home buyer Archives - Page 35 of 41 - Real Estate News and Commentary

August 18, 2011October 11, 2019

Understanding Title Insurance

The necessity of title insurance has been debated over the years by many home owners. However, foreclosure disputes, between lenders and former home owners, have brought focus on a valuable and often misunderstood protection. Besides the many stories that have been told about how an owner’s title insurance policy has saved or could have saved a home, many home buyers are unaware of how title insurance was conceived. Many have difficulty understanding title insurance.

According to the American Land Title Association (ALTA.org), title insurance came about as a result of a landmark court case in Pennsylvania in 1868, which found that home seller was not be responsible for a erroneous title opinion. Subsequently, the first title insurance company was formed in 1876 in Philadelphia. The company promoted itself by claiming that they would insure “the purchasers of real estate and mortgages against losses from defective title, liens and encumbrances”…”Through these facilities, transfer of real estate and real estate securities can be made more speedily and with greater security than heretofore.”

Like today, title examinations were conducted to ensure that the title was marketable (or defect free). However, prior to the offering of title insurance, property owners were often held responsible for liens and encumbrances left on the title by the previous owner, or when mistakes occurred. Title disputes were often settled in court.

Initially, title insurance was often a local process. However, the title insurance industry surged along with an expanded housing market after World War II ended. Additionally, the use of lender’s title insurance grew along with the secondary mortgage market; because as the number of nationwide mortgage holders increased, lenders found that title insurance was necessary to protect their interests.

Contrasting to the recordation system has been used in most of the United States (in some cases before the formation of the country); many other countries use a land registration. Land registration typically allows a government to determine ownership when property ownership is challenged; property owners usually have no recourse.

Title insurance is a result of our recordation system that continues to this day, where property ownership can usually be determined by conveyance. Although the recordation system relies on transfer instruments that indicate a grantor, grantee, and property description; the system is not perfect. Besides recordation mistakes and claims from unrecorded conveyances; fraud can also occur by recording falsified transfer documents with a complicit or unsuspecting clerk.

There are two types of title insurance that are offered: lender’s and owner’s. A lender’s policy is usually required by a mortgage lender and protects the interests of the lender by validating the lender’s validity and enforceability of the mortgage. The lender’s policy is typically issued for the mortgage amount and coverage decreases as the principal is paid down.

An owner’s title insurance policy protects the owner’s interest in the property. The policy is typically issued for the purchase price and is usually valid through ownership to cover claims against the title. Policy coverage varies- so check with your title agent for pricing and coverage levels.

When purchasing a title insurance policy, consult with your title attorney about the policy coverage and limitations. Additionally, A Consumer Guide to Title Insurance is available from the agency that regulates title insurance producers – the Maryland Insurance Administration (https://insurance.maryland.gov/Consumer/Documents/publications/titleinsurancebrochure.pdf).

by Dan Krell
© 2011

Original published at https://dankrell.com/blog/2011/08/18/title-insurance-a-misunderstood-safeguard/

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

January 26, 2010June 27, 2019

Transfer tax controversy brews in Maryland Counties

by Dan Krell © 2010
DanKrell.com

Most real estate issues usually do not grab people’s attention – unless they are the ones affected. Eminent domain is a prime example; those affected usually become embroiled in the controversy. One current issue that you may have heard (although you may not have become fully aware) of is the transfer tax controversy that’s brewing in Montgomery and Anne Arundel Counties. The anticipated opinion on the controversy from the Maryland Attorney General may have lasting and widespread consequences on how transfer tax is calculated in this state.

The controversy surrounds the decision from Montgomery and Anne Arundel Counties to collect transfer tax on the “forgiven” mortgage amounts in a short sale. At face value, the policy of collecting transfer tax on the unpaid portion of a short sale appears to be a way for the counties to compensate for their declining tax base; however the fundamental method of calculating state and county transfer tax may be more the issue. On January 12th, however, Montgomery County put “a hold” on the collection of transfer tax of the “forgiven” mortgage amount until the Maryland Attorney General issues his opinion.

The “forgiven” mortgage amount is the amount that the seller’s lender agrees to not collect at the settlement of a short sale. However, this amount is not literally forgiven as the lender typically either considers it income and issues a 1099 to the seller or pursues payment through a deficiency judgment against the seller. Since part of the requirement for a short sale is usually to provide evidence of a hardship, some critics have argued that the collection of transfer tax on “forgiven” mortgage amounts to be punitive.

The collection of transfer tax on forgiven mortgage amounts should not be confused with “nominal consideration” rules that are used in some jurisdictions around the country (including Washington, DC). “Nominal consideration” rules typically calculate additional transfer tax when the sales price is less than the assessed value. In Washington, DC, a transaction is considered to be of “nominal consideration” when the sales price is less than 30% of the assessed value.

