients in days. This turnkey system is designed to run side-by-side with your existing company. XYZ provides all the required backend services to support your sales operation and business objectives. Our focus is on providing the very best customer service and attorney services for your customers. I am very confident that we will be able to help you and I think you will quickly see why our customers find our attorneys to be the experts when it comes to helping them get their financial issues resolved. Here are just a few key components that separate XYZ from the competition:·
Provide a REAL service to homeowners
You collect NO paperwork
All you do is fill out a one-page form online
Highest Marketing Fees to Affiliates
Make a Huge Income by Helping Others

Someone with a law license please explain to raincityguide readers how this could be legal.  It looks like they want people to sign up to become an affiliate and send referrals to their company, and for that the company is going to send out a referral fee. Predators love scams where they do no work and collect a fee.  So if these ads are targeting loan originators and other people in the real estate and mortgage lending industry, it looks like the company wants referrals of consumers who are in a position to challenge their lender.

We already have a 2009 law in Washington State where the lender is required to prove they hold the note before foreclosing. I don’t see how this service can help struggling homeowners. I do see how people who will believe anything will once again be scammed out of an upfront fee before any work is performed.

“Good faith” negotiations and the Inspection Contingency

One of my great challenges as I build my RE broker practice is learning how to develop positive working relationships with other brokers. I’ll admit, a broker is a different animal than a lawyer. I think the difference flows from the fact that brokers to a certain extent are on the “same team” while lawyers are not. Brokers need each other to keep their clients on track towards closing, or neither broker gets paid. Lawyers, in contrast, get paid whether the deal closes or not. Transactional attorneys are not adversarial per se — at least not the good ones — but they retain their own self interest independent of opposing counsel. I think an absence of this “mutual interest” can foster a degree of conflict between brokers.

Since I don’t have that mutual interest with the opposing broker, I’ve tried to come up with a “work around,” some style that is consistent with what is expected of a broker. In that vein, it has been my understanding and experience to date that everybody expects the parties to negotiate in “good faith.” That term is of course extremely slippery and not susceptible to an easy definition. Its sorta like porn — hard to describe, but you know it when you see it. As a general rule, I think “good faith” requires the parties to negotiate realistically with the understanding that each side is genuinely interested in consumating the transaction on terms that are fair to all. If one side fails to live up to this standard, then the other side will perceive that they are not negotiating in good faith.

To date I’ve operated under the assumption that if I can faciliate good faith negotiations, then I’ll keep to a minimum any conflict between me and the other broker. What does that require in the context of the inspection contingency? Once the inspection has been performed and the defects noted, is that an opportunity to essentially renegotiate the price? Or should the negotiations focus strictly on the specific defects, their respective importance (e.g. safety issue vs. cosmetic), and the costs to repair? Or is even that too aggressive?

Any insight would be greatly appreciated. I just love “RCG University”…

Can you have a “contingent” offer without a bump clause?

As always, this is not legal advice. For legal advice, consult an attorney, not a blog.

First, my humble apologies to the Rain City Guide community. I have been grossly delinquent in posting to the site! My excuse: I had my very first jury trial on August 9. Thankfully, the jury came back with an excellent verdict in my client’s favor. When the smoke clears, I’ll post about the experience and some of the specific issues raised.

In the meantime, I came across what I believe to be a novel theory about contingent offers. Specifically, I was informed by somebody who should know that use of the Form 22B is “optional.” As background, the Form 22B, “Buyer’s Sale of Home Contingency,” is for use in a contingent offer where the buyer must sell his house before being obligated to complete the purchase of the seller’s house. By its terms, the Form 22B allows the seller to continue marketing the property (in part by noting “contingent” in the MLS). If the buyer receives another, non-contingent offer before the buyer has sold his house, the seller can demand that the buyer either waive the contingency (i.e. commit to completing the purchase even if his own house does not sell) or the contract will be terminated. Obviously, if the contract is terminated, then the seller is free to enter a new, non-contingent contract with the new buyer.

So, the Form 22B really protects the seller. What buyer wants to get “bumped”? Nobody, of course. But what if you represent the Buyer? It’s in your client’s interests to NOT have the bump clause — so can you draft a contingent offer without using the Form 22B? I’m curious to know what others think of the issue.

My thoughts: Absent use of the Form 22B, there is real ambiguity as to whether the contract is “contingent” at all. In the transaction that brought this issue to my attention, the buyer simply checked the second, “if this sale is contingent” box in Para 1 of the Form 22A Financing Addendum. In my mind, this is simply insufficient to render the contract contingent, so if the buyer is unable to complete the purchase there will be a dispute about whether or not the buyer gets the protection of the financing contingency. If, on the other hand, the buyer’s agent drafts a comprehensive Form 34 that addresses the issue, but that does not contain a “bump” clause, then I suspect the agent will have overstepped his authority to engage in the limited practice of law. But those are just my thoughts…

WA State Real Estate Agents are now Brokers.

