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Thursday, December 22, 2016

What business is it of theirs?

In the real estate business we often hit cases where a buyer may need to tap into the Bank
of Mom and Dad or perhaps another relative.  Many times these transactions take place in secret, without the buyer informing his mortgage company. The common attitude is, “What business is it of theirs if I get some help from mom and dad?” Unfortunately, it is their business and they will discover it anyway when they look at the detailed bank statements that the underwriter will ask to see perhaps going back as long as six months or more.

Why is that their business? Well there are a couple of reasons that mortgage underwriters look to see where the money is coming from in a real estate sale. One reason is an unfortunate sign of our times and that is that real estate sales have often been used by drug dealers to launder their ill-gotten gains. Any large sums (and not that large to attract attention) that flow into the buyers account in the last six months will be questioned and documentation demanded for the source of those funds. If you sold something else, maybe
even another property, and the money came from that, you will need to document that sale.

Perhaps the money is coming from parents or relatives. That’s not illegal or necessarily bad, if it is a gift; however, the underwriter is going to want proof that it is a gift and not a loan, which would count against your debt to income ratio. You will be asked to provide a letter from the person giving you the money that states that it is a gift with no expectation of it ever being paid back.  If there is any expectation that you’ll pay it back “once you get on your feet”, it will be treated like a loan and probably screw up your debt to income ratio and could cost you the mortgage.

I’ve also seen buyers go out and spend money for things like furniture for the new place or maybe even a new car after they’ve been pre-qualified, but before the underwriting is done. They also think, what business is it of theirs if I buy furniture or a car. What does that have to do with the house mortgage? Any new and big expenditures like those will also impact your debt to income ratio and could screw up the mortgage process.

The bottom line is that once you apply for a mortgage, your life becomes an open book, at
least to the mortgage underwriter. He/she is going to want to know everything about your and your finances. The amount of detail that the underwriter may ask for and the depth to which he will probe may surprise and even annoy you; however, he is trying to learn enough about you very quickly to make a call for the bank on whether or not you are a good credit risk and will be able to repay the loan. You might not be able to repay it if you are in jail because it was drug money  or if you also have to repay that relative who so kindly “loaned” you that money for your down payment.

So, it really is their business and they are usually very good at it, so don’t think you are going to outsmart them with a wink and a nod to your parents about their “gift”. The penalties for fraud, which is what that would be, are quite stiff and could even land you in jail right next to that drug dealer.

Monday, December 19, 2016

Dealing with fixtures…

One of the areas in real estate transactions that cause quite a few disagreements between buyers and sellers is the concept of what is a fixture that goes with the real estate, vs. personal property that the sellers may remove and take with them. Many Realtor® and most lay people involved with the sale of real estate understand (or think that they do)  things like refrigerators and stoves and other items that are obviously considered to be personal property and not a part of the real estate that is being sold. However, there are lots of things that are not as cut and dried, because they may fall under the legal concept being  a fixture in real estate terms.

We recently had a Continuing Education class on this topic at our office that was conducted by Donald Rump, Chief Council for our Capital Title Insurance Agency subsidiary. Real Estate One does a lot of Continuing Ed classes at its branch office to keep its agents up to date on the changing world of real estate. Don is a Vice-President and the chief litigator for Capital Title and has a career in real estate law that spans over 30 years. He’s also an entertaining speaker on what might otherwise be a very dry topic.

All Purchase Agreements have some standard boiler-plate language about the fact that all of the normal stuff that one might expect would go with the house actually does go with the house. We have a fancy term for most of that called appurtenances. WikiPedia defines the term this way -  Appurtenances are things that belong to and go with something else, the appurtenance being less significant than what it belongs to. In the case of real estate the appurtenances belong with the realty or property. Fixtures would be considered to be appurtenances; however the devil is in the details of how a fixture is defined. That definition is what Don spent his time on helping us to understand.

How one determines whether something is a fixture and becomes an appurtenance to the real estate is determined  by a combination of law from court cases and the facts in each instance. Since not every possible situation has been litigated, the courts have established over time a set of three guidelines or tests that may be applied to try to determine if an item is a fixture prior to having to litigate the matter.  Don went over the three tests that courts would use and apply to determine whether an item is a fixture or not.

The three tests are:

Annexation – This is the test that looks at whether or not the item is attached (i.e. it has been annexed onto the real estate). Annexation further breaks down in the Actual or Constructive, with actual annexation covering those cases where the items have been physically added to the property through attachment or securing them to the real estate. If it is screwed, nailed, tacked or glued to the real estate the court would likely find it to be a fixture.  Court cases have established under this principal that carpeting in a property is a fixture. In another instance a wall-mounted Flat screen TV might not be considered to be a fixture.  Keep reading to find out why. Constructive Annexation most often deals with situations where smaller pieces of land may have been added to a larger piece to create an even larger parcel.