Title 13 of the Tax-Property section of the Code of Maryland (COMAR) discusses the collection of transfer tax by the State and counties, as well as tax rates and possible exemptions. COMAR discusses various ways in which transfer taxes are calculated and collected; for example tax is calculated on the “consideration payable for the instrument of writing”; and the tax is “imposed on the instrument of writing.”

Some may have mistakenly thought that consideration is only the sales price and the instrument in writing is only the deed; however, others have argued that consideration also includes additional amounts involved in a transaction (such as assumed loans) and instruments in writing to also include deeds of trust. I am not an attorney and I am not attempting to practice or interpret law, but it appears that clarification from the Attorney General has become necessary in interpreting “consideration” and “instruments of writing” when calculating transfer tax in today’s market.

You might consider the collection of forgiven mortgage amounts another sign of a depreciated real estate market. However, the future of transfer tax calculation and collection (at least locally) is sure to be affected by the highly anticipated opinion of Attorney General Gansler.

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell

**Update—HB 590/SB 657 – Taxation of Forgiven Debt in Short Sales
STATUS: PASSED – Effective May 20, 2010.
This law clarifies that recordation and transfer taxes MAY NOT be imposed on the forgiven debt in short sale transactions.

January 5, 2010June 30, 2019

Coping with the stress of the real estate transaction

Unless you are under the care of a psychiatrist prescribing you Valium, “stress free” is not something that comes to mind when describing real estate. According to the American Institute of Stress (stress.org), stress is subjective and can originate from negative and positive experiences.

On the “Holmes-Rahe Social Readjustment Rating Scale” otherwise known as the Holmes and Rahe Stress Scale (Holmes & Rahe 1967), having a mortgage over $10,000 rates 31 (just above being foreclosed upon) and moving is rated as 20. This commonly used stress scale (which rates life events to determine risk of illness) is cumulative, so the rating for buying a home is at least 51. Your stress level obviously increases when you add in other life stressors such as (but not limited to): getting divorced (73); getting married (50); having a baby (39); changing careers (36).

The reason why buying a home may rate so high on the Stress Scale is that, unlike other transactions, buying (and selling) a home is a large emotional investment! Gordon Gekko, from Oliver Stone’s Wall Street, was on to something when he said, “don’t get emotional [over stock], it clouds your judgment.” Emotions often become amplified when stress increases and can interfere with judgment.

Although most real estate agents don’t understand stress (what it is or how it’s reduced), it does not stop them from lecturing and blogging about “reducing stress” during the home buying or selling process. Being prepared and dividing the buying/selling process into segments is common advice and makes sense. This guidance often helps buyers and sellers feel a sense of “control” by understanding what to expect. However, the wonderful thing about real estate is that every transaction presents a new set of personalities, conditions, and (sometimes) problems. Reactions among buyers and sellers, as well as real estate agents, vary depending on their personalities and life circumstances. So no matter how much you plan, prepare, and visualize what it may be like, stress can be produced just by going through the process (created by both positive and negative feelings).

For some, being prepared is enough to help them anticipate and deal with most circumstances that may arise; while for others, the act of preparation may actually increase stress. Emotional factors, often based on needs and fears, can play a key role in your stress levels. Sometimes your needs are beyond your control and can increase your stress level, such as the need to stick to stringent timelines. And sometimes your needs can adapt and change which can mitigates your stress, such as finding the “perfect home.”

Fears about the outcome of the transaction can increase your stress, especially if you’re a first time home buyer. Common buyer fears include mortgage approvals and rising interest rates; sometimes buyers fear that the home inspection may reveal problems with the home. Common home seller fears include the home buyer’s qualifications and the ability to consummate the sale.

Good real estate agents know how to address the needs and fears of the real estate transaction to keep stress levels in check. Regardless, some people may turn to self help, “pop” or common stress reduction techniques (such as meditation); and if the stress is overwhelming, it wouldn’t hurt consulting with your physician or a qualified mental health professional – especially if you’re already stressed by your job, family and other life stress.

This article is not intended to provide nor should it be relied upon for legal and financial advice. Permission to use this article is by written consent only.

By Dan Krell
Copyright © 2010

June 23, 2009November 23, 2021

What are the risks of owning a home?

Accepting the Risks of Home Ownership
by Dan Krell © 2009
www.DanKrell.com
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For many, owning a home is part of their long term financial and personal plan. Unfortunately for some, the responsibilities and risks of home ownership are not well thought out; many first time home owners are unprepared. The benefits of home ownership are often presented to first time home buyers, how about the risks?

During the recent real estate market boon, it seemed as if there were no risks to home ownership. Homeowners, who felt that their home was too much of a financial burden, were able to sell their home quickly and sometimes made a profit. However, when home values began to depreciate, it become all too clear that there are inherent risks to being a home owner, which include decreasing property values, increasing home related expenses, and poor home maintenance.

