Getting ready for your home closing? Make sure you know where that email on where to send the money is coming from.
Q: I’m about to close on a home purchase on the Big Island of Hawaii.
Because of recent volcanic activity, I am concerned about the value, and even the continued existence, of the house we are about to buy. Our contractual contingencies have all been met. We are just waiting for the final approval from our lender, which is expected any day. As volcanoes are unpredictable, who knows if Kilauea will settle down shortly or spew gases for the next 50 years?
[River of lava destroys hundreds of homes in Hawaii, including one owned by mayor, officials say]
I am wondering if anything in my purchase agreement is renegotiable this late in the process, and what do buyers do when they are about to close on a property, and say a natural disaster were to strike, such as a major volcanic eruption?
— Hot in Hawaii
Hot: The event you are referring to, Mount Kilauea’s eruption, is what we lawyers often refer to as a “force majeure event.” Force majeure means “greater force.” The legal concept of a force majeure is derived from the French Napoleonic Code. This clause provides that the parties’ performance under a contract is excused if an unforeseeable event beyond their reasonable control occurs that prevents their performance. Force majeure events are often defined in the contract to include political events such as wars, insurrections, riots, strikes, lockouts, terrorist threats or actions, or explosions. It also applies to acts of nature such as hurricanes, floods, earthquakes, landslides, tornadoes, tsunamis, volcanic eruptions, sinkholes and storms. It would appear that Mount Kilauea’s eruption is a classic force majeure event.
[Graphic: Where the Earth is erupting on Hawaii’s Big Island]
A force majeure clause is a contract provision that allows a party to delay or extinguish the performance of its contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible. Sometimes this is also referred to as an act of God or act of nature.
You should examine your purchase contract to see if it contains a force majeure clause that may delay or even excuse your performance under the contract. These clauses are also sometimes identified as “Risk of Loss.” The standard Greater Capital Area Association of Realtors contract contains a damage or loss clause that reads: “The risk of damage or loss to the Property by fire, act of God, or other casualty remains with Seller until the execution and delivery of the deed of conveyance to Buyer at Settlement.” If your Hawaii purchase contract contains a similar clause and your property is damaged or destroyed by the lava flow, your obligation to pay for your home will probably be excused.
If you still wish to go to settlement on the home, but just not at the original price or terms, you may also use a force majeure event to renegotiate price or terms as well. This means that if the home is damaged before settlement, because of an unforeseen force majeure event, the seller will be responsible for that damage and any diminution in value caused but that damage. You should be able to proceed to settlement, with a new price and terms.
Hopefully, the seller has a homeowner’s hazard policy that covers volcanic eruptions. The seller can then sell the home to you at its “after-eruption value” and presumably recover their loss from the insurance proceeds covering the damage. The situation gets complicated if your seller has an existing loan that must be paid off, before they are able to convey clear title to you. This can get tricky. I recommend you consult with a member of the Hawaii State Bar Association who is familiar with real estate contracts.
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law in Rockville. He is an active real estate attorney, investor, landlord, settlement attorney and licensed real estate broker. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Jacobs at firstname.lastname@example.org or email@example.com.
Copyright © Harvey S. Jacobs, Esq. 2019
The prestigious Counselors of Real Estate (CRE.ORG), an organization comprised of 1100 real estate professionals from around the world, annually compiles the Top Ten Issues Affecting Real Estate 2017-2018. The CRE released their list at the June National Association of Real Estate Editors (NAREE.ORG) Conference in Denver, CO. Harvey Jacobs was pleased to attend and speak during a panel at this conference.
To see what the Number One Topic affecting Real Estate is, click here.
With the richest men in the world such as Bill Gates, Warren Buffett and Mark Zuckerberg giving away their fortunes, you may wonder whether you have similar options and what the tax benefits would be.
Chase Magnuson, director of the Planned Giving Department-Real Estate at George Washington University and co-author of “The Secret Power Behind Real Estate Donations,” said giving away property can be tricky if not done correctly.
Nearly 2 million qualified charities “reject over $15 billion in real estate donations annually because they are unable or unwilling to assess and accept the real estate risk,” Magnuson said. But he added that when real estate agents, CPAs, property managers, appraisers, risk managers, title attorneys and other consultants “are brought onto the team, the donation success rate increases dramatically.”
There are several strategies for giving your property away and obtaining beneficial tax treatment. An outright gift is easily accomplished and provides the maximum and earliest financial benefit for the charity, while providing you with the maximum tax benefit. You are able to deduct the gifted property’s full appraised value against 30 percent of your adjusted gross income. If you are unable to use the entire deduction in one year, you can carry that deduction forward for an additional five years.
Another strategy is the “bargain sale.” A bargain sale is when you sell your property to the charity at a price below the property’s appraised fair market value. In return, you can take a charitable deduction for the difference between the sales price and the appraised value. That deduction from this gift portion can often be used to offset the exposure to capital gains tax on the property’s sale portion.