Adaptation – This is the test that looks at whether the item was adapted to become a part of the real estate or perhaps the real estate adapted to accommodate the item. A case in point may be found in the creation of a home theater room, where the room may have been modified to fit the home theater projection equipment and the equipment integrated into the room design. Court cases in foreclosure disputes have found that the equipment becomes fixtures within that room and property. If you had to modify the property to accommodate the items it most likely is now a fixture. But keep reading to see why your wall-mounted flat screen is still not a fixture.

Intention – This is perhaps the difficult one for home sellers to understand. It concerns the intention of the homeowner at the time the item was added to the property, not when the owner decides to become a seller and tried to take the item with him. The court will try to decide if it was the intention of the owner that the items be integrated into the property at the time it was added.  

So, you can’t just walk away with your home theater equipment and leave a big empty theater room that you built into the house, with everything missing and large holes or spaces where it used to be
integrated. You can, however, walk away with your wall-mounted TV and even  the mount, if you want it, since it was possible that you did not intend it to be permanently used there and so there was no intention of it being permanent (a fixture). You may still have to repair the holes in the wall where the mount was screwed in, but that’s a different issue between you and the buyer.

The value of understanding these three tests is in not making the mistake of trying to take something out of a property that you are selling that a buyer (and the court) might reasonably believe passes one or more of these tests for whether or not it was a fixture. As a Realtor, It’s my duty to inform seller clients how to avoid getting into a situation that might involve a court having to make a decision based upon those three tests. The best way is to be very detailed and clear about what is staying and what is not in the listing agreement and the MLS advertising. 

If I’m a buyer agent on the deal I tell them to put in the Purchase Agreement anything and everything that you believe should come with the property.  There may be items on their list that the seller intends to take, but that can be clearly and unambiguously established in the negotiations before the deal is finalized. Make no assumptions. Put everything in writing.

Some of the examples that Don used were from commercial sales and involved things like the tools or equipment that make be part and parcel to the property functioning in its commercial role. One example was a bowling alley that was foreclosed and where the owner removed all of the bowling equipment. The owner claimed that the equipment was separate from the real estate and was his property to take and use elsewhere. The courts said, No, the equipment met the test of annexation, adaptation and intent (it was a bowling alley, after all) and thus that equipment became fixtures.

The classic real estate fixture disagreement is about light fixtures, especially large and special chandeliers. It is an easy one to decide but not a decision that the sellers want to here. A light fixture (hint in the name), even a chandelier is a fixture. It certainly passes the first two tests and even though your intention now might be to take it with you, that was likely not your intention when you installed it. I always advise my listing clients,“If you intend to take it, then take it down (or out) now and replace it, so that a buyer will not see it and make any assumptions about it being a part of the property.”

Another common issue that we hit in the residential real estate business involves things like play structures. The key tests there may be whether the legs or posts of the structure sit atop the ground (think about the metal swing sets that you buy and put together yourself) or have been buried (perhaps even cemented in) the ground and whether things like a maybe a wooden border were added around the structure area with perhaps rubber mulch added to provide safe places to fall off the structure – that’s a fixture. An owner would be hard pressed in court to defend a decision to take that structure when he moved. Utility sheds also come up often and the difference may be between  the little plastic shed that you buy at Home Depot and haul home and assemble yourself vs. the shed that you have a concrete pad pored for and then have it built or assembled on that slab. Which do you think passes one of more of the tests for a fixture?

The whole issue of whether something should be considered to be a fixture or not is so dependent on the situation that there is no hard and fast rule, just the tests that the courts have established; and even those are subject to further consideration of the facts of the specific situation. As in all matters that involve legal decisions it is best to consult and attorney if there is doubt. Your Realtor is a good starting point for advice and he/she will suggest that you get legal help if the situation is not clear cut. The three tests that Don outlined provide a good background for you to look at the situation yourself. If you are honest with yourself about those three, you probably won’t have a problem or maybe not create a problem for yourself later.  And remember, when in doubt, put it in writing.

Thursday, December 15, 2016

Get the water tested when buying new home

There has been much in the news about water and testing of drinking water ever since the Flint crisis of lead in the drinking water exploded in the news.  It is a good idea to have the home inspector that you hire to do the inspection of the home also perform a water test. You can even do one yourself and for $6, if you live in Oakland County  and some of the other local Counties.  Water test kits are available from the County Health Department. 

Lead isn’t the only potentially bad thing that can show up in your water. In fact, if you are buying a home that has a well and a septic system, lead may be the least of your worries. 
Many homes and subdivisions that were built in rural area were built on land that had once been farms. Farmers use tons and tons of fertilizer on crops, as well as many pesticides and herbicides to control unwanted bugs and weeds. We don’t think about it too much, but many of those farms also had farm animals, sometimes a lot of them, that may have had an impact on the ground water that we are now using for the new homes. Run off from farm animal waste can seep into the water table over time. Both of those things often resulted in increasing the levels of Nitrates and Nitrites in the water that is now drawn from the wells that service those new subdivisions or homes.