On July 1, 2010, real estate salespeople in Washington State will become brokers.  It’s taken the Department of Licensing a total of seven years from initial research to the final implementation having started in 2003 on this project. The revisions passed the legislature in 2008 and the law is now in effect. There are many, many questions still to be answered during the rule-making process which makes the transition challenging but not impossible.  Here are some of the higlights:

  • There are now two levels of licensure for individuals: broker and managing broker.
  • The ‘salesperson’ category has been eliminated. The entry-level license for an individual is now “broker.”
  • A person with three years of experience as a broker will now be able to become a managing broker.
  • The 2010 license law requires the licensing of brokerage firms. A real estate firm is any business entity (including a corporation, partnership, or sole proprietorship) that conducts real estate activities.
  • All real estate services contracts are between the client and brokerage firm, instead of between the client and any individual licensee. A listing agreement is the property of the brokerage firm.
  • A designated broker is responsible for meeting all recordkeeping and trust fund requirements, plus he/she has supervisory responsibility over all the firm’s licensees.
  • All first-time broker license applicants must submit fingerprint identification.
  • Those renewing their licenses must also submit fingerprints and have their backgrounds checked every six years.
  • Educational requirements have been increased for first time broker licensees as well as managing brokers. Existing licensees must take a transition course to update them on the licensing law changes.
  • A broker with less than two years’ experience (remember, I’m talking about a new real estate agent, now referred to as a “broker) is subject to one additional responsibility: working under a heightened degree of supervision. He or she must conduct all brokerage activities under the direct supervision of a designated or managing broker, and submit all signed documents to the designated broker for her review, within five days of the signing, and submit evidence of their required education courses to the designated or managing broker.

There are more changes relating to recordkeeping, trust accounts, the role of firms, and property management. The complete law and its rules can be found here.

I highly recommend all real estate agents brokers and other interested stakeholders join the DOL’s listserve. DOL sends out a new set of Frequently Asked Questions each week and has been doing a great job of keeping us up to date during the transition.

The following links are from the Department of Licensing
Frequently Asked Questions


During the Transition Course, I’ve been asking my students at the end of class if they believe the new law changes will help the industry, hurt, or make no difference.  The majority of students believe the changes will help the industry raise the bar.  The three biggest changes they are happy with are: 1) the increased level of supervision required of new licensees;  2) the mandatory fingerprint/background check; and, 3) the increased level of required prelicensing education for new agents brokers.

As a side-note, I’ve had more than a handful of students ask what kinds of conviction on the background check would dis-qualify them from keeping their real estate license.  For the answer to that question, follow this link and scroll down to the section on “fingerprinting.”

The Financing Contingency: Does it disfavor mortgage brokers?

As always, this is not legal advice. For legal advice, consult a lawyer, not a blog.

First and foremost, let me admit my own ignorance up front as to exactly how a buyer works with a mortgage broker. Hopefully, someone with such knowledge and experience will clarify any errors below that result from my ignorance. Indeed, this post is for my own education as much as anything else.

In its current iteration, the financing contingency (NWMLS Form 22A) specifically defines “lender” as “the party funding the loan.” Thus, by its very terms, the term lender does not include a mortgage broker, since a mortgage broker simply brokers the loan (i.e., matches up a lender with a borrower) and does not actually lend any money.

So what’s the issue? Its two-fold. First, in paragraph 1 Form 22A states: “If Buyer changes the lender without Seller’s prior written consent after the agreed upon time to apply for financing expires, then the Financing Contingency shall be deemed waived.” [Only relevant portions of sentence included in quote.] If the buyer is using a mortgage broker, it is possible that the buyer will not have decided on a specific “lender” before expiration of the application period (by default 5 days but often shortened). In that case, the buyer may be deemed to have waived the contingency, or at a minimum the buyer may need to get the seller’s written consent for a lender selected after expiration. If seller refuses to give such consent, then the buyer may have waived the contingency. Note use of the word “may” as the form is ambiguous and open to some interpretation on this issue.

One the second issue, however, the risk is clear. If buyer’s financing fails, then per paragraph 4 the buyer must present “written confirmation from buyer’s lender” of the date of application, that buyer had the funds to close (i.e. the down payment), and why the loan was denied. I think its safe to say that a declining letter from a mortgage broker would not satisfy this requirement given the specific definition of “lender” in the form. So don’t rely on a letter from your mortgage broker (as many buyers do).

The upshot? If you’re using a mortgage broker rather than dealing directly with a lender, discuss this issue with your broker to confirm that you will still get the protections of the contingency. Make sure the broker will have “applied” for a loan on your behalf with a specific lender prior to expiration of the application period. And if the application is denied, make sure you get a letter so indicating from the LENDER, not just your broker.