If you wish to sell your property but do not wish to donate it all, there is another option to receive charitable benefits: You may donate an undivided fractional interest in your property to a charity, at which point, typically, you and the charity cooperate in marketing and selling the property.
At the closing, net sales proceeds are distributed to you and the charity based on the respective ownership shares. You are entitled to a charitable deduction based on the ownership percentage you donate (sometimes adjusted to reflect the minority discount rule that provides that a minority interest is worth less than a majority interest). Since this strategy does not require the charity to come up with upfront cash to purchase the property, it is often the charity’s preferred strategy vs. the bargain sale.
There are even strategies that will allow you to donate your property, receive the charitable deduction and an income stream for life. These strategies utilize a charitable gift annuity (CGA) or a charitable remainder unitrust (CRUT).
Your income stream is based on several factors, including your property’s appraised value, the expected net sales proceeds realized when the property is sold, your age, your life expectancy, and the prevailing interest rate discount factor that takes current market interest rates and the money’s time value into consideration.
CRUTs vary slightly in that they are established by placing your property in a trust, then selling it to establish an asset on which a fixed percentage is paid to you for life. A percentage, these days, typically 5 to 7 percent, is then paid out to you for your lifetime or for as many years as you select.
So, for example, assume 30 years ago you bought property costing $50,000. It is now appraised at $550,000. Assume you paid off the mortgage, so it is now debt-free. When you sell it for the appraised value, you will pay a real estate agent $33,000 in commissions, and $15,950 in transfer and recordation taxes. Your net sales proceeds will be $501,050. Assuming a 5 percent annuity rate, the charity will pay you $2,087 monthly for the remainder of your life.
“These strategies can be combined into hybrid strategies to customize the donation to suit the donor, the charity and to assure strict compliance with the detailed IRS rules and regulations,” Magnuson said. “You can even retain a life estate allowing you to live in your property for life and still complete a tax advantaged gift.”
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law in Rockville. He is an active real estate investor, landlord, settlement attorney, lender and associate real estate broker. This column is not legal or tax advice and should not be acted upon without obtaining your own legal counsel. Contact Harvey at (301) 417-4144, www.jacobs-associates.com, or firstname.lastname@example.org.
By Harvey S. Jacobs October 30, 2015
In Maryland, home sellers who know that their homes have elevated radon levels are required to disclose that information to prospective buyers. However, at present, home sellers have no duty to measure the radon levels in their homes.
That could change in Montgomery County if the County Council approves a controversial bill that would mandate radon testing.
Bill 31-15, sponsored by Council members Craig Rice (D-Upcounty) and Sidney Katz (D-Gaithersburg-Rockville), would require home sellers to test their homes for radon and provide the results to prospective home buyers before entering a sales contract. If the bill is enacted, Montgomery County would become the only jurisdiction in the country to mandate radon testing.
Radon has been a known carcinogen for decades.
It is odorless, colorless, tasteless, resides in your basement and kills 21,000 homeowners a year.
Radon is a radioactive gas that occurs naturally in decaying rocks, water and soil, and it enters your home through cracks or other openings in the foundation. Although radon is found naturally indoors and outdoors, its characteristics cause it to be found in higher concentrations in a home’s lowest level.
The Environmental Protection Agency has determined that a high concentration of radon, meaning four or more picocuries per liter of air (pCi/L), increases the risk of lung cancer among homeowners who have never smoked. According to the American Association of Radon Scientists and Professionals, the EPA’s figure of 21,000 annual deaths from radon comes from a 20-year-old study of miners exposed to radon.
The bill would require every home seller to purchase a state-mandated testing kit, use a state-certified testing company and provide test results to prospective buyers before signing a sales contract. In addition, if tests reveal a high radon level, the seller would be required to get a written estimate from a state-licensed remediation company detailing the costs to reduce the radon level to 2 pCi/L. The tests cannot be conducted more than one year before a sales contract is signed. According to the National Radon Proficiency Program, there are 23 remediation providers in Maryland.
It is beyond debate that radon is a serious concern for the public. But the solution proposed by the Montgomery County Council members will increase sellers’ costs while having precious little practical effect. The bill neither mandates remediation nor identifies the penalty for failing to comply. The bill does not cover common-ownership communities such as condominiums, apartments or cooperatives. And it does not address the hundreds of thousands of occupied homes that may have dangerously high levels of radon but are not for sale and thus the homeowners/occupants are at continued lung cancer risk.
The Greater Capital Area Association of Realtors has submitted written testimony opposing the bill. The association asserts that its members already go to great lengths to educate the public about radon, and its official Radon Testing Notice and/or Addendum refers clients to the EPA’s Web site, atwww.epa.gov/radon , for information.