You certainly may be forgiven for not knowing what Nitrites and Nitrates are and how they may harm your health. I didn’t know either, before I got into real estate sales and started dealing with home inspections and water tests for wells.   From a Study published by the Water Research Center  comes this information about Nitrates/Nitrogen in the groundwater.
The primary health hazard from drinking water with nitrate-nitrogen occurs when nitrate is transformed to nitrite in the digestive system. The nitrite oxidizes the iron in the hemoglobin of the red blood cells to form methemoglobin, which lacks the oxygen-carrying ability of hemoglobin. This creates the condition known as methemoglobinemia (sometimes referred to as "blue baby syndrome"), in which blood lacks the ability to carry sufficient oxygen to the individual body cells causing the veins and skin to appear blue.   Note - The health concern is primarily related to potential exposure through consumptions by infants.

Adults can tolerate higher levels of nitrate-nitrogen with little or no documented adverse health effects and may be able to drink water with nitrate-nitrogen concentrations considerably greater than the 10 mg/L level with no acute toxicity effects. However, little is known about possible long-term chronic effects of drinking high nitrate water. If your water test indicates a level of nitrate-nitrogen above 10 mg/L and only adults or older children will be drinking it, consult your family physician for a medical recommendation.
To read the entire report got to -

If you find an unacceptable level of Nitrates/Nitrogen in your well water, you may chose to ignore it, if you don’t have small children or babies; however, you may wish to deal with the problem by installing a system to remove the Nitrate. From the same report comes this advice –  Nitrate can be removed from drinking water by three methods: distillation, reverse osmosis, and ion exchange. Home treatment equipment using these processes are available from several manufacturers. Carbon adsorption filters, mechanical filters of various types, and standard water softeners do not remove nitrate-nitrogen. To read more about the methods available to remove Nitrates, go read the full report.

In addition to any potential nitrates/nitrogen issues, the water tests should also test for
arsenic, lead, E.coli and Chloroform. The issues with lead are well documented, so I won’t go over them. Suffice to say that lead in the water is bad. 

Arsenic is a poison that occurs naturally in the ground in Michigan and shows up in almost all wells at some level. Arsenic ingestion can result in both chronic (long-term) and acute (short-term) health effects. Acute effects can include nausea, vomiting, neurological effects such as numbness or burning sensations in the hands and feet, cardiovascular effects and decreased production of red and white blood cells which may result in fatigue. Chronic effects include changes in skin coloration and skin thickening and small corn-like growths that can develop especially on the palms of the hand and soles of the feet. Chronic exposure to arsenic is also associated with an increased risk of skin, bladder, and lung cancer. There is also evidence that long-term exposure to arsenic can increase risks for kidney and prostate cancer. 

There are filters that may be added to your water system that will remove up to 99% of the arsenic from the water. As a side benefit they also remove several other heavy metals that are not good to ingest in the water either. 

E.coli is a bacterium that causes an intestinal infection. We hear about it most often as being caused by contaminated foods, but is may also be in the water system. While it is often caused by animal feces at the surface level, in wells the main cause seems to be infected bugs that get into the well casing, due usually to cracks in the well head cover. The bugs may have picked up the bacteria from animal feces and carried it with them to the inside of the well casing. Once there they die and fall into the water at the bottom of the pipe – the water that the pump into your home. An E.coli infection is pretty nasty and can be life threatening. There are no sure ways to get it out of the water with filters. You could put in a reverse-osmosis system for your drinking and cooking water, but it is much easier and less expensive to just treat the well itself to remove the threat by having the well chlorinated to kill the bacteria and then making sure that a new, secure cap is on the well head.

Chloroform, a simple compound consisting of carbon, chlorine and hydrogen, and is often a byproduct of water chlorination. Chloroform was the “go-to” anesthetic during the American Civil War. Doctors eventually stopped relying on chloroform for surgery and childbirth after it was shown in some cases to cause adverse effects on the heart, liver and/or kidneys and safer anesthetics were developed. Most coliform bacteria will not likely cause illness. However, these bacteria are used as indicators in water tests because their presence indicates that disease-causing organisms (pathogens) could also be in the water. The presence of some types of coliform bacteria in the water signal the presence of feces or sewage waste. Feces and sewage wastes are usually the source of the disease-causing organisms (see the E.coli advice above).

There are many more organic or inorganic things that can show up in well water, some caused by industrial or farming pollution and many that just occur naturally. You can’t see or smell most of these potential health hazards in the water and most are not going to be handled by the normal filters and water softeners that may already be in place. You just won’t know until you get sick, unless you have the water tested.  