The real estate market, like other financial markets, is cyclical. There have been escalating market cycles, like the recent “seller’s” market; and there have been depreciating market cycles, some down cycles being much like what we are currently experiencing. Many first time home buyers, who bought homes as a commodity often analyzing their purchases as if it were a mutual fund, are now finding that (unlike mutual funds) selling a home may not be as easy as previously thought. Selling a home in a down market has many considerations, such as an increased marketing time and the possibility of owing more on a mortgage than the value of the home.

During an escalating market, it is easy for people to talk about home value appreciation as one of the benefits of home ownership. Unfortunately, in the recent boon market, many home buyers were caught up in the exuberance of rapid appreciation such that they believed that home value appreciation is guaranteed- no matter the type or condition of the home. Some home buyers are now lamenting their purchases because they bought homes they did not much care to live in but rather for the perceived “investment” value.

Many first time home buyers are also not prepared for increasing monthly housing expenses. Keep in mind that a first time home buyer’s monthly mortgage payment is already more than their monthly rent. Because of rising property tax and increasing utility costs, home buyers need to consider that the associated cost of home ownership will most likely increase over time. Although some of the initial increase may be offset by an interest tax deduction, the increases often add more to monthly expenses than the savings of the deduction.

Maintenance is an ongoing expense that is often overlooked by home buyers; all homes, including new homes need regular maintenance. Lack of home maintenance becomes a threat to anyone’s home leaving the home’s systems, walls, and foundation vulnerable to the elements, which can erode the home’s value.

Be prepared to take on the risks of home ownership. Take into account the reasons for owning a home as well as the financial responsibility you place upon yourself. Although long term home ownership has proved to be a good investment for many, value appreciation is not guaranteed. Additionally, the cost of home ownership along with future increases should be anticipated. You can get more information about the benefits and risks of home ownership by visiting HUD (HUD.gov), Fannie Mae (FannieMae.com) and Freddie Mac (FreddieMac.com).

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 15, 2009. Copyright © 2009 Dan Krell.

October 2, 2008September 27, 2018

Buyer beware when purchasing distressed property

Buying a bank owned home might be a great way to get a great deal on your first home or the home of your dreams. However, you will find that buying a distressed home from a corporate owner is slightly different than purchasing a non-distressed home from an owner-occupant.

When you are purchasing a bank owned home, the bank requires you to sign addenda that favor the bank in many ways. Foreclosed homes that are sold by banks are exempt from many disclosures, including the Maryland Residential Property Disclosure And Disclaimer Statement (which discloses the home condition as well as any latent defects). Additionally, banks selling foreclosures (and their real estate agents) will sometimes want to take control of the entire transaction by coercing you to use their vendors, including their title company.

First and foremost, the bank is selling the foreclosure in as-is condition. This means that “what you see is what you get.” Often, what you don’t see is what you get as well. The bank addenda will warn of possible mold and other hazards that may be in the home. Even the best of homes can develop issues due to having utilities disconnected as well as being vacant for many months. A thorough home inspection, that may include testing for environmental hazards, is highly recommended to determine the condition of the home.

Another consideration in purchasing a foreclosure is that the bank will only offer you a Special (or limited) Warranty Deed. In a typical residential transaction, the seller will provide to you a warranty deed that guarantees that the seller has the ability to sell the home, and all debts held against the home are paid. However, buying a foreclosure is a bit different in that the bank will only provide a deed that covers the period the bank has had ownership of the home. Owner’s coverage title insurance will usually protect you from title defects not corrected by the bank; however, as policies vary, you should read the fine print.

Lastly, your deposit will become non-refundable after a short period of time. The bank will give you a short period for due diligence (obtain financing, conduct home inspection, etc); be prepared to act quickly!

So, is it a good idea to purchase a foreclosed home? Buying a foreclosure could be a real coup for you- but you must do your due diligence. Before you write an offer on a foreclosure, line up your vendors (such as home inspector, title attorney, contractors) so you can act quickly by having your team determine the home’s condition and legal status.

Unfortunately, the proliferation of distressed properties has some real estate professionals believe that consumer protection laws do not apply (such as RESPA and Maryland’s Wet Settlement Act). Make sure you are well represented! As a home buyer, you have the legal right to choose your vendors (including home inspector, title attorney, lender, etc.).

If you are planning to purchase a bank owned home, it is highly recommended that you review these special addenda carefully as well as consulting an attorney if you do not understand what these addenda require of you. Remember, “caveat emptor” applies when buying a bank owned home.

Original published at https://dankrell.com/blog/2008/10/02/buyer-beware-purchasing-a-bank-owned-home/

By Dan Krell