The Realtors also cited the increased costs, added complexity and confusion likely to ensue if this bill becomes law. The test kits cost approximately $40, but locating a state-certified testing laboratory, arranging for ideal testing conditions (rain, snow and excessive drafts can all affect the test results), and, if necessary, locating and obtaining a written estimate for remediation and completing that remediation can increase transaction costs by several thousand dollars.
Realtors also are concerned that the bill, if enacted, would be likely to delay closings while buyers, sellers and lenders wait for remediation to be completed because there are only 23 qualified licensed remediation companies statewide.
Finally, the Realtors cite the inevitable costly lawsuits that would arise from conflicting test results, allegations of easily manipulated testing conditions and/or other failures to strictly comply with the vague law. A more prudent approach would be to require an educational disclosure that would help buyers make a more educated decision and then leave the negotiation up to the buyer and seller in the private real estate transaction whether a radon test and remediation should be done, said Meredith R. Weisel, GCAAR government relations consultant.
The bill is to go before the council for a vote Tuesday, Nov. 3.
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law in Rockville. He is an active real estate investor, developer, landlord, settlement attorney, lender and Realtor. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Jacobs at (301) 417-4144, email@example.com or firstname.lastname@example.org.
By Harvey S. Jacobs June 25, 2015
I co-own a rowhouse in the hot U Street area with my ex-partner. He wants to buy me out of the property which has appreciated quite a bit since we purchased it in 2001. My ex has proposed a selling price. When I ask how he determined it, the response was, I’ve been watching the market.
With his new mortgage, there will be an appraisal but that doesnt give me much comfort. I’ve been told that in a hot, fast-paced real estate market like D.C., appraisers cant keep up with the value because of the lag in available comparables. It was suggested that a real estate agent who knows the area would have a better idea of the house value. I shared that suggestion with my ex but he didnt think it was necessary. Any suggestions?
Pricing a home in todays market is a challenge. Pricing is part science, part art. It sounds like you intend to sell your interest for its fair market value. Fair market value is often defined as the price that a willing buyer, under no compulsion to buy, is willing to pay to a willing seller, under no compulsion to sell.
An experienced real estate agent in your neighborhood will be an essential resource for you and your ex-partner. The real estate agent will provide you with a comparative market analysis (CMA) which will tell you what the other comparable homes sold for over the past several months. They can determine if prices are trending up or down, and by how much.
Agents can tell you how long those comparables remained on the market. They can determine if those prices were affected by unusual external factors, such as: extreme weather, or government sequestration. Active real estate agents will know how contract terms and conditions impact their sellers bottom line.
In the current market, buyers often ask for, and receive, up to 3 percent purchase price concession from sellers at settlement. Finally, the savvy agent will be able to provide you with his gut feeling about the steps you need to take to maximize your sale price and minimize your days on the market.
If you are more the science type, I highly recommend you consult the District of Columbias Real Property Assessment Divisions Appraisers Reference Materials 2016 (ARM). This 148-page report is a valuation data treasure trove.
The report is broken down into sub-neighborhoods and provides guidance to the Districts appraisers on how to value literally all the factors which determine the assessed value. Assessed value is determined by the District on an annual basis in order to assess and collect real property taxes.
This approach takes vast amounts of data into account and assigns values to all major housing elements. For example, it values the second full bath at $12,500; each additional half bath at $8,125; a fireplace at $8,000; a finished basement will be valued at $55 per square foot; an open porch increases your homes value by $22 per square foot, whereas a fully enclosed porch fetches $55 per square foot in additional assessed value.
Even floor coverings can cause your assessed value to vary widely. Carpet adds $2.17 per square foot to your homes base value, whereas ceramic tile adds a whopping $8.53 per square foot, even more than hardwood, which the District values at $7.17 per square foot.
The main drawback to relying on assessed value to determine fair market value is that the data used by assessors for taxation purposes can be somewhat dated. The 2016 ARM data is based on closed sales through year-end 2014. The other drawback is the fact that District assessors do not field inspect every property every year.
If the scientific approach appeals to you, but you do not want to do your own number crunching, you can always hire an independent appraiser to do that for you. The costs are nominal at about $450. Most appraisals can be completed in a week or so. Your independent appraiser will have the market data, and your cooperation in allowing him to carefully inspect all the interior improvements that you have made over the years.
No home pricing discussion is complete without addressing online valuation Web sites such as Trulia or Zillow. These sites historically have had an abysmal error rate (between 18 and 32 percent) for their online, computer-generated valuation.
Recently, they have taken steps to increase their accuracy by entering into agreements which allow them to get near real-time data directly from the various multiple listing services.
As recently as June 10, they were still reporting an overall 8.3 percent median error rate nationwide. As Zillows own site says the Zestimate isnt intended to replace a real estate professionals opinion of value.
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates-Attorneys At Law, LLC in Rockville. He is an active real estate investor, developer, landlord, settlement attorney, lender and Realtor. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Harvey at (301) 417-4144 Jacobs@Jacobs-Associates.com or Ask@thehouselawyer.com.