New Construction — does that property even legally EXIST?

This post is not legal advice. For legal advice, consult an attorney in person and not via a blog.

I recently had the opportunity to submit an offer on behalf of a client for a new construction home. The price was right and the clients really liked the house. However, in preparing the offer it quickly became apparent that the developer had yet to record the short plat used to create each of the new parcels that contained the new construction (there were a total of three new parcels, each with a SFR).

Before I go further, and in case anyone is wondering “What’s a short plat?”: Generally speaking a short plat is the division of an existing legal parcel of land into smaller parcels. Depending on the jurisdiction (e.g., King County, City of Seattle, City of Bellevue, etc.) a short plat can consist of up to 9 new parcels. A short plat must be approved by the jurisdiction in which the property is located. Once approved and recorded, the short plat creates the new legal parcels of land.

So what’s the big deal in buying a property BEFORE the short plat is approved and recorded? Well, in that instance you’re buying property that is not yet a legal parcel. If for some reason the short plat is not approved or recorded, then you could be in for a real hassle in terms of paying taxes or dealing with the city or county in regards to your property. To be perfectly frank, I don’t know exactly howthat might play out, but I do know it would be a pain (and if you have to hire a lawyer, expensive). On the other hand (and perhaps a title insurer or escrow agent will weigh in here) its possible that the transaction would not close until the plat had been recorded.

But there is at least one other issue as well: A short plat can create additional legal interests (such as easements) in or restrcitions on the property. If you commit to buying the property before the short plat is recorded (by signing a purchase and sale agreement, which certainly can happen before the plat is recorded) you may be in for an unpleasant surprise. For example, what if you discover that you have a shared driveway?

The bottom line: Be careful in buying property that legally does not exist when you sign the purchase and sale agreement. At a minimum, any purchase and sale agreement for property that does not legally exist should include a contingency allowing the buyer to receive and approve the recorded short plat before closing.

The Statutory Warranty Deed: What You Should Know as the Seller

This is not legal advice. For legal advice, consult an attorney in person, not a blog.

In most instances, a buyer will take title to the property by a statutory warranty deed. As the name implies, this deed is defined by statute. That said, this statute merely codified the common law, which evolved over several hundred years (beginning in medieval England).

In any event, a statutory warranty deed includes several warranties, or promises, from the seller:

(1) That at the time of the making and delivery of such deed he was lawfully seized of an indefeasible estate in fee simple, in and to the premises therein described, and had good right and full power to convey the same; (2) that the same were then free from all encumbrances; and (3) that he warrants to the grantee, his heirs and assigns, the quiet and peaceable possession of such premises, and will defend the title thereto against all persons who may lawfully claim the same.

Given that this is pretty dense “legalese,” I’ll summarize: When a seller conveys title by statutory warranty deed, the seller warrants to (or promises) the buyer: (1) that the seller was the sole true and legal owner of the property; (2) that the seller had the legal authority to pass title to the buyer; (3) that the property is free from all encumbrances; (4) that the buyer’s ownership of the property will not be challenged; and (5) that the seller will defend the buyer’s claim of ownership if challenged. If one of these warranties is breached, then the seller will be liable to the buyer under the terms of the deed.

Of particular importance, a seller makes these warranties and will be liable for their breach even if the buyer knows of the breach at the time of conveyance. If the seller wants to limit these warranties and to exclude certain known breaches (for example, a known encumbrance), then the seller must do so in the deed itself. This is accomplished by a “subject to” clause in the deed.

If the deed does not identify an existing encumbrance in a “subject to” clause, then the seller faces liability immediately upon closing. For example, assume the seller and buyer are both aware of the fact that the neighbor’s fence encroaches five feet onto the property. Moreover, everyone knows that the fence has been there for 20 years. Thus, everyone knows that the neighbor has a very good adverse possession claim (i.e., the neighbor has a good claim that he has taken ownership of the portion of the property on his side of the fence). Regardless, unless the deed specifically excludes this claim from the warranties within the deed, the seller will still be liable to the buyer for this claim. The seller would have to pay for any defense of the buyer’s title (i.e., attorney’s fees and costs of litigation), and if the neighbor had taken title to the area then the seller would have to compensate the buyer for the resulting loss in value.

Thus, it is important that the deed by which the seller conveys title correctly excludes from the inherent warranties those defects on title that are known and exist at the time of closing. Of course, a buyer may object to a “subject to” clause that includes the known defect (such as the fence and adverse claim in the hypothetical above) because the purchase and sale agreement requires the seller to resolve such encumbrances. But if the seller simply folds on the issue and warrants against the encumbrance, the seller is not doing himself any favors. Rather, certain liability will result.