The bottom line is that you should go ahead and spend the extra money to have the water tested or take the time to get a water test kit from your County Health Department (for $6 in Oakland County, Michigan)  and draw some water from the tap in the home that you are buying and turn it in to see what is in your water. In 90% or more of the tests there may be traces of any or all of these potential health treats; however, they rarely show up in concentrations that are dangerous to humans. Some of these hazard have cumulative effect, so they build up over long periods of time. Water is necessary for life; however, water-born chemicals and bacteria can make life miserable, so test the water before you finalize the sale.

Monday, December 5, 2016

Local business event this week - Heinsight Eye CAre

The Huron Valley Chamber of Commerce is holding a ribbon cutting event this week during an
open house by Heinsight Eye Care. Dr. Marla Hayden is the new owner of Heinsight Eye Care, which was previously known as Heinsight Optical. Dr Hayden and her staff have made many changes to the practice, including a complete remodeling of the facility. Come and check out Heinsight's remodel and meet Dr. Hayden and staff. Open House from 5-7 p.m. and ribbon cutting at 5:30 p.m.

Dr. Hayden graduated from Illinois College of Optometry in Chicago in 1999.  During her last year in optometry school she worked at Omni Eye Specialists in Baltimore and the Detroit VA Hospital. She specializes in primary care optometry including treatment and management of vision disorders and ocular diseases such as dry eye. Think of Dr Hayden as your primary eyecare specialist. If she finds a disease or disorder that she can't treat, she will refer you to the appropriate specialist who can.  She also has extensive experience in fitting contact lenses,
including single vision, monovision,  bifocal, multifocal and Ortho K/CRT lenses.  
Dr. Hayden purchased Heinsight Optical in June of 2015 and is looking forward to the next phase of her career.  She has enjoyed exploring the Milford area and loves how genuine and caring the people of Milford are. Dr. Hayden grew up in Kansas, graduated from Kansas State University, and attended Illinois College of Optometry in Chicago. She moved to Michigan with her husband after optometry school 17 years ago. She is a member of the Huron Valley Chamber of Commerce and attends The United Methodist Church in Fenton.

Event details:
Tuesday, December 6, 5 -7 p.m.
Open House/Ribbon Cutting
Heinsight Eyecare
304 W. Commerce, Milford

Friday, December 2, 2016

Get legal help on Lease with Option to Buy Agreements

I recently  read a good article on Lease with Option to Buy Contracts at the RealtyTimes site by Benny L. Kass, a lawyer. Option to Buy contracts are popular with people who may not be in a position to get the necessary financing to buy right now, perhaps because they are still trying to sell a home or maybe because they had some financial difficulties that impacted their credit and are still working their way back from that.

No matter what the reason is behind the need to do a Lease with Option to Buy contract, the buyer
and seller both need to realize that they need help with that contract beyond what a Realtor® would normally be able to provide. Hopefully the Realtors involved have already advised them to get an attorney involved to draft the contract. As Kass points out in his article, there are just too many questions involved in such a contract to leave it to chance.  Even if the Realtors involved have some “standard boiler-plate” Lease with Option to Buy contracts, it is worth a review by your own attorney to make sure that your interests are clearly protected and that there are clear definitions of what happens with any money that has been paid when the option is exercised or allowed to lapse.

In general, the lease portion of the contract needs to clearly define what happens to the money paid monthly as lease payments and what happens with any money that is paid as a security deposit.  In addition, the disposition of any “down payment” money that is paid up front, should the option not be exercised needs to be clearly stated in the document.  Also enumerated in the document should be any restrictions on the buyer during the term of the lease, including what they can and cannot do to the house. The owner might allow painting and minor redecorating but restrict
any real remodeling projects. There would need to be clear provisions for what happens to the remodeling content that might be added to the property, should the option to buy not be exercised. 

Both sides usually go into these Leases with Option to Buy contracts with the best intentions of the option being exercised; however, life gets in the way occasionally and both sides need to have clear protections in the contract for their interests and rights. The seller may not plan on ever getting the property back when he enters the agreement; however, what happens if his own fortunes take a turn for the worse? Can he get his hose back at the end of the lease period or even before?  What will he have to give back to the buyer if that happens?  As Kass points out in his article, both sides would like to have the contract skewed to better protect their own interests. The best contract would clearly state and protect the legitimate interests of both sides.

There is a clause in all of the real estate contracts that I have seen that advises the parties to seek the advice of an attorney. That clause states that the contract is an important legal document and should be clearly understood by all parties. Unfortunately, many buyers and sellers just see a bunch of “blah,blah, blah” legal gobbledygook  when they try to read through the contracts. The Lease with Option to Buy contact is one on which you absolutely should seek the advice of your attorney. If you don’t have an attorney that you’ve used for other things, as your Realtor for a referral.